USDMXN recorded a fresh 6-year low overnight at 17.3148 as
momentum from the break below 17.4000 continues to build. The next technical
support level is near 17.0400, last traded in April 2016. With the Fed expected
to hold rates steady at the FOMC’s policy meeting next week, the peso carry
trade is back in favor with investors looking for exposure to emerging markets.
Overall, the USD is weaker against the major pairs in
trading today, reflected in the U.S. Dollar Index which is -0.18%. The dollar
today: -0.65% vs. NOK, -0.49% vs. SEK, -0.27% vs. AUD, -0.26% vs. GBP, -0.20%
vs. MXN, and -0.13% vs. EUR. The dollar’s single gain vs. the majors is 0.13%
vs. NZD.
Next week’s economic data release schedule for the U.S.
includes Tuesday’s CPI (consumer inflation) readings, Wednesday’s PPI (producer
inflation), and the FOMC’s rate decision, also on Wednesday. Markets will likely
be quiet leading up to the reports and rate decision as traders adjust
positions and hedge against surprises in the data.
U.S. Treasury prices are higher in all tenors today with the
3-year leading on a gain of 0.078%. The 3-year yield at 4.187% is nearing May’s
high at 4.2372%.
Global equities are a mix of sub 1% gains and losses. Oil is
1.27% at $72.66/barrel, the mid-range for the last four months.
The Bank of Canada will announce its rate policy today at
10am ET. The central bank is expected to hold rates at 4.50%.
U.S. Nonfarm payrolls posted a strong 339k gain in May vs. a
195k estimate. April Nonfarm payrolls were revised higher to 294k (from 253k). Private
payrolls were 283k (168k est.), and Manufacturing payrolls were -2k (5k est.). The
unemployment rate for May increased to 3.7% from April’s 3.4%.
U.S. Treasury yields have surged in the wake of the
employment data, the biggest gain of 0.08% in the 2-year tenor. Fed Fund
Futures are pricing in a 0.42% probability of a 0.25% hike at the FOMC’s July
policy meeting.
The USD has gained fractionally against the G10 currencies
following the surprise employment data. Dollar gains are 0.38% vs. JPY, 0.24%
vs. CHF, 0.17% vs. EUR, and 0.14% vs. GBP. Notable dollar losses today include
a 0.48% decline vs. MXN and 0.72% drop against the AUD.
Equity markets remain buoyant following the Senate’s
approval of the debt-ceiling measure, which is fueling today’s risk-on
sentiment. All major equity indexes are trading higher along with other ‘risk’
assets such as the Mexican peso and Bitcoin.
USDMXN is quickly approaching this year’s low at 17.4010
(May 16th) while trading below the 2017 low of 17.4395. Continued
peso strength suggests a possible test of next major support at 17.1800.
The House passed the new debt-ceiling agreement in after-market
hours yesterday. The legislation now goes to the Senate which must approve the government’s
borrowing increase before June 5th (estimate) to avoid default.
Fed officials tilted towards a pause in rate hikes at the
June 14th meeting in a series of coordinated comments yesterday. Speculation
had been ramping up for a 25-basis point increase with the probability of a
hike peaking at 69.6% at mid-day yesterday. But by market close the probability
of a June increase had dropped to 31.7%.
Progress on the debt-limit and the Fed’s more dovish stance
on rates is driving a risk-on move in markets today. U.S. Treasury yields are
down in all tenors with the exception of the 1-year which is currently showing
a small gain. The USD is lower vs. most G10 and major pairs, the biggest
decline a 0.48% drop against the Mexican peso, consistent with increased risk
appetite.
ADP Employment Change data released today was 278k,
significantly above the 170k estimate. The ADP data is the precursor to tomorrow’s
Change in Nonfarm Payrolls, the key reading on labor conditions in the U.S. The
strong labor market is a key component of persistently high inflation, and is
closely watched by the Fed in its ongoing rate policy.
The Fed’s favorite measure of inflation, Core PCE, was
reported today at 5.0% for Q1, above the 4.9% estimate. This is most certainly
unwelcome news for the Fed but can’t be much of a surprise given it lines up
with the CPI data released on May 10th which also showed no retreat in
consumer inflation.
