OVERNIGHT MARKET SUMMARY
The U.S. dollar index, a measure of the greenback’s performance against a basket of its major rivals, soared to a fresh five-month peak overnight as higher Treasury bond yields and a heavier euro added fuel to the greenback’s month-long rally. Yesterday, the benchmark 10-year Treasury bond yield jumped to 3.09%, its highest level since mid-2011 and importantly, closed well above this year’s high-water mark for yields. The run higher in Treasury yields across the curve makes dollar assets more appealing to global investors, particularly compared to higher risk investments from emerging markets.
The dollar continues to draw support from relatively strong U.S. economic news, which at times has come in below consensus forecasts, but has largely remained strong enough to keep alive expectations that the Fed will lift U.S. lending rates at least two more times this year. That outlook contrasts an increasingly cautious outlook for central bank policy in most of the rest of the industrialized world.
The euro tumbled to a fresh five-month low against the resurgent U.S. dollar overnight after news emerged that the two Italian political parties currently in negotiations to form a coalition government, could push for up to 250 billion euros in debt forgiveness form the ECB. A document obtained by the Huffington Post showed that in addition to the debt forgiveness, the 5-Star Movement and the League planned to create a mechanism by which member states could leave the EU, renegotiate Italy’s EU budget contributions, scrap a 2011 pension reform, and end economic sanctions against Russia. The parties attempted to downplay some of the details of the document, calling it an “old draft’, but the damage to market confidence and the single currency was already done.
The British pound fell back toward its lowest level all year against the rallying U.S. dollar overnight following mixed economic data on the U.K. labor market the previous day. Investors are increasingly focused on the ongoing Brexit negotiations. Yesterday, the U.K. government said it would lay out a detailed plan on its future relationship with the European Union next month amid complaints from EU officials that the Britain has not been clear in its plans. The optimism that surrounded Brexit discussions late last year is turning into concern that negotiators are becoming more deadlocked as the March 2019 deadline for a deal quickly approaches.
USD: The U.S. dollar jumped to a fresh five-month trade-weighted high overnight as its impressive rally that began in mid-April gained momentum. The rise in Treasury bond yields, which makes dollar-denominated assets more appealing to global investors, continues to be a big driver of the greenback’s broad strength. Yesterday, the benchmark 10-year Treasury bond closed above this year’s high yield mark, a development that suggests further upside for yields (and the dollar) is likely. Economic data in the U.S. has remained strong enough to keep alive the outlook for the Fed to hike U.S. rates at least two more times this year- an outlook that appears increasingly more hawkish than expectations for the ECB, the BOE and the BOJ. This morning, big declines in April housing starts and permits, which were likely influence by a colder and snowier start to the spring, did little to halt the dollar’s momentum.
EUR: The euro skidded to its lowest level in five months against the dollar as investors became more concerned about debt in the euro zone’s third largest economy. A document obtained by the Huffington Post showed that the 5-Star Movement and League parties currently in discussions to form a coalition government, planned to ask for forgiveness of up to 250 billion of Italian debt, renegotiate the nation’s contribution to the EU budget, scrap a 2011 pension reform and end sanctions against Russia. The document also included a proposal to allow member states to leave the monetary union. While both parties tried to downplay the document, the damage to the euro was already done. A deal to form a 5-Star/League coalition government will likely keep investors nervous and keep the euro pressured.
GBP: Sterling fell back toward its lows for this year against the U.S. dollar as investors became increasingly worried about ongoing Brexit negotiations. Late 2017’s market optimism surrounding the talks continues to fade as increasingly, both the EU and Britain appear headed for a deadlock. Yesterday, the U.K. government said it would present a detailed plan around its future relationship with the EU next month in response to complaints from the EU that British negotiators are not being clear. Prime Minister Theresa May’s Brexit cabinet failed again yesterday to agree on a customs plan with the EU- highlighting the deep divides, even within the Tory Party, on the direction of how to approach the Brexit.
JPY: Japan’s economy contracted by 0.6%(annualized) in the first quarter, much worse than the 0.2%(annualized) contraction expected and the first negative print for GDP in the world’s number three economy in nine-quarters. The news did little to move USD/JPY, which remains near its best level in three and a half months but does suggest the previous run of solid economic expansion in Japan has likely peaked and that the Bank of Japan will likely be in no rush to begin removing massive policy stimulus anytime soon.
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