FX Mixed, DXY Steadies, Stocks Flat; US Yield Curve Inversion Widens

AUD Rebounds, RBA Hawkish Hold; USD/JPY Holds Below 145.00

Summary:

The Dollar Index steadied to 103.07 from yesterday’s 102.92 as the US yield curve inversion between the 2-and 10-year yields widened. A yield curve inversion is where shorter dated securities trade higher than longer dated treasuries.

The benchmark 10-year rate settled at 3.85%, while two-year US bond yields were last at 4.94%. The inversion is the deepest since 1981. The 30-year US treasury rate was unchanged at 3.869%.

According to a Reuters report, the 2/10-year US treasury yield curve has inverted six to 24 months before each recession since 1955. US markets were closed to celebrate the US Independence Day holiday.

Other global bond rates rose modestly. The UK 10-year Gilt yield rose to 4.41% (4.38%). Germany’s 10-year Bund yield climbed 2.45% from 2.39%. Japan’s 10-year rate dipped to 0.37% (0.39%).

Against the Japanese Yen, the US Dollar was little changed at 144.45 (144.40) after Japanese officials warned against excessive Yen selling. Japan’s Masato Kanda, its top currency diplomat said that authorities were in close contact with US Treasury Secretary Janet Yellen.

The Australian Dollar (AUD/USD) rebounded sharply to 0.6697 from 0.6639 after the RBA left interest rates unchanged. RBA Governor Philip Lowe said some further tightening may be needed to ensure inflation returns to target. New Zealand’s Kiwi (NZD/USD) soared to 0.6195 (0.6125).

The Euro (EUR/USD) dipped to 1.0882 from 1.0910 in subdued trade. Sterling (GBP/USD), however, rallied 0.20% to 1.2715 (1.2695). UK Prime Minister Rishi Sunak said: “we will use monetary and fiscal policy fully on inflation”, which lifted the British currency.

Against the Asian and Emerging Market Currencies, the Dollar was mostly lower. The USD/CNH (Dollar-Offshore Chinese Yuan) slid to 7.2245 from 7.2690 after the PBOC (China’s central bank) set the Dollar reference rate at 7.2046 Yuan, against expectations at 7.2361.

The USD/THB pair (Dollar-Thai Baht) tumbled to 34.90 from 35.30 while USD/SGD (Dollar-Singapore Dollar) dipped to 1.3495 from 1.3515.

Economic data released yesterday saw China’s Caixin Manufacturing PMI dip to 50.5 in June from May’s 50.9, but better than expectations at 50.2.

Australia’s May Building Permits rose 20.6%, higher than May’s upward revised -6.8% (from -8.1%). Japan’s Tankan Large Manufacturing Index climbed to 5 from a previous 1, beating forecasts at 3.

The Eurozone’s June Final Manufacturing Index dipped to 43.4 from 43.6 previously. British June Final Manufacturing PMI edged up to 46.5 from 46.2.

The US ISM June Manufacturing PMI eased to 46 from 46.9, and lower than median estimates at 47.2. Germany’s Trade Surplus shrank to EUR 14.4 billion from EUR 16.5 billion previously.

AUD/USD – The Aussie Dollar had a choppy session, initially dropping to 0.6639 from its opening at 0.6662 after the RBA kept its cash rate unchanged at 4.1%. Most analysts had forecast a rate increase to 4.35%. Following hawkish remarks by RBA Governor Philip Lowe, the Australian Dollar rebounded to close at 0.6662.USD/JPY – Settled little changed at 144.45 (144.40 yesterday) in choppy trade. The Greenback soared to an overnight high at 144.68 as US bond yields rose. Warnings from Japanese officials against excessive Yen weakness prevented USD/JPY from climbing above the 145.00 threshold level.GBP/USD – The British Pound advanced against the Greenback to 1.2715 from yesterday’s open at 1.2695. Comments from British PM Sunak (see above) lifted Sterling. The overnight high recorded was at 1.2739. The low traded was at 1.2683. Manufacturing activity in the UK rose in June to 46.5, beating estimates at 46.2.EUR/USD – The shared currency dipped to 1.0882 from yesterday’s 1.0910. Trading was subdued ahead of the US Independence Day holiday. The Euro traded to an overnight low at 1.0872, while the overnight high recorded was at 1.0916. Eurozone Manufacturing PMIs were mixed. German June Manufacturing PMI slid to 40.6 from 43.2 in May.On the Lookout:

Today’s economic calendar kicked off earlier with New Zealand’s Global Dairy Trade Price Index which fell -3.3% against the previous level of 0%.