The probability of a rate hike at the FOMC’s July meeting
crossed above 50% for the first time today in the current rate hike cycle following
the release of Core PCE. Fed Funds Futures are also implying a 43% chance of a
hike at the June policy meeting, but a June move has been essentially ruled out
in recent comments by Fed officials. So, assuming a debt-ceiling agreement is
reached soon, the Fed will likely keep rates unchanged at the June meeting and
hike 25-basis points at the July meeting.
U.S. Treasury yields have rallied today, the biggest gain in
the 1-year tenor, 0.079%, as treasury prices drop in anticipation of lending rates
moving higher.
The U.S. dollar index is 0.26% with the dollar gaining in
all G10 and major pairs. The dollar’s widest gains are 0.73%vs. SEK, 0.69%
vs. NZD, 0.37% vs. NOK, 0.35% vs. AUD, and 0.28% vs. EUR.
The major equity indexes are a mix of gains and losses, but
the Nasdaq 100 is the standout performer today with a gain of 2.31%, taking the
lead from tech company Nvidia.
Markets are lower today as investors continue the shift to
defensive positions. The impasse in the debt-ceiling negotiations becomes more critical
by the day and traders are forced to adjust for the potential of a worst-case scenario.
Inflation numbers for the UK were released today, with April
CPI reported higher than forecast in every category: monthly CPI was 1.2% vs.
0.7% forecast; and yearly CPI was 8.7% vs. the 8.2% estimate. Combined with hawkish
comments from Fed officials this week, global markets are coming to the
realization that rates are going to be higher for longer than previously
thought.
European equity indexes are trading in negative territory
and U.S. equities are set to open lower at the start of trading .
U.S. Treasury yields are split evenly between gains in the
1-month to 5-year tenors and declines in the 6-year to 30-year tenors. The
probability of a 0.25% hike at the FOMC’s June and July meetings has increased and
the likelihood of cuts at the remaining scheduled meetings through January has
declined significantly.
The U.S. dollar index is -0.02% today, but that result masks
some significant overnight USD gains and losses: 1.94% vs. NZD, 0.61% vs.
AUD, and -1.13% vs. MXN.
The focus of today’s economic data is on the FOMC’s meeting minutes
from the May 3rd policy decision.
Hawkish comments from Fed officials yesterday came as a
surprise to traders, who had filed away the 0.25% increase in the Fed’s policy
(overnight) rate on May 3rd as the ‘last hike’. Granted, consumer
prices remain elevated. The small tick down in YoY CPI (4.9% vs. the previous
5.0%) reported on May 10th was a disappointment to the Fed and was
likely the impetus for new calls for higher rates from Fed policymakers. YoY
CPI (year over year consumer price inflation) crossed above 4% in April of 2021
and has remained above since.
The Fed seems chronically in an unenviable position, being
second-guessed for responding with rate adjustments that are criticized for
being either too fast or too slow. Now add the debt-ceiling crisis to the mix,
and the cross currents in forming Fed policy must be mind boggling. Higher borrowing
rates translate directly into a higher debt service amount the U.S. government
owes on its obligations, adding fuel to the current and future debt-ceiling
crises. On the other hand, consumer inflation is becoming entrenched. Ask
anyone reliant on a fixed source of income and they will tell you that whatever
the recent inflation adjustments have been (if any), they have not been enough
to keep up with prices.
The Fed’s Volker era of policy rate adjustments is looking increasingly
brilliant in hindsight. A series of tactical outsized rate adjustments of
several % shortly followed by equally sized rate cuts were effective at
containing inflation.
The U.S. dollar index is 0.28% today and reached a 2-month
high overnight at 103.65. Dollar gains vs. the G10 pairs: 0.45% vs. JPY,
0.22% vs. SEK, and 0.06% vs. GBP.
U.S. Treasury prices are down, lifting yields for the third
consecutive day.
Equities are mixed with most major indexes trading in the
red. Oil is higher by 1.04%. Gold is -0.15%.
Debt-ceiling negotiations remain on center stage for markets
as traders take on more defensive positions against a U.S. debt default. Nobody
knows exactly when the U.S. government will run out of money, but the consensus
is early June. Treasury Secretary Janet Yellen has estimated that funds could
be exhausted by June 1st.
U.S. Treasury yields are higher in all tenors following
hawkish comments by Fed officials early in the trading day. The Fed’s Kashkari
said the probability of a June hike or cut is too close to call. And the Fed’s
Bullard indicated two more 25 basis-point hikes will be needed in 2023, citing
tight labor markets.
