Global financial markets went for another rollercoaster ride on Wednesday as the US dollar got slammed across the board, helping crude oil to erase its losses from the previous two sessions. The combined effect of a sell-off in the greenback and a recovery in crude oil prices was beneficial for commodity currencies with the New Zealand dollar rallying the most against the USD. The Kiwi surged more than 2.80% yesterday, reaching $0.6698, but stumbled over the resistance implied by the high from January 8 at 0.6678. The Canadian dollar was the second best G10 performer with a climb of 2.20% against the greenback. USD/CAD moved below its 50dma (currently at 1.3923); on the downside a strong support can be found at 1.2832 (low from October 15). The Australian dollar climbed 2.10% to stabilise around $0.7170, while the Norwegian krone rose 2% against the USD as USD/NOK consolidated around 8.55.
A strong stomach was also needed to manage the sharp moves in the treasury market. The US 2-year treasury yield slid more than 8bps in less than two hours, reaching its lowest level since October 28 at 0.6750% as investors dumped equities to rush into safe haven assets. Finally, the monetary policy sensitive rate bounced back to 0.7265%, up 5bps. On the long-end, the 10-year fell 10bps to 1.7920% before returning to its initial level at 1.8960%. The market is now roughly pricing no rate hike in 2016 as the US economy continues to post lacklustre data. US Markit PMIs disappointed with the Services and Composite gauge being revised lower to 53.2 from 53.7. Separately, ISM non-manufacturing slipped 2.3 points to 53.5, while the market was expecting a print of 55.1 in January.
With the exception of Japan, Asian regional equity markets are blinking green across the screens following Wall Street's positive lead. In mainland China the Shanghai and Shenzhen Composites were up 1.53% and 1.95% respectively. In Hong Kong the Hang Seng increased 0.99%, while in Australia shares were trading on a firmer footing, up 2.12%. European futures started the day on the right foot with the positive mood sweeping in from Asia. The Footsie led the charge, up 1.66%, while the DAX jumped 1.36%. The SMI was up 0.97%, the CAC 1.23%, while the Euro Stoxx 600 surged 1.28%.
Just like most EM currencies, the BRL reacted more than positively to fading rate hike expectations in the US. The Brazilian real surged 2.40% against the greenback and moved below the 3.90 threshold.
***Yann Quelenn, market analyst: “Russia: Still willing to increase its forex reserves. Russia’s economic situation is concerning. 2015 GDP fell to 3.7% y/y in 2015, down from the slight rise of 0.6% in 2014. The country has also had to deal with a weakening currency, mostly due to the lingering low oil prices. The USDRUB is now trading near its record of above 76 rubles for one dollar, meaning that gold in the Russian currency is very expensive. Recently, the price of gold and metals improved to a 3-month high.
Yet, in an effort to stabilize the Ruble, Russia will expand its Foreign-Exchange reserves (including gold). Today, Russia will disclose this amount for the period ending 29th January. Russia’s Central Bank head, Elvira Nabiullina has already made it clear that one of its primary objectives is to increase these reserve holdings up to $500 billion. For the time being, holdings only amount to 369.3billion.
For China, the challenge will be to know whether Russia is in fact capable of entirely backing its currency with gold. There is a deliberate strategy from Russia to remove the dollar from the Russian international exchanges. And this is why Russia needs more gold in order to gain credibility. Gold definitely represents confidence in a Central Bank. It would appear that currency wars are still blazing!”***
Today traders will be watching Halifax house price and BoE interest rate decision from the UK; Markit PMIs from Germany, France, Italy and the euro zone; initial jobless claims, factory orders and durable goods orders from the US.