Analysts had forecast -1%. The Kiwi (NZD/USD) was little changed at 0.6695 (0.6691 New York close).

Australia follows with its Judo Bank Services PMI (f/c 50.7 from 52.1 – ACY Finlogix).

Next up is Australian AIG Group Industry Index (f/c -14 from -10.9 – ACY Finlogix).

Japan follows with its Jibun Bank June Final Services PMI (f/c 54.2 from 55.9 – ACY Finlogix).

China is next with its June Caixin Services Index (f/c 56.5 from 57.1 – ACY Finlogix).

France kicks off European data with its French May Industrial Production (f/c -0.2% from 0.8% - ACY Finlogix).

France also releases its June HCOB Final Services PMI (f/c 48 from 52.5 – ACY Finlogix), Germany follows with its June HCOB Final Services PMI (f/c 54.1 from 57.2 – ACY Finlogix), Eurozone HCOB Final Services PMI (f/c 52.4 from 55.1 – ACY Finlogix).

The Eurozone also releases its June PPI (m/m f/c -1.8% from -3.2%; y/y f/c -1.3% from -1.0% - ACY Finlogix).

The UK follows with its UK S&P Global Final Services PMI for June (f/c 53.7 from 55.2 – ACY Finlogix).

The US rounds up today’s data releases with its May Factory Orders (m/m f/c 0.8% from 0.4% - ACY Finlogix), US May Core (ex-Transportation) Factory Orders (m/m f/c 0.3% from -0.2% - ACY Finlogix).

The US releases its IBD/TIPP Economic Optimism Index for July (f/c 43 from 41.7 – ACY Finlogix).

Trading Perspective:

While the Dollar Index (USD/DXY) drifted up, the Greenback was mixed against its major and minor rivals.

Expect uncertainty in FX markets to prevail today with the Dollar most likely to pull back, surrendering gains.

Data releases will also be a factor.

Globally, after climbing and beating most median expectations, a pullback is likely.

Which should keep a lid on the Dollar Index.

AUD/USD - The Aussie Battler had a roller coaster ride after the RBA chose to keep rates on hold. Hawkish comments though by RBA Governor Philip Lowe prevented a bigger move to the downside and lifted the Australian Dollar. On the day, look for immediate resistance at 0.6710 followed by 0.6740. Immediate support lies at 0.6665 and 0.6635. Look for more choppy trading, likely between 0.6640-0.6740. The preference is to sell Aussie rallies.

(Source: Finlogix.com)

USD/JPY – Had a subdued trading day kept at bay by Japan Inc. Japanese top currency diplomat Masato Kanda remarked that authorities were in close contact with their US counterparts, led by Janet Yellen. USD/JPY closed at 144.45. Immediate resistance is found at 144.70 and 145.00. The 145 psychological level is strong and should hold. A clean break above could see higher and elicit more rhetoric, possibly followed by action. Immediate support lies at 144.30, 144.00 and 143.70. Look for more choppy trade in this currency pair, likely between 144.00-145.00. Prefer to sell rallies.EUR/USD – The Euro failed to advance versus the US Dollar in uninspired trade, closing at 1.0882 (1.0910 yesterday). For today, look for immediate support at 1.0870 followed by 1.0840 and 1.0800. On the topside, immediate resistance can be found at 1.0915 (overnight high traded was 1.0916). The next resistance level is found at 1.0950 followed by 1.0980. Look for the Euro to trade in a likely 1.0850-1.0950 range today. Trade the range.GBP/USD – Sterling edged higher to 1.2717 against 1.2695 yesterday. Overnight, the British Pound traded to a high at 1.2711. Look for immediate resistance today at 1.2715 followed by 1.2740. On the downside, immediate support is found at 1.2670 (overnight low traded was 1.2674). The next support level is found at 1.2640 and 1.2600. Look for Sterling to trade a likely range today of 1.2650-1.2750. Sell rallies as long speculative GBP positions look to unwind.Have a good trading day ahead all. Happy Wednesday.

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