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While the headlines were centred on a disappointing April retail sales reading, the sell-off in bonds continued through European and US trade. In the US, treasuries felt the pressure with the 10-year finishing the session up 3.5 basis points.
With treasuries being sold off, the greenback also struggled against the majors with the US dollar index slipping below the 94.00 handle. As a result, all US dollar crosses experienced a similar trajectory and this has been the dominant theme in Asian trade today.
USD/JPY dropped and AUD/USD rose; both moves have had an adverse impact on related equity markets today. With USD/JPY giving up its grip on the ¥120.00 handle, the Nikkei has struggled all day and is one of the underperformers of the region.
Data has been limited as well and this has seen investors happy to stay on the sidelines. Perhaps there is also a bit of caution ahead of BoJ Governor Haruhiko Kuroda’s speech tomorrow.
In US trade today we have unemployment claims and PPI being released. While these readings aren’t blockbusters, they’ll be enough to get the lift-off conversation going again if they’re significantly different from estimates.
RBA hard work undone
The ASX 200 has swiftly given up yesterday’s gains and the renewed AUD strength has had a lot to do with today’s weakness. Many investors will have been doing their analysis, assuming the AUD will remain below $0.8000 to the greenback for a prolonged time, with assumptions likely to have the currency pinned at a $0.7500 median.
However, with the RBA’s hard work coming undone this week, some investors will be scratching their heads. AUD/USD rallied to $0.8124 and this will provide fresh headaches for the RBA. The momentum from the budget also seems to be continuing for the AUD and not even a poor showing from Chinese data yesterday was enough to deter the currency. This has left the pair trading at its highest since January – the period before the RBA’s first rate cut.
The run iron ore miners had experienced now seems to have come to a screeching halt as the retreat in iron ore prices and a higher AUD takes a toll. To put it into perspective, at the current US$62.58/t, iron ore translates to around $82.34/t on an exchange rate of $0.7600. However, on an exchange rate of $0.8200 it translates to around $77.26/t.
This shows just how significant the exchange rate is for these miners. It’ll also be interesting to see whether the run in some consumer stocks can continue after yesterday’s budget-fuelled rally. JBH is trading at 52-week highs and that run will be one to watch closely in the near term.
Healthcare names which benefited immensely from the USD rally are also starting to feel the pinch as the greenback unwinds. ResMed stood out for all the wrong reasons today with a 19% drop after news a sleep device trial increases risk of death.
Weaker open for Europe
Ahead of European trade we are calling the major bourses weaker with the spike in the euro and sterling against the greenback also likely to play a role. Recent euro weakness had given European equities an amazing tailwind and that has somewhat dissipated in recent weeks.
While the firmer euro is unlikely to be a sustainable move, it is enough to cause some discomfort for investors in the near term. The pound is currently the biggest beneficiary, with cable rallying to near $1.5800, its highest level since December.
Yesterday’s downgrade to growth forecast has not made much of a difference for the sterling and analysts still expect normalisation in May next year. Despite all the structural issues, EUR/USD is knocking on $1.1400. This was despite German GDP missing estimates yesterday.
Bank holidays for France and Germany could result in fairly quiet European trade but the volatility in bond markets can never be written off.