FX today was seeing a further spike in the dollar and EUR/USD worts performance in two-years after the ECB left the prospects for an interest rate rising disappearing over the horizon and downgrading its assessment of the economy in 2018.
It is evident that synchronized global growth theory is more biased to the US economy in reality, while the Fed's position stands in stark contrast to that of other central banks, offering the dollar a boost. DXY rallied between a range of 93.1930-94.9310. There was not much of an impact on US yields with the US 10yr treasury yield ranging sideways between 2.93% and 2.96% and the 2yr yields inched up slightly from 2.55% to 2.57%. The Fed fund futures yields price 1 ½ more hikes in 2018.
German 10yr government bond yields fell sharply after the ECB statement, from 0.50% to 0.42%. French bond yield fell 8bp, Italy -6bp.
As far as the ECB went, the ceasing of its Asset Purchasing Programme into end 2018 was well telegraphed, so there were no surprises there. However, the delivery of details of its policy guidance earlier than expected (their July meeting was the market’s consensus) was surprising. What hurt the euro the most was the central bank's current negative rate stance that will remain to “at least through summer 2019”. Also, with the ECB reinvesting maturing bonds for an extended period engraved a dovish slant to the meeting.
Subsequently, after an initial bid in anticipation of tighter policy, where 1.1851 was traded, the single currency sunk to 1.1562 the late low in NY, closing at 1.1568 from a 1.1824 starting point. The US retail sales was a further catalyst that sent the DE-US yield spreads further in the greenback's favour.
Sterling was hit on the ECB and Brexit angst continues to weigh on cable. GBP/USD ended the US session at 1.3260 having made an outside of the channel low of 1.3256 with eyes to the May 29th low of 1.3205. For the cross, this dropped 1% to 0.8730 on the ECB seeing rates lower-for-longer.
USD/JPY was up to the descending resistance of the weekly downside trend from 118.65. However, the crosses remain heavy, holding up the advance on the 110 handle vs the dollar. The retails sales beat helped the pair move to the highs of 110.69 ahead of the BoJ today with eyes on the May & Nov highs at 111.39/4.73.
The higher betas got whacked. The soft Aussie jobs were the foundation to the downside in AUD/USD, underpinned by a more cautious RBA of late, in stark contrast to the Fed's rhetoric and actions. AUD/USD at 0.7424 was the lowest level since the 15th May - a stone throw away from the May lows of 0.7412 and a breakout point for a renewed bear leg, completely reversing the slow grind of a correction of the 2018 downtrend.
Key notes from US session:
- ECB’s Monetary Policy Statement surprises by outlining the ending of APP and more! - Westpac
- ECB policymakers split over wording of stimulus end, rate hike - Reuters
- EUR/USD: ECB aftermath, overshoots will be punished - TDS
Key events ahead:
Analysts at Westpac offered their outlook for the key events for the rest of the week as follows:
"Australia’s data calendar is now very quiet until end-June. RBA’s Ellis speaks on infrastructure from about 1:30pm Syd/11:30am Sing/HK.
The Bank of Japan is expected to hold its key policy settings unchanged: keeping the 10 year bond yield around 0%, a -0.1% deposit rate on banks’ excess balances held at the BoJ and, less justifiably, claiming to purchase JGBs at an annual pace of JPY80 trillion. It would be sensible to drop the latter pledge and keep its 0% “yield curve control” policy which has been successful, but the BoJ seems worried about the market reaction if they did. There has been no indication from officials that a policy change is imminent, with inflation of just 0.4%yr on the measure it wants to raise to 2%. There is no fixed time for the statement but the last release was around 1pm Syd/11am Sing/HK.
Markets are closed in Singapore, Indonesia, Malaysia and the Philippines.
The US data calendar includes June manufacturing sentiment in the New York region (Empire State index), May industrial production and June consumer sentiment from the University of Michigan. The general tone should be positive, with any surprises to have limited market impact."
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