US 10-Year Yield Sinks to Late 2016 Lows, Dollar Slips

Summary: The Dollar Index (USD/DXY) slipped from two-week highs to 96.772 (96.834) as US bond yields sank to late 2016 lows. Benchmark US 10-year bond yields slumped to 1.976%, from 2.03% yesterday, the lowest since November 2016. While central bank policy makers were divided on the next policy move, global yields were lower, indicating their openness to easier monetary policy. The Reserve Bank of Australia cut interest rates for the second straight meeting, which was widely expected. The Australian Dollar climbed 0.45% to 0.6995 (0.6965) to lead all gainers after the RBA said it would lower again “if needed.” Sterling slumped 0.45% to 1.2595 (1.2638) after BOE Governor Mark Carney said that a trade war and a no-Brexit deal was a growing possibility which would hamper domestic UK growth. USD/JPY fell to 107.95 (108.45), weighed by the slump in the US 10-year yield. The Euro slipped back to end unchanged at 1.1285 after initially climbing on a report that the ECB’s governing council weren’t ready to rush into additional monetary stimulus at this month’s meeting.

CNBC US 10-Year Bond Yield Chart - 03 July 2019
CNBC US 10-Year Bond Yield Chart – 03 July 2019

President Trump threatened the European Union with US$4 billion worth of additional tariffs. Christine Lagarde (current IMF head) was chosen by EU leaders to succeed Mario Draghi as ECB President.

  • AUD/USDThe Aussie led all gainers to close at 0.6995 from 0.6965 following the RBA’s decision to cut its key interest rates by 0.25% to 1.00% an all-time low. The move was widely expected. AUD/USD dropped initially to 0.6956 immediately after the news of the rate cut. In its statement, the RBA said it would lower again “if needed” which markets saw as a more balanced outlook.
  • USD/JPY The Dollar fell back against the Yen weighed by the fall in US yields. USD/JPY closes at 107.95 from 108.45 yesterday. The Dollar is most sensitive against the Yen to any moves in the 10-year yield. Japanese 10-Year JGB yields, by contrast, were up one basis point to -0.15%.
  • EUR/USD – the Single currency settled unchanged at 1.1285 after initially rallying to an overnight high at 1.1321. Reports that the ECB’s Governing Council were in no rush to cut interest rates at their meeting later this month provided a brief boost for the currency.
  • GBP/USD – Sterling closed as worst performer to 1.2595 (1.2638) after Mark Carney remarked that a trade war and no-deal Brexit were growing possibilities. The BOE Chief said that both would hamper global and UK economic growth. UK Construction PMI fell well below forecasts.

On the Lookout: While the spotlight moves to Friday’s US Payrolls report, date releases today are heavy. Markets will be keen to see if global services PMI’s follow the pattern of the slide in manufacturing.
Australia starts with its June Building Approvals and Trade Balance. China reports on its Caixin Services PMI report. Euro area Services PMI’s (Spain, Italy, France, Germany) follow. The Eurozone Final Services PMI is next. UK Services PMI rounds up Europe’s data releases. Canada’s June Trade Balance follows.
US reports include: Challenger Job Cuts, ADP (Private Sector) Non-Farm Payrolls Change, Trade Balance, Weekly Unemployment Claims and Final and ISM Services PMI’s.

Trading Perspective: Though global bond yields fell overall, the slump in US rates were not matched by those of its Rivals. Except for the UK 10-year Gilt yields which plummeted 9 basis points following Mark Carney’s comments. The gap between US yields and those of its rivals has narrowed which is Dollar negative overall.

DAILY FX USD JPY Chart - 03 July 2019
DAILY FX USD JPY Chart – 03 July 2019
  1. USD/JPY – The Dollar slid back under 108 to finish at 107.95. Overnight low traded was 107.765, which is todays immediate support level. The next support level lies at 107.40. Immediate resistance can be found at 108.20 and 108.50. Expect Japanese corporates to be on the bid in the USD/JPY near last night’s lows. USD/JPY will continue to be led by moves in the US 10-year yield. The next move in US bond yields will come following Friday’s US Payrolls report. For now, look to trade a likely range of 107.75-108.45. Prefer to sell rallies.
  2. AUD/USD – The Australian Dollar rallied to an overnight high at 0.70003 before easing to settle at 0.6995. While the RBA presented a more balanced outlook following its second rate cut in successive meetings, the RBA may now pause and monitor global developments. The Aussie then becomes driven by the US Dollar. Australian 10-year bond yield were 2 basis points lower to 1.33%. The gap between US and Australian 10-year yields have narrowed 10 basis points since April this year. The Aussie was then at 0.7002. AUD/USD should be higher. Immediate resistance can be found at 0.7010 and 0.7040. Immediate support lies at 0.6970 and 0.6940. Look to buy dips with a likely range today of 0.6885-0.7035.
  3. EUR/USD – The Euro closed unchanged at 1.1285 weighed by the prospect of President Trump’s threat of additional trade tariffs on European goods. German bond yields were one basis point lower to -0.37%. Broad based US Dollar weakness will provide the Single currency the support it needs to move higher. EUR/USD has immediate support at 1.1275 (overnight low) followed by 1.1245. Immediate resistance can be found at 1.1300 and 1.1330. Look for a likely range of 1.1275-1.1325. Prefer to buy dips.

Happy trading all.