USD weakness has returned, showing a broadly based reduction, as investors seek out safe havens like JPY and CHF. Equity markets are in the red while US 10-year Treasuries are relatively steady.
The S&P500 is down slightly, following on from solid gains over the previous two sessions. However, there has been a distinct lack of volatility, as the index has traded a narrow range. There hasn’t been much news overnight and the market looks to be in a holding pattern ahead of tonight’s important US CPI release.
There’s a bit more to say about currency markets, with renewed USD weakness taking hold after last week’s recovery. The two safe-haven currencies, JPY and CHF have outperformed. USD/JPY began to lurch down after the NZ close and is down 1% to 107.60, meeting some support at 107.40, with technicians keeping a watchful eye on last year’s low of 107.32. The move might have been exaggerated by stop-loss orders, as short-Yen remains a predominant position amongst speculative traders. Seasonal factors might also be at work, with US bond redemptions peaking in February, spurring yen demand for repatriation purposes ahead of the March fiscal year-end.
A weaker USD is consistent with the story of the rising US twin fiscal and current account deficits we have previously talked about. The last thing the US economy needs right now is fiscal expansion but that is precisely what the government is delivering, sending the fiscal deficit on a path towards 5-6% of GDP, which will likely add to the pressure on the US current account deficit.
The softer USD sees EUR up 0.5% to 1.2360 and GBP up 0.3% to 1.3880. A stronger GBP was supported by UK CPI figures coming in a tenth ahead of expectations, adding to upward pressure for UK rates, albeit we only saw a modest 2bps move across the curve. Another rate hike by May is priced at just over a 70% chance.
Commodity currencies have underperformed with AUD and CAD down slightly overnight and barely higher from this time yesterday. Of the commodity bloc, NZD has performed better. NZD/USD has nudged up to 0.7280 after spiking to 0.7315 last night, while NZD/AUD has nudged up to 0.9275. The strong yen sees NZD/JPY down 0.6% to 78.4.
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