Amidst light trading volumes, risk sentiment has improved, seeing stronger equity markets, higher global bond yields and the USD reversing previous losses.
With no bad news in the headlines, we’ve seen a reversal of sorts of some of the recent price action. The key US and European stock market indices are up nearly 1% and the VIX index is back below 12. Traders report very light summer trading volumes and there have been few economic releases.
A positive report published on Politico has got some attention. The US political website reports that Trump’s top aides and congressional leaders have made “significant strides in shaping a tax overhaul, moving far beyond the six-paragraph framework pushed out in July”. There has been agreement to include a one-time low tax rate for US companies to bring back earnings from overseas and the article says there’s a “broad consensus” on some of the best ways to cut individual and corporate tax rates. The USD has recently been significantly “oversold”, with market pricing consistent with Trump’s policy agenda not getting off the ground, so any positive news on tax reform should be clearly USD-supportive.
Even before that report was published, the USD was well on its way towards recovering the losses of the previous session. The various USD indices are up 0.4-0.5%, moving away from the key technical levels we mentioned yesterday.
The CAD has been the only major currency to hold its ground against the USD. Much stronger than expected Canada retail sales (ex auto) data helped support the case for further Bank of Canada rate hikes, with a 71% probability of another hike priced in by October. USD/CAD is flat at 1.2560.
The NZD is down 0.7% to 0.7275 and NZD/CAD is down the same to 0.9140, reaching its lowest level in over a year. The NZD is flat to down slightly on the other crosses. The AUD continues to outperform the NZD amidst the backdrop of the ongoing rally in metal prices. Still, the 0.92 support level for NZD/AUD is managing to hold, but only just.
The only other economic release of note overnight was the ZEW index of German investor confidence falling by more than expected, down for the third consecutive month, reflecting the stronger euro and the widening scandal in the German auto sector. EUR was well on its way down before that release, reflecting the stronger USD, so the market impact was limited. EUR is down 0.5% to 1.1750 and NZD/EUR has nudged below the 0.62 mark.
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