Politics, Trade Worries Lift Dollar Even as Bond Yields Slump

Summary: Global political and trade worries lifted the Dollar against its peers even as US bond yields slumped. Benchmark US ten-year treasury yields slumped 5 basis points to 2.27%, 19-month lows.  The Dollar Index (USD/DXY) a popular measure of the Greenback against a basket of foreign currencies rose to 97.963 (97.756). The Euro eased to 1.1162 (1.1192) after Italy’s Deputy Prime Minister Mateo Salvini’s far right League Party gained seats in the European Parliament. Salvini is expected to pressurize Rome over the European Union’s tight budget rules. Sterling slipped to 1.2653 on continued uncertainty over Brexit. As Conservative candidates vie to replace Theresa May, Labour leader Jeremy Corbyn was reported to have backed a second Brexit vote. On the trade front, President Trump said the US is “not ready to make a deal’ (with China) according to a Bloomberg report. FX trading was light despite the return of traders in London and New York from holidays.
Wall Street stocks declined. The DOW ended 1.1% lower at 25,365(25,648).

CNBC US 10-Year BOnd Yield Chart - 29 May 2019
CNBC US 10-Year BOnd Yield Chart – 29 May 2019

The US Conference Board Consumer Confidence gauge rose to 134.1 in May, beating forecasts of 130.1. US Case Shiller Composite House Price Index though fell to 2.7% against expectations of 3.1%. The Dallas Fed Manufacturing Business Index slumped to -5.3 from a forecast of +5.0.

  • EUR/USD the Single Currency eased to 1.1162 from 1.1192 at the NY close. The Euro steadied yesterday on relief that pro-European parties secured a majority of seats in the European Parliament. The outlook for the economic bloc remained was clouded by the gain of seats from right wing and Eurosceptic parties.
  • GBP/USD – Sterling retreated to 1.2652 (1.2678) on renewed worries over Brexit. The victory of the Brexit party in the European Parliamentary elections was seen to increase the chances of a hard Brexit which weighed on the British currency.
  • USD/JPY – slip-sliding away. The combination of a general risk-off atmosphere and lower US bond yields weighed on the Dollar, which slipped 0.12% to 109.35 (109.55).
  • USD/DXY – The Dollar Index, which is really a mirror of the Euro rose to 97.963 from 97.756. While the immediate resistance at 98.00 held, a sustained break may see last week’s high of 98.37.

On the Lookout: With markets back in full swing today, the focus remains on the trade war between the world’s two largest economies which has no end in sight. President Trump’s was last reported saying that the US was not ready to make a deal with China. Risk appetite was further dented by the rise in treasuries and fall in yields.
Today’s economic reports begin with New Zealand’s Financial Stability Report followed by a Press Conference from RBNZ Governor Graeme Orr. New Zealand data end with ANZ’s New Zealand Business Confidence Diffusion Index. BOJ Governor Haruhiko Kuroda speaks at the opening remarks at the BOJ Institute for Monetary and Economic Studies Conference in Tokyo. European data starts with French Consumer Spending, Preliminary CPI and Q1 GDP. Germany’s Bundesbank President Weidmann speaks at a Bundesbank Symposium in Frankfurt. German Unemployment Change report follows. The ECB’s Financial Stability Review rounds up Europe’s reports. Finally, the Bank of Canada’s interest rate decision and rate statement follow. While the BOC is not expected to change interest rates, it may downgrade its economic projections as concerns on global growth and the trade war rise.

Trading Perspective: While the Dollar has benefited from a “flight-to-quality” with the market’s risk-off stance due to global political and trade war worries, a decisive move higher would need yield support. Which is not happening. The US 10-year treasury yield fell to near 2-year lows at 2.268 %. At the end of 2018, the 10-year yield was at 2.74%. Global yields bond yields also fell, but to a lesser extent. Germany’s 10-year Bund Yield fell 1 basis point to -0.16%. Australia’s 10-year bond slipped 2 basis points to 1.53%. As differentials between US yields and global rivals narrow, the Dollar will lose support. While US Consumer Confidence was boosted in May, Home prices and Dallas Fed Business Index underwhelmed. Finally, current market positioning is long Dollar bets, with multi-year highs against a few currencies.

  1. EUR/USD – the Euro eased further as political uncertainty in the European bloc due to the increase of seats from Eurosceptic and right-wing parties. Pro-European parties still have the two-thirds majority in the Parliament. The latest COT/CFTC report saw Euro short bets increase to multi-year highs. EUR/USD closed at 1.1162. Immediate support can be found at 1.1150 and 1.1130. Immediate resistance lies at 1.1200 and 1.1230. Look to buy dips with a likely range today of 1.1150-1.1200.
  2. GBP/USD – Sterling slid to 1.2652 as the UK grapples with its own political worries and the future of Brexit. UK High Street (Mortgage) Lending beat forecasts climbing to 43,000 from an upward revised 40,600. The latest COT/CFTC report saw a relatively big build-up of GBP shorts as former PM May struggled to push her Brexit plan through the UK Parliament. Sterling bears added close to 23,000 contracts of GBP shorts to total -GBP 26,152. Which is the largest number of shorts since March. GBP/USD has immediate support at 1.2640 and 1.2610. Immediate resistance lies at 1.2680 and 1.2710. Look to buy dips today with a likely range of 1.2640-1.2710.
TRADING View USDDXY 3M Chart - 29 MAY 2019
TRADING View USDDXY 3M Chart – 29 MAY 2019
  1. USD/DXY – The Dollar Index, a mirror of the EUR/USD rallied to 97.963 from 97.756 yesterday. Overnight high traded was 97.978. Immediate resistance can be found at 98.00 followed by 98.20. Immediate support lies at 97.70 and 97.50. With the US 10-year yield near 2-year lows and a long US Dollar market position, look to sell the USD/DXY on rallies. Likely range today 97.60-98.00

Happy trading all.