- Bond yield rally should last as investors continue to favour riskier assets
- Pound sterling should continue to rally as Theresa May takes over as UK PM, making it clear that she is in no hurry to push the Brexit button
- GBP increase may be limited as BoE is expected to cut rates on Thursday
- We expect the Japanese yen to resume freefall as traders continue buying back their short positions and adjusting them before the next BoJ meeting at the end of July
- We expect Bank of Canada to cut rates today from a quarter point, mainly in reaction to declining oil prices
- We are bearish on the loonie as we target USDCAD around 1.35 in the medium term
US equity indices printed at a new all-time high yesterday as investors cast aside their concerns about slowing global growth and Brexit spillovers. In Wall Street yesterday, the Dow Jones Industrial average broke its previous record from May 19 2015 and hit 18,259.12 points. The S&P 500 set, for the second day in a row, a new all-time high at 2,155.40.
In the bond market, US treasury yields eased slightly during the Asian session, taking a breather after rallying for five straight days. Monetary sensitive 2-year yields eased to 0.6752% from 0.69%; 10-year yields fell to 1.4875% after testing 1.5288%. The rally in bond yields should last as investors continue to show a taste for riskier assets in this improving risk environment.
In the FX market, the pound sterling continues to rally as Theresa May takes over the reins as Prime Minister. The fact that she has made it clear that she won’t rush towards the exit has helped Brexit clouds to dissipate in the short-term and allowed the pound to rally for a fourth day in row, up to $1.33, while it was still trading at around $1.29 last Friday. However, the pound’s upside potential may be limited as the BoE is expected to cut its benchmark interest rate on Thursday. GBP/USD traded range bounded in Tokyo between 1.3225 and 1.3338 as it tumbled on the 1.3350 resistance area (previous highs from early July).
In Japan, the yen stabilised after rallying roughly 4% over the last three days. We expect the Japanese yen to resume its freefall as traders keep buying back their short positions and investors adjust their positioning ahead of the BoJ meeting at the end of July. USD/JPY edged down 0.50% to 104.42 after hitting 104.99 in Wall Street.
Commodity currencies took a hit with NZD, AUD, NOK and CAD falling sharply on Wednesday as crude oil prices edged lower and traders locked in their recent profits. NZD/USD fell roughly 1% from Wall Street’s high, down to 0.7250, while the Australian dollar slid 0.90%. Both currencies failed to break their respective key resistance levels to the upside as crude oil prices stabilised. USD/CAD rose slightly to 1.3070, while USD/NOK was up 0.40%.
Yann Quelenn, market analyst: “Is a surprise in store for the Bank of Canada? There are important central bank rate decisions this week. Before the BoE decision tomorrow, the Bank of Canada will announce, its rate decision this afternoon. Financial markets expect it to remain on hold at 0.50%. The consensus is that the Canadian economy is still adjusting from tumultuous oil prices and that consequently the BoC will wait for further developments in terms of growth before making any change to its monetary policy.
Our perspective is rather more bearish as we believe that the BoC is likely to cut rates from a quarter point in reaction to declining oil prices and Canadian job creation, which was negative in June, as well as in February and April. As a result, downside pressures on inflation should be expected and the BoC may be anticipating such issues. There are also mounting concerns that household debt is growing at too fast a pace and that it will negatively impact retail sales in the near future. In our analysis of Canada’s current situation we have also factored in the Alberta wildfires, the impact of which is still not exactly known but may be severe. Also, the Brexit impact still has to be quantified and qualified but the underlying difficulties faced by banks may soon also spread to Canada. Currency-wise, we are bearish on the loonie and we target the pair to increase again towards 1.35 in the medium-term.” —
Today traders will be watching CPI from Spain, Italy and Russia; industrial production from the Eurozone; MBA mortgage application, monthly budget statement and crude oil inventories from the US; retail sales from South Africa; interest rate decision from Canada.