OVERNIGHT MARKET SUMMARY
The U.S. dollar index pared some of last week’s impressive gains as global stock prices added to Friday’s rally overnight. The greenback, which found broad support from a flight to safety across global financial markets last week, moderated against it major rivals overnight as a second-straight day of rallying stock prices encouraged investors to seek returns in riskier assets. Still, U.S. Treasury bond yields continued to head higher- an indication that bond markets are pricing in higher inflation and likely, higher rates from the Fed. A spike in bond yields was partially responsible for the recent selloff in global stocks and the spike in volatility across global markets. With the benchmark 10-year Treasury yield trading above 2.9% for the first time in over four years overnight, investors are likely to remain nervous.
Another busy week of economic data will likely keep conditions very choppy this week. The active calendar will be headlined by Wednesday’s U.S. CPI report for January. A jump in wages in January’s payrolls report helped trigger the recent selloff in global stocks. Investors, who had become increasingly complacent with the very easy central bank backdrop in industrialized economies, began to quickly price in a risk of tighter global monetary conditions in the wake of the January wage numbers. A hotter than expected CPI print this Wednesday could further spook investors about rising inflation and higher interest rates, likely keeping market conditions very choppy and adding to the greenback’s improved tone.
Sterling failed move higher against the greenback overnight following its worst weekly performance in October. The pound fell to a three-week low on Friday after the EU’s head Brexit negotiator poured cold water on recent optimism about the Brexit by saying a post-divorce transition period between the U.K. and the EU was not a given. His comments reminded investors that it may not be smooth sailing ahead for the Brexit negotiations and that there remains considerable risk of a disorderly exit from the European Union for the U.K.
Higher yielding and riskier currencies from Australia, New Zealand and emerging market asset firmed overnight as global stocks added to Friday gains. Higher stock prices and tentative calm in global financial markets encouraged investors back into badly beaten up risk assets.
USD: The dollar pared some of last week’s gains against its major rivals as global stocks rebounded and encouraged investors to test riskier waters. The dollar found support last week amid the heavy selling of global equities that drove investors out of riskier assets and into the relative safety of the dollar, the Swiss franc and the Japanese yen. Surging global market volatility has proven, at least for now, to be mildly supportive for the safe haven U.S. dollar. This week, heightened market volatility is likely to persist as major U.S. economic news, particularly on inflation is digested. A hotter than expected CPI print on Wednesday could fuel further worries that inflation is finally moving higher, which would likely keep bond yields and the dollar rising and global stocks vulnerable to renewed losses.
GBP: Sterling remained on the defensive overnight following its worst weekly showing against the dollar since October last week. The pound fell last week, despite a more hawkish than expected message from the Bank of England, following comments from the EU’s head Brexit negotiator on Friday that played up the risk of a disorderly divorce process. This week, the pound will look to key economic data on inflation tomorrow. Another pullback in CPI in January could reduce some pressure off of the BOE to raise rates sooner than previously expected- a scenario that would likely add to sterling’s heavier tone.
AUD: The Aussie bounced off of its lowest level since late last year overnight as global stocks rebounded and drove investors back into riskier and higher yielding currencies. The Aussie was down in eight of the last 10 trading sessions as a combination of higher global market volatility, rising U.S. yields and the view that the RBA will not likely raise Australian lending rates until some time in 2019 all weighed on the AUD.
CAD: The loonie firmed off of its lowest level since December 27 on Friday but remains near the lower end of its ranges against the resurgent U.S. dollar. A disappointing Canadian payrolls number on Friday added to the CAD’s heavier tone, which was already in place due to a widening yield advantage of U.S. bonds over their Canadian rivals and to the sharp drop in the price of crude oil last week. A sparse economic calendar north of the border will likely keep the loonie’s direction driven by developments in the U.S, moves in commodity prices and the overall level of volatility in global financial markets.
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