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Starting on the FX front, the broad US dollar index has gained 0.4%, which won’t surprise when we see US Treasuries push around three basis points across the curve. This comes at a time when new homes sales in April fell a sizeable 11.4%, but it seems this data point was widely dismissed. It also seems unlikely the selling (in US fixed income) was pre-positioning ahead of tonight’s existing homes sales or trade balance, but the FOMC minutes could set somewhat of a tone for the key 15 June FOMC meeting.
It’s interesting to look at the pricing in the US interest rate markets around the probability of a hike in the June meet. Here we can see the yield on July Fed funds future (this effectively covers the June meeting) push to 1.11% (or 111 basis points), therefore pricing in 20 bp, or an 80% chance of a hike. This details a hike is close to being fully priced and we would need to see a fairly drab outlook in next week’s Beige Book, or terrible non-farm payrolls to dramatically alter this. Of course, US political angst could cause some increased volatility, which will have an impact on Fed expectations, but for now the market seems to be of the belief a June hike is good to go.
We can look further out and see the Fed funds future priced at 1.28% for year-end and 1.58% for end 2018. This details that while we are expecting a hike in June there is a 48% chance of a second at some stage this year and if that occurs, just over one hike is expected in 2018. A total of 3.6 hikes are priced in going out to 2019, which of course is well below the eight or so the Federal Reserve have pencilled in as their median forecast.
Sellers have been seen in EUR/USD, which doesn’t surprise too greatly given we flagged yesterday that the pair had run 'a bit too hot, too soon' relative to its key valuation drivers.
AUD/USD looks interesting here, with price having hit a high of $0.7517 overnight, but sellers have flooded in and we are about 50 pips lower from the session high. A close above key resistance of $0.7491 would have been taken well by the bulls, but that doesn’t seem to be on the cards and traders can react to the falls in the key valuation drivers. Here we see spot iron ore closing -1.9%, while Dalian iron ore and steel futures are down 2.4% and 0.6% respectively. I also think traders need to be paying far closer attention to the yield premium the Australian ten-year Treasury commands over the US ten-year Treasury. This premium has fallen to 15 basis points (or 0.15%), which is the lowest since May 2000. If this yield premium is the key driver for EUR/USD and USD/JPY, perhaps it plays a greater role in determining moves in AUD/USD.
In equity land, the fairly tepid moves in US equity markets should resonate, although our call for the ASX 200 currently sits up at 5777, with SPI futures having pushed up 17 points in the night session. The more technically focused traders out there are still viewing how price is reacting into the 19 April low of 5791 and this seems to be acting as a short-term barrier on price for now, but if price does roll over and head lower after rejecting this level then I’d be happy to jump on board for a short positons targeting 5670 and perhaps to 5650.
US banks have driven outperformance in the portfolio and perhaps that could support the Aussie banks this morning and although bulk commodities have been sold off we can see BHP’s American Depository Receipt (ADR) closing up 0.7%, while Vale’s US-listing closed 1.7% higher.
US and Brent crude have seen good interest from clients and both have pushed higher on the session, and printed new highs in the rally that started on 5 May, with various OPEC players giving further views on a potential extension to the November output cut agreement. The argument seems to be more centred on whether the collective roll out of the agreement for a further six or nine months, although the Saud’s are orchestrating a nine-month extension. A six month agreement would seemingly not be taken well by oil traders, should be in fact be what is aged upon. Of course, oil can squeeze higher from here and mitigate the prospect of a ‘sell the fact’ event. However, we would need to see a cohesive and untied stance from the players that gives us a strong belief that they will continue to adhere to the production quotes’ and even be prepared to do 'whatever it takes' to rebalance inventories (a line floated by the Saudi’s recently).
Also supporting the oil market this morning were the weekly API inventory report which detailed a draw of 3.2 million barrels in gasoline stocks and 1.5 million in crude inventories. This should give traders some confidence that tonight’s (10.30pm AEST) official Department of Energy should see a decent draw down too.
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