The U.S. dollar index is -0.03% today after trading in
narrow overnight ranges. Dollar gains vs. the G10 are 0.36% vs. JPY, 0.22%
vs. NOK, and 0.20% vs. AUD. The primary dollar decline is -0.22% vs. CHF.
Widening the view of the dollar’s performance against all
major currencies, the biggest move is a 0.73% gain vs. MXN. The Mexican peso is
under pressure on two fronts today: first is a shift to ‘risk off’ stemming
from the debt-ceiling impasse, as traders exit the more volatile assets in exchange
for the safety of the dollar; and second are the hawkish Fed comments which
have lifted treasury yields and bringing the Fed’s overnight rate and Banxico’s
overnight rate closer together (and reducing the expected payoff in the short
USDMXN carry trade in the process).
In other markets, U.S. equities have opened trading higher
by a slim margin, gold is -0.22%, and oil is -0.25%.
Banxico (Mexico’s central bank) left the overnight rate at
11.25% (as expected) in its policy announcement yesterday, the first pause in
its tightening cycle since June of 2021 when the official rate was 4%. The bank’s
policy statement indicated that inflation was beginning to ease but that the risk
for inflation remained to the upside, and that the key rate is expected to
remain at 11.25% ‘for an extended period of time’. The peso is 0.46% today vs.
the dollar, its first gain after three consecutive daily declines. Near-term
support is seen at 17.4000 and resistance at 17.9000.
The U.S. dollar is trading lower vs. all G10 and major currencies
today. The biggest swings for the dollar are -1.0% vs. NZD, -0.93% vs. NOK,
-0.66% vs. AUD, -0.48% vs. CHF, -0.46% vs. MXN, -0.45% vs. EUR, and -0.41% vs.
GBP.
USDCNH is lower by 0.47% after China’s central bank vowed to
curb speculation in the yuan. Offshore yuan (USDCNH) had been 0.36% after reaching
7.0752 overnight, its highest mark since December.
The major global equity indexes are universally higher today,
and combined with the lower dollar can be read as increased risk appetite. Fed
Chairman Powell is scheduled to speak today at 11:00am ET, and his comments will
be watched for clues on the Fed’s next policy decision in June.
The dollar is trading higher on increased hope of a
resolution to the debt ceiling negotiations. The U.S. Dollar Index gained 0.22%
overnight, its 5th daily gain in the last six trading days and is
now at its highest level since March 27th.
Today’s primary dollar gains: 0.61% vs. MXN, 0.42% vs.
GBP, 0.40% vs. EUR, 0.38% vs. JPY, 0.36% vs. AUD, 0.34% vs. CHF, and 0.12%
vs. CAD. USDJPY reached its highest point since December 2022 at 138.39.
U.S. Treasury yields are sharply higher today in all tenors,
with the widest gain the 5-year of 0.063%. Lower probability of a U.S. debt
default has increased risk appetite, prompting traders to exit traditional ‘safe’
assets in exchange for risk. Selling Treasury bills simultaneously drives down
the price and lifts yield. Gold (another ‘safe’ asset) is lower by 0.63% today
at $1,969.05/oz, its lowest price since April 3rd.
Global equity indexes are mostly higher today, more evidence
of the revived ‘risk-on’ enthusiasm in today’s markets.
Three Federal Reserve policymakers are scheduled to speak
today (Jefferson, Barr, and Logan), and their comments will be closely watched
for any hint of change to the Fed’s rate hike cycle. Fed Chairman Powell and
former Fed Chairman Bernanke are scheduled to speak tomorrow.
Mexico’s central bank will announce its overnight rate
policy today. No change expected to the current 11.25%. U.S. Weekly Jobless
Claims for the week ending May 13th were 242k, below the 251k
estimate.
*The arrows indicate how the base currency performed against the counter currency overnight. This document is for information purposes only and does not constitute any recommendation or solicitation to any person to enter into any transaction or adopt any trading strategy, nor does it constitute any prediction of likely future movements in exchange rates or prices or any representation that any such future movements will not exceed those shown on any illustration. All exchange rates and figures appearing are for illustrative purposes only. You are advised to make your own independent judgment with respect to any matter contained herein.