In the currency space, GBP and the CAD remain in the spotlight, with both showing good gains against the USD. But markets are generally treading water ahead of the FOMC announcement due tomorrow morning and UST rates are little changed.
GBP is showing signs of recovering and is about 100pips higher from the 1.2640 level that proved to be an area of support. It currently sits 0.7% higher for the day at 1.2750. NZD/GBP has peeled away from above the 0.57 mark down to 0.5670. There is some pressure on PM May to adopt a “softer” Brexit approach in negotiations with the EU that are due to begin shortly and this would be one factor providing some support to GBP. In economic news, UK inflation rose to its highest level in four years and surprised to the upside. While this puts any further easing out of play by the BoE, which meets again this week, it adds to the weak outlook for consumer spending, with real wages falling. UK 10-year gilts finally showed some upward pressure, rising by 7bps to 1.03%, with higher inflation and expectations of less fiscal austerity ahead contributing. Yields still look way too low considering inflation, political risk and the fiscal outlook.
The CAD showed further strength, adding to yesterday’s gains after Deputy Governor Wilkins signalled a surprise move to a tightening bias in a speech. Governor Poloz reaffirmed that view in a radio interview overnight, saying that rates have been “extraordinarily low” and that rate cuts “have done their job.” Last week, net speculative positioning in the CAD had been near a record low, so a classic short squeeze has emerged. USD/CAD fell by another 0.7% to 1.3230, taking the two-day loss to 1.8%. NZD/CAD is down to 0.9560, a 2-cents fall from only a couple of days ago but back to where it began the month.
The NZD itself has nudged up a bit to 0.7225, with the technical resistance level of 0.7250 still firmly in sight. There has been no news to drive the NZD – indeed NZ specific news has been absent for the best part of a month – but the positive risk appetite and commodity prices backdrop remain supportive. The S&P500 continues to flirt with recent record highs, while the VIX index is heading lower again after the recent technology sector collapse caused some temporary anxiety.
Elsewhere in the currency space there is little else to report, with the AUD, JPY and EUR all showing no change against the USD. The Nordic currencies have shown some life, with NOK supported by slightly higher oil prices and SEK up on stronger-than-expected inflation and many wondering when the Riksbank will capitulate on its over-easy policy stance.
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