Markets Today: Blowin in the wind

The USD has resumes its downtrend with Euro strength the main culprit and with USD indices trading sub key support levels the big question is how long will the Dollar fall, if only Bob Dylan new the answer.

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Today’s podcast

Overview:

  • The US dollar resumes decline while Euro flirts with 1.25
  • AUD has a look sub 80c and JPY is the other underperformer
  • US equities trade in an out of positive territory while European equities struggle
  • Higher yields is a headwind for equities, but earnings reports are currently a big factor too
  • Amazon, Apple and Alphabet to report after the bell
  • Move up in oil and softer USD help most of the commodity complex

The USD has resumes its downtrend with Euro strength the main culprit and with USD indices trading sub key support levels the big question is how long will the Dollar fall, if only Bob Dylan new the answer….After yesterday’s soft data and ongoing repricing of RBA expectations the AUD is the G10 underperformer. Equities remain volatile and aside of currencies and higher yields the current reporting season is a big source of volatility. Expect more of the same with Amazon, Apple and Alphabet reporting after the bell.

The aftermaths from yesterday’s FOMC meeting has resulted in a solidification of a March FOMC hike (now fully priced) and a bear steepening of the UST yield curve. 10y UST are currently trading at 2.78%, 8.3bps higher over the past 24hrs and although European yields have also moved higher, their rise has not been quite to the same degree. 10y UK gilts closed up 2.1bps  to 1.53% and 10y Bunds are up 2.4bps to 0.72%.

So higher rates differentials are not supporting the USD. The DXY index is down 0.50% and given the break of key support levels, the move sub 89 has increased concerns over the potential of a bigger slide in the greenback.  Euro is again the main culprit, after initially trading with a softer tone post Sydney’s close, which saw the pair briefly trade sub 1.24, the currency has been on a steady rise and now trades at 1.2518. Although the euro was already on its way, ECB Nowotny helped the cause noting that  the ECB should end the bond-buying programme, while earlier, Bloomberg ran a story that some ECB officials are said to want to provide the market clearer guidance on interest rates. So on the one hand the USD is starting to look oversold, but the repricing of the euro and expectations that other central banks will follow the ECB in removing their easing measures (amid a broad global growth recovery) remains the dominant theme.

After yesterday’s softer than expected building approvals number, the market has continued to reprice RBA rate hike expectations (a first rate hike is now not seen until February 2019, while early this week a first hike was fully priced in November this year). So given this backdrop the AUD drifted lower overnight, briefly trading sub the 80c mark. Later in the session amid a soft USD environment, the pair has recovered and currently trades at 0.8043, for now a break above the 0.8160/70 remains a key resistant level.

JPY has been the other underperformer (-0.20%). USDJPY now trades at ¥109.37, early days but after last week’s inability of the pair to trade sub ¥108 along with a reassertion of Governor Kuroda and other officials that the Bank will retain its accommodative policy, it seems that the USD/JPY relationship with UST yields is reasserting itself. Our FV model suggest the pair is now trading at an extreme level and its due for a move higher.

Meanwhile NZD continues to flirt with a move above 0.74. After briefly trading on the figure the kiwi currently trades at 0.7399, up 0.39% on the day and Jason Wong, our  BNZ strategist, suggests NZD appears to still be benefiting from a reduction in long AUD/NZD positions, amid the softer AU data of late. Jason also notes that GBP has largely managed to keep pace with EUR despite the soft UK data and negative Brexit headlines.  The two most read stories on the FT have the headlines “EU rejects Brexit trade deal for UK finance sector” and “EU moves to stop post-Brexit bonfire of regulation”.  Talk is toughening up on Brexit negotiations but we still expect a transitional deal to get negotiated next month which will help take Brexit off the front pages and support GBP.

As for equities, while they may be wobbling amid a higher yield environment, drilling through sectors and shares performance a lot of the volatility is coming from companies reporting their earnings. For instance overnight, after a solid report, eBay jumped 15.33% ,Mastercard solid sales and profits helped the stock rise 3.24%, despite concerns over a negative impact from tax reform. Meanwhile, UPS disappointed after acknowledging an increase in costs from service delays, the share currently trades 5.66% down. So while equities ability to sustain higher yields is a macro theme, the ongoing reporting season is important too. So on that score, is worth noting that Amazon, Apple and Alphabet will report after the bell today.

Finally commodities have had a relatively good night, amid a softer USD environment with the move higher led by oil prices (Brent +0.7, WTI +1.2%) . Nickel has outperformed (+3%), but gold and iron ore are little changed.

Coming Up

  • New Zealand kicks of the day with Consumer Confidence, Building Permits and Net Migration. The consumer confidence reading for January should be of some interesting as it could be interpreted as a grading on the new government’s policies and intentions.
  • Australia’s PPI is unlikely to trouble the scorers and then later today the UK releases its Construction PMI reading for January
  • The US Labour market report is today’s big ticket and the market is looking for a solid 180k non-farm payrolls print, up from 148k previously. The unemployment rate is seen unchanged at 4.1% and the average hourly earnings is expected to print at 0.2%mom, down from the 0.3% printed in December. Still the yoy reading is expected to climb by one tenth to 2.6% yoy. The US also gets Factory and Durable (final) Orders and Fed Williams speaks in San Francisco

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