Rising US inflation fails to lift dollar, treasury yields

Aussie, Kiwi Weak; Yuan Extends Advance, EUR Flat

Summary: The US PCE Core Price Index, considered a favoured inflation measure by the Fed, rose 0.7% in April, from 0.4% in March and higher than median forecasts of 0.6%. On an annual basis, core price inflation (which excludes volatile food and fuel prices), rose 3.1% (Fed target 2%), and the largest annual gain since 1992. However, market reaction showed that participants are comfortable with indications of acceleration US inflation. The benchmark US ten-year Treasury yield ended at 1.59% from 1.60%. Other rival global bond yields were mostly unchanged. After making initial gains in early trade, the Dollar Index (USD/DXY) which measures the Greenback’s value against a basket of rival currencies, closed little changed at 90.05 (89.97 Friday). The Euro settled at 1.2192 (1.2197 Friday) while Sterling ended at 1.4192 from 1.4201, both currencies little changed. The Australian Dollar finished as the weakest performing currency, down 0.49% at 0.7710 (0.7745 Friday. The other Antipodean commodity linked currency the Kiwi (NZD/USD) settled at 0.7247 from 0.7296. USD/CAD edged up to 1.2075 (1.2065). Against the Japanese Yen, the Greenback changed hands at 109.85 at the NY close (109.80 Friday). China’s Offshore Yuan extended its advance against the US Dollar despite a warning from a former Chinese central bank official. USD/CNH closed in New York at 6.3605 from 6.3735 on Friday. In an interview with the Chinese state media run Xinhua News yesterday, a former central bank official Sheng Songcheng said that the current rapid appreciation against the US Dollar may have overshot.
Wall Street stocks dipped at the close of trade ahead of the long weekend Memorial Day holiday (today, 31 May) in the US. The Dow closed at 34,567 (34,572) while the S&P 500 settled at 4,207, down 0.16% (4,212).
Other data released Friday – Japan’s May Unemployment Rate rose to 2.8% from 2.6%. German Import Prices climbed 1.4%, beating estimates of 1.0% but lower than the previous 1.8%. The US April Goods Trade Balance showed a fall in the Deficit to -USD 85.2 billion, from a previous -USD 92.0 billion. US Personal Income in May was at -13.1%, beating median forecasts at -14.2%. Chicago’s PMI rose to 75.2 from 72.1, bettering expectations at 67.9.

• EUR/USD – The Euro initially slid to an overnight low at 1.21326 in early trade following the release of the US PCE inflation report. Other US economic reports were mixed and saw the single currency rally to close at 1.2190, near its overnight high but little changed from Friday’s 1.2197.
• GBP/USD – Sterling, like the Euro dipped to 1.41361 overnight low before lifting toward the close of trade to a 1.4190 finish, from 1.4200 in early Friday. The Pound, like the Euro closed near its overnight peak (1.42056).
• AUD/USD – The Aussie lost ground against the Greenback and other major currencies in another lacklustre performance. AUD/USD was last at 0.7710 after slumping to an overnight low of 0.7677. Australia’s RBA has its monetary policy meeting tomorrow where policymakers are expected to maintain a dovish stance.
• USD/CNH – slip-sliding away. Despite a warning from a former Chinese central bank official, China’s Offshore Yuan extended its impressive advance against the Greenback. USD/CNH slid to an overnight and mid 2018 low at 6.35544 before settling at 6.3600. All eyes on the news wires today with the possibility of further official jawboning from China Inc. Chinese PMI data are released later today (see below).

