Durable Goods show weakness to lean on the USD/rates

JPY the underperformer as yield-seeking overwhelms

Early USD sales petered out first thing in London as traders sounded out the larger orders, consigning the market to range bound trade ahead of the US data readings.  Durable goods on the slate for the early NY slot, and we saw the numbers missing on all measures with the headline fall of 1.1% over May deeper than expected.  Ex defence and ex air also fell 0.3% vs an expected 0.2% rise, and in light of Fed chair Yellen’s positive assertions on business investment, this taint it to some degree.

We saw EUR/USD pushing back up through 1.1200 accordingly, but gains have been faded into circa 1.1220-25 levels for now.  Similarly, in USD/JPY the dip back has stopped well short of 111.00, but we continue to run into selling interest ahead of 112.00 which highlights the lack of conviction here. 

Adding to the USD bearish mix was the Chicago Fed national activity index, which also fell, with the Dallas manufacturing index also lower.  More from Dallas (services tomorrow) as well as the Richmond indices, but more focus on Yellen due to speak after London hours.  Other Fed speakers Tuesday include Williams, Harker and Kashkari.

Earlier in the day, the German IFO survey also beat on current assessment as well as expectations, so all points to another grind higher in EUR/USD, but upside momentum continues to suggest a deeper setback is required.  ECB President Draghi is scheduled to speak early on, the market expected to be hanging on his every word.

EUR/GBP (and Cable) continue to battle it out inside limited ranges, with news that the Conservative deal with the DUP doing little to generate fresh upside momentum.  Traders pre-empted this move with an early Cable run up above 1.2750 as reports hit the wires that the Tories were in discussions with the DUP this morning, so it looks as though pre 1.2800 will be a tough ask irrespective of some of the growing calls for a BoE rate hike in Q3.  These fresh rate calls have been fuelled by comments from BoE chief economist Haldane in comments last week, but the uncertainty factor over the EU talks ahead look to be overpowering rate based moves for now.  BoE Carney speaks tomorrow after the FSR. EUR/GBP above 0.8800 looks anything but convincing but looks well cushioned in the mid 0.8700’s.

Looking ahead, the trade data in NZ is the main event to look to early on in the Asian sessions and with terms of trade at record highs.  NZD is still pressing on better levels against the USD and AUD, and this is where the RBNZ will be focusing their concerns over exchange rate valuations.  The spot rate is now very close to the recent 0.7320 highs, but 0.7330-50 is the resistance zone to watch.  1.0350-70 is where AUD/NZD finds support, which has held over recent sessions, but which remains vulnerable.

From the AUD perspective, fresh gains in Copper and iron ore leveling off has been cause for a modest upturn, but continues to be hampered by selling ahead of 0.7600.  The hunt for EM yield goes in line with the softer risk tone today – also AUD (and NZD) supportive, which the JPY underperforming against the USD also despite early selling in the greenback first thing. AUD/JPY and NZD/JPY are both 0.5% higher late in the day, with EUR/JPY also pushing on 125.00 but with little success as yet.  RBA assist gov Debelle down to speak in early London.

CAD/JPY caught up with its commodity-linked counterparts later in the day, having weathered some early weakness on the back of the soft inflation data last Friday.  Oil prices have come off better levels, but with WTI holding onto the USD43 handle, there is little cause for concern as yet.