Forex today: lower yields send dollar onto the back foot again

Forex today sent the dollar lower as US yields tanked with the US 10yr treasury yields paring the previous day’s gains. Stocks made an impressive recovery at the start of the session as investors followed the flows of money, but were weaker towards the close. 

Despite the strong labour data today, (a 45-year low in US Jobless claims):

• US initial jobless claims Feb-17: 222k (est 230k; prev r 229k).
• Continuing jobless claims Feb-10: 1.85m (est 1.930m; prev r 1.948m).

... the forex market has seen another reversal in the dollar and US yields. The DXY has been moving to the downside within a range of between 89.635 - 90.235 and is currently down -0.32% at 89.7160

In terms of US 10yr treasury yields paring the previous day’s gains, they dropped from a three-year high of 2.95% to 2.91%. As for shorter-term rates, such as in the  2yr yields, these fell from 2.27% to 2.25%. Also, the US Treasury sold 7-year notes at 2.839%, the highest level since March 2011. The long-term Fed Funds futures were testing the ceiling at 2.5%. The market is currently pricing in five hikes, three in 2018 and two in 2019, (Fed fund futures yields are pricing in the chance of another rate hike in March as a cert). 

In Fedspeak:

• Fed's Bostic: things are continuing to look up, citing the GDP tracker.
• Fed's Bullard: too many rate hikes in 2018 could slow economy too much.
• Fed's Quarles: gradual us rate hikes 'appropriate'.
• Fed's Bostic: the Fed carefully calibrating return to a more normal policy.
• Fed’s Dudley: there’s a ‘speculative mania’ in the cryptocurrency market, (no comments on US economy, Monetary policy in Fed Dudley’s prepared remarks).

As for the other currencies, the euro has been in a 1.2260-99 range in Europe and pressured on the basis of the FOMC minutes pointing towards a faster pace of tightening and the market factoring the 5th hike in 2019. Then, there was weaker data in the Feb IFO at 115.4 vs the 117 consensus and below the prior 117.6 following on from the lower ZEW and PMIs. For the NY session, the euro opened around 1.2290 and was still underwater on the back of the ECB minutes. However, US yields gave way and the single currency was then able to attract a bid to 1.2350 before a correction back to 1.2315 as the dollar recovered before another correction back to 1.2340 for the close on further weakness in the greenback.

As for cable, it had been struggling to maintain a bid in the European session and was beat up from space on the 1.39 handle to 1.3870 due to US 10-yr yields towards 3%. The UK Q4 GDP was downwardly revised to 1.4%. For the NY session, it was handed over at 1.3880 resistance to end higher at 1.3958 on dollar weakness.

As for the cross, EUR/GBP was in a chop between 0.8825/55 while the pair remains caught up between Brexit angst and expectations for both the BoE and ECB. Traders will be looking out for the outcome UK PM May's Brexit Cabinet meeting at Chequers today where she will dine with key decision makers to try and come up with a final plan. There could be some risk on Monday when the opposition's leader, Corbyn, gives a Brexit speech.

USD/JPY was lagging the rest of the pairs on the back of the FOMC minutes and the pair corrected the bid in Tokyo with supply into London as well within a range of between 107.16-107.78. However, with the US yields falling back, and the dollar offered, along with EUR/JPY's proximity to the 200-D SMA at 131.14, USD/JPY dropped to 105.54 before closing at 106.29.

And for the antipodeans, higher beta play improved on lower US yields and both the Aussie and Kiwi were able to catch a bid on higher commodity prices, ( weaker dollar), despite the supply in gold.  AUD/USD opened at 0.7815 in NY, popping the 55-D SMA and was making a high of 0.7859 before easing back to 0.7838, supported by the descending 50-hr SMA at 0.7835 for a close of 0.7845. The Kiwi turned up to the NY session at 0.7330 and climbed to the 10 and 21-D SMAs, capped at 0.7364, offered back to a low of 0.7322 before rising to the 200-hr SMA at 0.7345 into the close.

Key notes from US session:

Fundamental, political and economic wrap: dollar squashed by declining US yields

Event risks:

Analysts at Westpac offered the key events for the end of this week.

• "Japan Jan CPI is seen to lift to 1.3%yr from 1.0%yr. The expected quickening relates to an uptick in fresh food prices with consensus estimates for core (ex-fresh food) down slightly to 0.8%yr from 0.9%yr.
• The US Federal Reserve publishes its semi-annual monetary policy report ahead of Chairman Powell’s testimony to Congress on Feb 28. There is also a speech by San Francisco’s Williams on the US economic outlook."