US dollar and debt begin to disagree

A sharp 0.5% rally in the DXY dollar index overnight has heightened uncertainty as to the underlying state of the US economy.

Source: Bloomberg

A big month-on-month increase in US wholesale inventories and a noticeable pull back in weekly unemployment claims both helped fuel the dollar rally overnight. This comes hot off the back of US JOLTS employment data, which saw the vacancy rate reach a 15-year high. Although the hiring rate saw a further pullback, and this vacancy/hiring divergence could be showing a skills mismatch between job applicants and job postings. The divergence between the vacancy rate and the hiring rate shows the uncertainty around exactly where the US economy is heading. And while the US dollar shot up overnight, the US government debt seemed unconvinced with bond yields falling across the yield curve.

US wholesale inventories are increasingly looking like they may have hit a turning point. The Atlanta Fed’s GDPNow 2Q forecast remained unchanged at 2.5%, but could be set to see a boost from inventories investment if this trend continues into the May and June data.

The divergence in the JOLTS vacancy and hiring rates quite nicely sums up the current divergence between the US dollar and government bond market.

Nonetheless, this US dollar spike has sent jitters through the commodities complex with copper, in particular, having an awful night. LME copper prices hit their February lows, as LME copper inventories look to have seen a massive influx from Chinese copper inventories. The COMEX copper price in the US lost 1.1%.

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Oil similarly saw a dollar-induced pullback, as WTI oil lost 1.5% overnight, but managed to hold comfortably above the US$50 level.

Given the hit to commodities, the commodities-heavy ASX is set to have the toughest open in the Asian session. Currently, we are calling the Aussie market down 0.7% at the open. BHP’s ADR saw a massive 5.6% drop in the US session, its biggest one-day fall since 9 May. CBA’s ADR similarly underperformed, losing 2% overnight. Other Asian markets are all set to open slightly lower. Despite the big gains in the USD, the USD/JPY was little changed. The Nikkei is set to open down 0.2% and is unlikely to see a familiar dollar strength pop today.

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