Markets Today: Treading water

The USD has continued its ascendency with the DXY index up for a fifth day in a row.

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The USD has continued its ascendency with the DXY index up for a fifth day in a row. Meanwhile, European and US equity markets treaded water fluctuating between small losses and gains. Energy and industrial shares fell overnight weighted down by the move lower in oil prices while health care stocks posted gains on the back of better than expected earnings reports.

Reports that wildfires in Canada had moved away from key oil producing areas was cited as the major driver for the decline in oil prices. Other articles also suggested that Saudi Arabia’s new oil minister was also a factor as the new appointment will not lead to a cut in oil production. Metal and bulk commodities also had a bad night dragged lower by concerns over china’s economic prospect following disappointing trade figures over the weekend. Copper lost 2.6% overnight and iron prices fell 5.5%. The decline in iron ore was also not helped by an article from the Dalian exchange that it will introduce different transaction fees in order to strengthen market oversight and limit frequent short-term trading.

So given this backdrop of stronger USD and softer commodities, it is not surprising to see that the NZD, AUD and CAD amongst the biggest losers against the USD. The strength in the USD appears to have been driven by a reversal in positioning. The USD was heavily oversold in March and April and the bounce of a key technical level last week appears to have triggered an unwinding of these positions. Technical levels for the NZD and AUD have also been brought into the spotlight. The NZD/USD fell 0.8% overnight and in doing so it has broken through its 0.6790 support level. As noted by our BNZ currency strategist, the break of this key level brings into question the upward trend channel that has been in place over recent months. On this score we note that yesterday we published updated forecasts suggesting a range of 0.65-0.70 for NZD/USD over coming months. Similarly, the AUD fell 0.69% percent overnight and after trading to a low of 0.7308, it is now trading at 0.7315. Our technical analyst has noted that a confirmed break below the 0.7300/20 would imply that the recent decline is sustainable and could herald a retest of the 70 cent mark.

Looking at other currencies, the USD/JPY gained 1.3% on now new news. Stronger USD and good performance by the Nikkei contributed to the move while no material reaction was noted after Finance Minister Aso commented that that sudden exchange rate moves aren’t desirable and the government had the means to intervene.

On other news, Fed Kashkari was on the wires noting that a June Fed hike was possible and that the USD is important factor in Fed analysis.

Coming Up

It’s a quiet day in Australia with the weekly consumer confidence reading the only notable data release on the roster.

Indeed, while the Housing Finance and Monthly Consumer Confidence due for release tomorrow should garner some attention the rest of domestic data releases over the remainder of the week are unlikely to elicit a material market reaction. Given this backdrop we would suggest the AUD is more likely to be driven by global risk appetite, technical levels and key data releases offshore.

China, has a busy week of data releases. The CPI and PPI for April are scheduled for release today, New Yuan loans and Aggregate financing reports are due any day and on Saturday we get the April figures for industrial production and retail sales. As for the CPI today (due for release at 11:30am AEST), the median in Bloomberg is showing market expectations are for 2.3% print, unchanged from the March reading. However, if food prices are any guide, the risk is that we get a stronger than expected inflation print.

Germany releases its trade balance and industrial production for March. The UK also releases its March trade balance and another large trade deficit is expected.

On the other side of the Atlantic, the NIFB small business optimism index is the only notable data release. Given the improvement in the hiring intentions sub index released last week, expectations are for an uptick in small business optimism in April.

As for Fed speakers, Minneapolis President Kashkari speaks in Minnesota, Fed Williams is on Q&A session and New York Fed Dudley is in Zurich speaking on a panel. Given that Dudley is considered to be one of Yellen’s allies, the panel Q&A session could offer some noteworthy sound bites.

Overnight

On global stock markets, the S&P 500 was +0.20%. Bond markets saw US 10-years -2.47bp to 1.75%. On commodity markets, Brent crude oil -3.92% to $43.59, gold-2.2% to $1,266, iron ore -5.7% to $54.99. AUD is at 0.7314 and the range was 0.7308 to 0.7385.

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