On the Lookout: Month end factors and bank holidays in the US and UK will make for a slow market today. However, the week ahead will be busy in terms of data and risk events which culminate on Friday with the US May Payrolls report. The RBA meets on interest rates tomorrow. Wednesday sees US ISM Manufacturing PMI and Canadian (m/m) and Australian (q/q) GDP reports. The RBA’s Deputy Governor Guy Debelle speaks on Wednesday evening (Sydney 7 pm). Thursday sees Australian Retail Sales (May) and US ADP Payrolls, Weekly Unemployment Claims and US ISM Services PMI reports. Friday sees ECB President Christine Lagarde and US Fed Chair Jerome Powell speaking at a Global Virtual Conference as well as Canadian and US Payrolls reports.
Today sees Japanese Retail Sales (May) (f/c 15.3% from 5.2%), Industrial Production (f/c 3.5% from previous 3.4%), April Housing Starts (y/y forecast 3.5% from 1.5%) and May Consumer Confidence (f/c 33.2 from 345.7). China releases its May Manufacturing and non-Manufacturing PMI’s. New Zealand sees its ANZ Final Business Confidence (f/c +7.0 from +7.0). Australian Private Sector Credit follows (y/y forecast 0.4% from 0.4%). Europe kicks off with Germany’s Preliminary CPI (f/c 0.3% from 0.7%. Finally, Canada releases its Q1 Current Account (f/c +CAD 2.4 billion from a previous -CAD 7.26 billion). There are no US and UK data due to their holidays.

Trading Perspective: Continued signals of accelerating US inflation failed to lift US bond yields and the Dollar. Without higher interest rate support, the US Dollar will struggle to sustain a decent recovery. Asia markets today will focus on this morning’s release of Chinese Manufacturing and Non-manufacturing PMI’s (11 am Sydney). There are no other primary economic reports due today and financial markets will be shut in the UK (Spring Bank Holiday) and US (Memorial Day Holiday). The week though is a busy one in terms of data and events, culminating in the US Jobs report for May. Which is key for the Greenback. Expectations are for a Payrolls gain (+650 k from April’s +266 k Finlogix). We still have a long way to go until then. Today should see consolidation with the Dollar holding most of the gains over the weekend.

• EUR/USD – the Euro managed to climb off its overnight lows at 1.21326 and close at 1.2190, little changed from Friday’s opening. The Euro opens in early Asia at 1.2194. EUR/USD has immediate resistance at 1.2200 followed by 1.2230. Immediate support can be found at 1.2160 and 1.2130. Month-end factors will dictate any EUR/USD trade and with speculators still long of the single currency, the risk is lower from current levels.
• AUD/USD – The Australian Battler extended its grind lower to close at 0.7710 from 0.7745 Friday. AUD/USD slumped in early US trade to an overnight and early April low at 0.76771. The Aussie has that soggy feel to it at current levels. However, this could be misleading. The RBA is expected to maintain its dovish stance at its policy meeting tomorrow. This remains to be seen. Meantime immediate resistance lies at 0.7725 and 0.7750. Immediate support can be found at 0.7670 and 0.7640. Look to trade a likely 0.7685-0.7755 range today. Just trade the range shag on this one for now.
• GBP/USD – Sterling ended at 1.4190 at the New York close from Friday’s 1.4201 opening. The British Pound traded in a 1.4136-1.4206 range overnight, closing near its highs. GBP/USD has immediate resistance at 1.4205 followed by 1.4235. Immediate support can be found at 1.4160 and 1.4130. Sterling looks to have turned its momentum back down. Unless the US Dollar can strengthen, and this would only be due to higher yields, the Pound will continue to trade recent ranges. For today looking at a likely 1.4150-1.4230.
• USD/CNH – After closing at 6.3600 in New York, Asia sees a spike higher in USD/CNH, currently trading at 6.3680. Comments over the weekend by former Chinese central bank official Sheng Songcheng may have just put a bid under the US Dollar. And halted the Yuan’s advance for now. This latest “verbal” intervention will not be the only one (as history has taught us) and we can expect further “official” warnings of Yuan strength from current levels. However, we would need an overall US Dollar rebound to really see the USD/CNH shorts squeezed. Chinese data released today could see more fireworks in this currency pair. Immediate support likes at 6.3550 (overnight low 6.35554) while immediate resistance can be found at 6.3730 and 6.3830. Prefer to buy USD/CNH dips with a likely trade today of 6.3600-6.3850.

Have a good week ahead all, happy trading.