Forexlive Americas FX news wrap: US yields recover a bit into the weekend
Forex news for NY trading on August 16, 2019
- Stocks close the session with solid gains. Erase more of the declines from this week
- CFTC commitment of traders: GBP shorts trimmed modestly. JPY longs increased.
- Key events and releases for next week's trading
- Fed's Mester: She can see scenarios where rates are steady or moved lower
- WTI crude oil futures settle at $54.87
- UK finance minister Javid: Want to see lower taxes, that would pay for public services
- NY Fed GDP Nowcast rises to 1.82% from 1.58% last week
- Fed's Kashkari: Recession not base case but risks risen quite a bit
- Baker Hughes oil rig counts 762 versus 762 estimate
- Pres. Trump held call with top bankers as market tumbled
- European shares have a recovery day
- German government is getting prepared for deficit spending in case of recession
- German finance minister: EU27 stand united and is ready for all Brexit scenarios
- Atlanta GDPNow tracker for 3Q growth remains unchanged at 2.2%
- U Mich August preliminary consumer sentiment 92.1 vs 97.0 expected
- This is the most-important chart this week
- US July housing starts 1194K vs 1256K expected
- GBP is the strongest while the CHF is the weakest.
Yes this week, had a day when the Dow and Nasdaq each fell over 3%. However, this week was really about yields.
- The 10 year yield moved from 1.745 last Friday to a low of 1.4732 before rebounding yesterday afternoon and today and are currently trading at 1.555%. Nevertheless, that is a 10.9% decline for the week or nearly 20 basis points. PS at the lows, the yield reached 1.4732% or -15.56% for the week.
- The 2-10 year spread went negative for the first time since 2007 (see chart below)
Those were the catalysts for the tumble in stocks for the week.
The fundamental reason for the fall?
Despite concession by the Trump administration that some of the China tariffs would be delayed until December (and some will not take place at all), the anxiety about what can and will be done as far as "a deal" remains sketchy at best. It is the US's Brexit dilemma.
This week, China's Xi said:
- We will retaliate if tariffs go into effect in September
- Let's meet half way
- Hong Kong is none of your business.
- A deal will be on US terms
- Xi should go talk to the protesters
- The US will win
In addition, other central banks are ready to and willing to go low(er) even if the US is reluctant.
The EU's Rehn said that the it is better to be safe than sorry (the chance of a 20 bp cut went up for the ECB), and the Bank of Mexico went ahead and had a surprise cut. Last week, the RBNZ cut by 50 bps instead of 25 bps.
The global trend is for lower rates and that has the market marking down rates in the US as well.
The European 10 year yields are all making all time lows. Germany's low yield today was -0.727% before rebounding, and Spain got within 0.02% of reaching 0.0% (see lows in the chart below).
With the US 10 year at 1.56%, it seems like a steal, especially if the fundamental backdrop for the economies of the world are unknown and loaded with increased risks.
Now it is not alll doom and gloom. The data in the US this week was good enough to have the Atlanta Fed GDPNow rise from 1.9% to 2.2% and the NY Fed to rise to 1.82% from 1.58% (vs a week ago). Those are better than the German and UK GDP most recent numbers which were negative.
The key event in the new week will be Chair Powell's speech at the annual Jackson Hole Economic Symposium on Friday. With Pres. Trump getting on his case big time (especially as stocks fell), and the market looking for 3 more cuts in 2019, the market will be hoping for a dovish Fed chair.
In summary for the forex market this week (see the 5 day ranking of the strongest and the weakest), the GBP was the the strongest of the major currencies and the EUR was the weakest (helped by the Rehn comments). The USD was mostly higher with the largest gains vs the EUR at 0.98% and the largest decline vs the GBP (-0.94%). The EURGBP was the largest moving pair with a 1.98% move (EURGBP fell -1.98%).
That may just be covering in the GBP. Afterall the CBOT speculative positions still has the GBP shorts as the largest position. So a short squeeze is not out a surprise. However, the Brexit clock is still ticking and Germany today was encouraging the EU27 to stick to their guns on the current deal. PM Johnson will be going to Europe next week to meet France's Macron and Germany's Merkel who may just say "sod off mate" (or the equivalent) when he comes looking for a compromise. That may weaken the GBP again.
Wishing all a good and safe weekend.