OANDA Market Insights podcast (episode 27)

OANDA Senior Market Analyst Alfonso Esparza reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s biggest stories: US sanctions against Iran, Turkish lira collapse after steel sanctions and market reaction to UK GDP data

Big revisions offset July miss on payrolls

Another strong US jobs report expected today

The PBoC giveth the PBoC taketh

BoJ easing talk sends bond yields up

Signs that the Bank of Japan (BoJ) might scale back its monetary stimulus faster than expected sent tremors through bond markets on Monday, while European stocks slipped as threats of further U.S. tariffs on China drained risk appetite.

Europe’s bond yields climbed after a Reuters report that the BoJ was discussing modifying its huge easing programme sent Japan’s 10-year bond yield to a six-month high.

The report rekindled anxieties about monetary stimulus easing around the world and piled further pressure on investors already struggling to navigate rising protectionism.

The yield on Europe’s benchmark bond, the German 10-year Bund, hit a one-month high of 0.39 percent and U.S. 10-year Treasury yields also hit their highest in a month at 2.90 percent.

The yen climbed to two-week highs against the dollar and was last up 0.2 percent at 111.14 per dollar.

“It’s all that concern investors have about the move from global quantitative easing to global quantitative tightening. That fear gets stoked when you have reports such as this,” Psigma Investment Management’s head of investment strategy, Rory McPherson.

“The ECB meeting this week will be more in focus now that we’ve had this concern about Japan.”

The dollar index meanwhile bounced back, up 0.1 percent from two-week lows hit after U.S. President Trump criticised the Federal Reserve’s tightening policy and accused the European Union and China of manipulating their currencies.

“We see the latest news on trade policy as pointing to continued high risk of escalation between the U.S. and China, and a renewed focus of the Trump Administration on currency matters,” Goldman Sachs analysts said.

Beijing said it has no intention of devaluing the yuan to help exports.

Trump’s comments about rates also helped the Treasury yield curve reach its steepest in three weeks. The yield curve’s flattening has been seen by some as a sign of an impending recession.

The U.S. president’s new threats to slap duties on all $500 billion of U.S. imports from China triggered sell-offs across stock markets, though good earnings kept a lid on losses.

The MSCI all-country world index declined just 0.1 percent while MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.2 percent.

Reuters

Bank of Canada Expected to Hike on Wednesday

The US dollar is mixed against majors on Tuesday. The JPY has lost as risk appetite is back in vogue with investors and the GBP has risen after the market digested the resignations of pro-Brexit members of Theresa May’s government. The Bank of Canada (BoC) will publish its rate statement on Wednesday, July 11 at 10:00 am EDT. The market has priced in a 96 percent chance of an interest rate hike. BoC Governor Stephen Poloz will host a press conference where he could offer further insight into the decision or hedge if market reaction is too extreme in his view.

  • Bank of Canada (BoC) expected to hike rate by 25 basis points
  • US Weekly crude inventories forecasted to drop after API drawdown of 6.8M barrels
  • Bank of England (BoE) Governor Carney to speak in Boston

Loonie Awaiting Bank of Canada Decision
The USD/CAD gained 0.05 percent on Tuesday. The currency pair is trading at 1.3114 ahead of the central bank meeting. Monthly Canadian GDP data at the end of June surprised to the upside and with a positive business outlook added to a strong jobs report the Canadian central bank will be looking to close the gap with the U.S. Federal Reserve funds rate. Fed members have signalled that more rate lifts are coming and two have already been priced in. The BoC is in no hurry to hike, but there is pressure to act later in the second half of the year if it decides to hold in July.


usdcad Canadian dollar graph, July 10, 2018

While the lift in interest rates will not be a surprise, there is more anticipation for what BoC Governor Stephen Poloz has to say. Hawkish comments from BoC Governor Stephen Poloz earlier in the month taken into consideration for the meeting, although the market is forecasts more dovish remarks given the uncertain global trade scenario. If Poloz maintains a neutral to hawkish there could be a sharp movement in the currency.

Commitment of Trades (CoT) data out of the CFTC shows large investors are bearish on the currency, which could create a short squeeze scenario all depending on what Poloz ends up communicating to the market.

The Canadian economy had a solid start to 2017, but the pace kept slowing down as the Trump administration attacks on trade were gaining steam. The uncertainty about trade made the start of 2018 a difficult one for the loonie and until recently the worst performer against the USD from major currencies.

Elections in Mexico and the upcoming midterms in the US make a NAFTA renegotiation less likely this year, which minimizes but does not take out of the equation an end of the trade deal. Fundamental indicators in Canada have improved giving the central bank some room to close the gap between the US and Canadian interest rates.

Yen on the Back Foot as Risk Appetite Returns

The USD/JPY lost 0.38 percent in the last 24 hours. The currency pair is trading at 111.27 a six month high for the USD against the JPY. The yen is a preferred safe haven during times of uncertainty, but as investors seek returns they quickly sell the Asian currency. Trade war fears have waned this week and emerging markets have been the biggest winners at the expense of the JPY.



Pound Rises as PM May Survives Leadership Challenge

The GBP/USD gained 0.18 percent on Tuesday. Cable is trading at 1.3279 on the midst of Theresa May fighting for a soft Brexit and her job. On Friday it all seemed to have worked out with little opposition for her plans of an orderly divorce with the EU that allowed the UK to have access to the single market. Hard Brexit backing members of the cabinet started resigning over the weekend. The pound started to drop as Boris Johnson resigned and concerns rose of a confidence vote against PM May. The fact that May has survived a leadership challenge and some encouraging comments out of Brussels have boosted the currency.



The Conservative party remains divided, but the Eurosceptics do not have enough fire power to topple May so for now a soft Brexit is the only viable strategy. May has the support from Michael Gove, but if that were to change it could mean her ouster, with Gove a likely replacement.

Market events to watch this week:

Wednesday, July 11
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
10:30am USD Crude Oil Inventories
11:15am CAD BOC Press Conference
11:35am GBP BOE Gov Carney Speaks
Thursday, July 12
7:30am EUR ECB Monetary Policy Meeting Accounts
8:30am USD CPI m/m
8:30am USD Core CPI m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar