Yesterday’s risk-on move has been extended, with the S&P500 up to another record high and higher global rates across the board. GBP is the best performer after stronger inflation data, while the NZD has been supported by a shock political poll.
Market sentiment remains positive, following on from yesterday’s themes, with the market having less fear about the US-North Korea war of words and Hurricane Irma proving to be less devastating than predicted. The UN voted to adopt new sanctions against North Korea, although as we reported yesterday the US had dropped some of its demands like a complete oil embargo. US Treasury Secretary Munchin has warned that the US might impose additional sanctions on China, such as cutting off access to the US financial system if it doesn’t follow through on the deal.
The USD has managed to hang onto its gains of the previous session, providing some hope that although some key technical support levels were broken last week, there might not be any follow-through.
GBP has been in the spotlight after UK CPI inflation data were higher than expected, with annual core inflation of 2.7% reaching a six-year high. This sets the scene for a more hawkish BoE policy statement later this week. After the last meeting the market ignored Governor Carney’s assessment that policy may need to be tightened by a “somewhat greater extent” than investors anticipate. After the stronger CPI figures, the OIS market moved to price in a rate hike this year as a better-than-even chance, while the UK 10-year rate rose by 9bps to 1.13%. GBP is the top performer for the day, up 0.9% to 1.3290, its highest level in a year.
In other UK news, Brexit legislation that allows the UK government to copy EU law onto the domestic statute book passed its first hurdle, allowing it to move onto the committee stage. If the law is ultimately passed, it avoids a potentially “chaotic” scenario when the UK leaves the EU in 2019.
The NZD was out of favour during afternoon trading yesterday, alongside the AUD after the NAB survey reported a surprising fall in business confidence. From a low around 0.7220 the currency gained 50 pips after a surprise result from the latest Newshub political poll showing a surge in support for National at the expense of Labour and the Greens (who would fall completely out of Parliament). On this poll, National could govern alone, one permutation that hasn’t been given much credence, given it seemed such a low probability event. The NZD has held onto those gains and added some, and currently sits at 0.7290. Our view throughout this election campaign has been to fade any knee-jerk currency reactions, and the same applies here. There are far too many moving parts to be confident of any sustained impact on the NZD one way or the other no matter what the make-up of the next government.
The NZD has lost ground to the strong GBP, slipping below 0.55 but is up on all the other crosses. NZD/AUD broke through 0.91 last night and has since settled a little below that at 0.9090. Positive risk sentiment sees JPY losing further ground, with USD/JPY up through 110 and NZD/JPY up 1.2% to 80.3. EUR has been range-trading and sits around 1.1960, while NZD/EUR broke through 0.61 for the first time in a few weeks.
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