USD has extended its recent gains overnight, with the Bloomberg DXY moving up to a new high for 2018; NZD broke below 0.70 to a low of 0.6954, before bouncing back slightly to 0.6965; US 10 year Treasury is up 2bps to 2.97%

By Nick Smyth

President Trump announced a short while ago that he was pulling out of the Iran nuclear deal, although oil prices are unchanged on the day, implying the market had largely factored this in.  The USD has extended its recent move higher, with Fed Chair Powell reinforcing the message that more rate hikes are coming.  The NZD has made a new low for the year, below 0.70, as commodity currencies have underperformed overnight. 

A short while ago, President Trump announced that he was pulling out of the Iran nuclear deal and would re-impose sanctions on Iran.  Oil prices had fallen sharply earlier in the day, but recovered after Trump’s announcement and are close to unchanged on the day – implying the market had largely priced-in the decision (although the dust has still to settle).   The international response to the US decision is still uncertain, with the EU’s foreign affairs representative Federica Mogherini saying the EU was “determined to preserve'' the nuclear deal while the Russian deputy foreign minister said Macron’s earlier proposal for an enhanced nuclear deal with Iran “deserved serious consideration.”  There has been little reaction in other markets (equities, bonds, currencies) to the announcement. 

The USD has extended its recent gains overnight, with the Bloomberg DXY moving up to a new high for 2018.  The USD seemed to get a boost from Fed Chair Powell’s comments that reinforced the Fed’s message that more rate rises are coming (which shouldn’t really surprise anyone).  Powell said the market was ‘reasonably well aligned’ with the Fed’s tightening plans while noting that “overall U.S. domestic financial conditions have gotten looser” despite the Fed’s six rate hikes.  The breach of key technical levels – such as the EUR breaking below 1.19, to a new low for the year – and further USD short covering were probably as important as Powell’s comments in driving the USD higher on the day.  The extreme bearishness towards the USD that was evident a few months back (as reflected in record short USD positioning at the time) has started to fade. 

The NZD and AUD fell in tandem with the EUR after Powell’s comments.  The NZD broke below 0.70 to a low of 0.6954, before bouncing back slightly to 0.6965.  Commodity currencies have generally underperformed overnight, reflecting the earlier weakness in oil and commodities.  The NZD/AUD has moved a little higher, to 0.9350, but remains locked within a tight range that it has been in the last fortnight. 

There was little immediate reaction in US Treasury yields to Powell’s comments, although they have ticked up over the course of the day.  The 10 year Treasury is up 2bps to 2.97%, while the 10 year breakeven rate is steady at 2.17%.  The market prices a 25% chance of a third hike over the remainder of 2018 (the current Fed projections show most members expect two or three more hikes this year).  US core CPI released on Friday (the annual rate is expected to nudge up to 2.2%) will be a key release for interest rate markets. 

Amid a renewed focus on emerging markets in recent weeks, Powell downplayed the spillovers from Fed monetary policy to emerging markets in recent years, saying there was “good reason to think the normalisation of monetary policies in advanced economies should continue to prove manageable.”  Nevertheless, the renewed strength in the USD saw the Argentinean peso fall to a new low overnight, before recovering after President Macro announced the country had sought a (reportedly $30b) flexible credit line from the IMF.  The credit line is seen as a precautionary tool to reassure markets and hopefully to ‘short circuit’ the rapid depreciation in the peso.  There hasn’t been any contagion to other risk asset markets, like equities, as yet, with Argentina and Turkey seen to have idiosyncratic issues to deal with (rather than been representative of the broader EM complex).

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