The move higher in US yields has boosted the USD across the board with both the Bloomberg DXY and the more euro-centric DXY up more than 0.5%. Both reached new highs for 2018 overnight. The EUR, which only yesterday had met resistance at 1.20, fell to as low as 1.1820. It has recovered slightly to 1.1850 as we write. Eurozone GDP met expectations and caused little reaction, with the market more focused on higher frequency economic data to determine whether the slow-down in Q1 growth was indeed a soft patch.
The GBP has been one of the outperformers in the FX market overnight, although it’s still down 0.3% against the USD on the day. The GBP continues to hold above 1.35 for now. The UK labour market report showed a larger than expected increase in employment and wages rising to near 3% - the fastest pace of growth since 2015 (albeit matching expectations). Brexit uncertainty continues to linger in the background, with the two factions of the Conservative party still unable to agree on a path forward to deal with the Irish border and the customs arrangement with the EU. The EU’s chief negotiator Michael Barnier said yesterday that there had been “little” progress in talks since March and highlighted the June EU Summit as a “key rendezvous” to agree a deal that can be signed off in time by European parliaments.
The NZD is once again one of the underperformers in FX markets, against a backdrop of broad USD strength. The NZD has fallen over 7% in the space of a month, with the NZD/AUD cross down over 3% over that time. The relative decline in NZ’s interest rates post the RBNZ MPS has added to the downward pressure on the NZD since then. Meanwhile, the Global Dairy Trade auction overnight showed a 1.9% rise while the whole milk powder price fell 2.6%; there was little discernible impact on the currency.
US equity markets came under pressure overnight in response to the move higher in US yields. The S&P500 is down around 0.9% with the NASDAQ down a similar amount, although both remain near two month highs. The financial sector is one of the outperformers on the day, supported by higher rates and a steeper curve (generally thought to be supportive of banks’ net interest margins) and media reports that US regulators are preparing to scale back some of the restrictions imposed by the Volcker Rule.
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