USD Trying To Push Higher Still, But With Limited Momentum
It is not hard to see what is driving the USD higher in the current climate, as a re-coupling with rates has changed the mindset around this year from current account deficits to yield differentials. This has been highlighted by the resilience in USD/JPY, which has been somewhat immune to swings in the equity markets. Stocks are now looking a little more vulnerable as Treasuries present some really attractive levels, with the benchmark 10yr Note now through 3.05%, but perhaps not as convincingly as some had anticipated. This may prompt some hesitation in USD buying from current levels, and especially so given the USD upturn was always seen to be corrective in the big picture.
Yesterday afternoon, the US retail sales numbers may have missed a touch on expectations but were still healthy enough, and certainly did not put off the USD buying which looked to be brewing early on in the session. This morning we see pressure on the 1.1800 level in EUR/USD, and bears will point to the uncertainty of the new coalition government in Italy as a source of concern. This is reflected in some further weakness in the crosses where EUR/CHF is also eyeing a move under the 1.1800 level, keeping the USD/CHF rate close to parity as a result.
More US data this afternoon, with industrial production on the schedule, with the capacity utilisation rate expected to rise and highlight increased activity.
EU wide inflation came in as expected at 1.2%, but this was the final reading and the familiar confirmation as is more often than not the case.
USD gains are a little more restrained when looking at the commodity currencies. Both the AUD and CAD have suffered a little more than their fair share of weakness against the greenback of late, and are proving a little more resilient in the current climate.
Overnight we saw the wage price index a little lower than expected at 0.5% to keep real earnings depressed for now, but this is nothing we did not know already and if the employment report produces further job gains to the tune of 20k or more, than this should be enough to allay concerns at the RBA. Continued job gains should maintain hopes that this will eventually feed through into wages as was the case with the Fed and US jobs a few months back.
In Canada, the employment data was softer in the headline, but the breakdown showed full-time jobs growing, so all was not bad. Even so, USD/CAD has also been caught up in the USD tide, and the market is choosing to ignore the positive talk on NAFTA, where PM Trudeau is looking for an agreement pretty soon. Mexico has thrown a spanner in the works by asking for a text to be produced by the end of the week. This has tempered any market optimism, but current levels may be dashed significantly if we do get a breakthrough, so we are expecting a moderation in the spot rate back under 1.2800 at some point soon.
NZD/USD has been an easy target for USD bulls with the RBNZ striking a dovish tone in their last statement. With the direction of interest rates evenly balanced according to the board, sellers have been encouraged to hit the pair lower still, but in 0.6822-0.6782, there is a strong cluster of support which we expect to be a tough obstacle, but pressure unrelenting as yet.