US Treasury yields were little changed, but the USD was softer across the board more than reversing Thursday’s gains.  The Big Dollar was on a steady decline for the whole of Friday with political news seemingly still weighing on the currency while equity markets focus appears to have shifted back towards the outlook on the economy and strong corporate earnings. North Korea test another missile on Sunday, but market reaction has been muted so far this morning.

The USD came under renewed downward pressure on Friday following a Washington Post Report stating that a current senior White House adviser is a person of interest on the FBI Russian probe during the election campaign. Meanwhile former FBI Director Comey has agreed to testify in public before the Senate Intelligence Committee after Memorial day at the end of the month.

On better news over the weekend, Saudi Arabia and the US announced several agreements from defense to gas and oil industries with the Pentagon reporting a package totalling approximately $110 billion in arms purchases”. The White House noted the deal would support “tens of thousands of new jobs in the U.S.”

USD weakness on Friday was broad based with both DXY (-0.75%) and BBXY (-0.63%) indices showing a steady decline on the intraday chart. The Euro (+0.93%) and other European currencies (NOK +1.32%, DKK +0.91%, SKE +0.88%) were the top G10 outperformers while commodity-linked currencies made relatively modest gains (CAD 0.68%, AUD 0.54% NZD 0.36%).

The EUR closed the week above 1.12 for the first time since November 9 last year and it has risen close to 6% since mid-April. The rapid rise in the currency is now getting to a point where the ECB is likely to become uncomfortable. The Central Bank monetary policy measures have been focused on reviving inflation within the Euro area, but a strong currency could potentially undermine these efforts. Bundesbank President Weidmann said “domestic price pressures are still subdued. But the economic recovery will gradually allow it to increase. This must be adequately taken into account in our forward-looking monetary policy”.

USD weakness also helped GBP regained a 1.30 handle, closing up 0.8% and this morning the pound trades at to 1.3017. In a weekend interview, UK Brexit secretary Davis suggested that the UK would quit talks on leaving the EU unless the bloc drops its demands for a divorce payment as high as €100b.  “The first crisis or argument is going to be over sequencing”, he said.

The AUD closed the NY session on Friday at 0.7459 (currently at 0.7447), after trading to a short lived high of 0.7470 in the London morning session. Meanwhile despite decent gains in oil prices, softer than expected retails sales and CPI readings prevented the CAD from making bigger inroads against the USD. WTI closed the week up 2% on the day and back above the $50 mark for the first time since April 26 (Brent was 2.12%). Speculation of an extension to oil production cuts continues to support the move higher in oil prices. On this score, Saudi Arabia’s energy minster Khalid Al-Falih said on Saturday that he believed everybody was on board favoring an extension to the production cuts agreement. OPEC are due to meet formally on Thursday.

US equities continued to recover on Friday with the S&P 500 climbing 16 points to 2381 (+0.68%) while the Dow (+0.69%) and NASDAQ (0.47%) also closed the week on a positive note. That said the positive returns on the last two days of the week were not enough to reverse the mid week damage triggered by controversial reports on the Trump administration.  The S&P 500 ended 0.38% down on the Week, the Dow was -0.44% and the NASDAQ -0.61%. The VIX closed the week at 12 (-18%).

10y UST yields closed the week at 2.325%, half a bps higher relative to Thursday’s close while the 2y rate was essentially unchanged at 1.272%. Corporate issuance pushed longer dated yields higher, but US political turbulence capped the move keeping rates constrained within a relatively tight range.

US Fed’s Bullard (non-voter) said recent economic data has been weak suggesting the current FOMC’s contemplated policy rate path is overly aggressive relative to actual incoming data on U.S. macroeconomic performance’’. Interestingly Bullard also commented on recent political events noting, “Even if there is political turmoil, it would just mean that Washington was paralysed in terms of making macroeconomic policy decisions. But that wouldn’t be any different than divided government which we have had in the past”.

Coming Up

We have a light start to the week with Japan’s trade data and Chicago’s activity index the notable releases for today. Looking at the rest of the week, AU Construction Work Done (Wed) and NZ Budget (Thurs) are the regional highlights. Trump Budget is expected Tuesday, then FOMC Minutes Wednesday, OPEC meets Thursday and then the G7 meets Friday-Saturday in Italy.  More Fed and ECB speakers too.

Overnight

On global stock markets, the S&P 500 was +0.68%. Bond markets saw US 10-years +0.52bp to 2.23%. In commodities, Brent crude oil +2.09% to $53.61, gold+0.1% to $1,254, iron ore +1.8% to $62.69, steam coal +0.3% to $74.25, met. coal +0.0% to $174.50. AUD is at 0.7447 and the range since Friday 5pm Sydney time is 0.7407 to 0.7470.

Good luck.

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• Markets Today: 22 May 2017 (PDF,110kb)

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