The US economy came back from the dead as Tuesday’s Independence Cay celebrations came a day early for US dollar bulls.
After yesterday’s innocuous Asia session, the USD turned bid en masse as the pound gave way on the weaker UK manufacturing PMI. The weaker print makes a case for the data not supporting the Bank of England hawkish tilt.
And USDJPY bounced after a stronger than expected Tankan Survey attenuated any lingering fallout from the LDB trouncing in the July 2 Tokyo metropolitan assembly election. But it was the robust US ISM data which propelled USDJPY above the critical 113 level fueled by rising US Treasury yields all but supporting the current Fed narrative to look through the recent US economic soft patch.
In US equity markets, the Dow posted a new record backed by energy stocks while the NASDAQ fell as sector rotation out of tech stocks lingers. The tech sector has reaped the benefits of the low-interest rate, low volatility environment, and with the real prospects of rising US interest rates tech investors are feeling the pain.
In commodity markets, oil prices had a buoyant overnight session as WTI Crude didn’t look back from the opening bell on US futures. Some cited headlines in circulation but I suspect the primary catalyst is the US rig count posted its first weekly fall since January, fueling speculation that the rigorous supply of oil from US shale oil producers is not sustainable below $45.00 per barrel.
The luster came off gold overnight in a big way on the stronger US dollar narrative driven by the expectancy of higher US interest rates.
However, the big story in currency markets remains the shifting central bank policy narrative. We’ve seen an aggressive pullback from last week’s speculative bets, fueled by the hawkish chorus of central bankers. The USD recovered in part due to the ISM manufacturing report which surprised with the highest print since August 2014.
But concerns that central banks may temper the hawkish lean for fear of creating unwanted volatility remain in the back of traders minds. Overnight, the mystery sources from the ECB were back at it again hitting the airwaves stating ECB officials were “unnerved” by the market’s reaction to Draghi’s speech. I think it’s safe to say the ECB members are scared of their hawkish shadow and may try to reel in the markets overzealous reaction to Draghi’s Sintra comments.
But headlines aside, the ECB has opened the door to tightening. It’s just a matter of how wide they’re willing to leave it ajar.
There will be no rest for the weary on the central bank narrative as the RBA, the Riksbank warrant considerable attention and are likely to keep traders hoping despite the US holiday-thinned trading conditions.