Due to technical issues there is no Morning Update video today
Good morning,
Sideways sentiment
The positive sentiment that the day started in, continued through yesterday’s session although moves were rather slow and sideways. Commodity currencies peaked higher on improving oil sentiment with AUD, CAD and NOK all gaining. The improved situation in Greece also brought bond yields lower on the session; a sure fire sign that politicians in Europe may for once have done the right thing before an existential crisis hits the continent.
Similar moves were seen as the US took over for the session and the overnight moves in Asia have mainly focused on the yen. Yen has strengthened from the lows on no news although the speed of the recent move higher is of the kind that generates thoughts that an asset is oversold. Risk appetite is naturally tied to the belief that we’re in an ultra-low-yield environment and investment managers can’t simply sit here and wait for the tide to turn.
Has the dollar bottomed?
Goldman Sachs have released their latest thoughts on the USD overnight, calling for a gain of 15% in the next 24 months. We are in a similar mind set in that we think that the risk of a Federal Reserve surprise higher is under-priced by markets. It has become clear to us that the market pricing is a lot more dovish than even the most dovish members of the Federal Reserve in most of the recent communications. A hike by the end of the year is only priced in with a 48% probability and only 30% by September.
If you believe that the latest jobs numbers continue to show that the jobs markets is tightening and wages running higher then it must be external factors that stay the Fed’s hand. June sees the UK referendum and the paralysis that we will see in policy before the vote is lining up to be quite something but for now, Q3/Q4 is still shaping up as a sensible time for the Fed to bring rates to 0.5%.
While we are not looking for a USD that is 15% higher and there is little to suggest that the USD has bottomed, we remain dollar bulls.
Kiwi relief rally
Kiwi dollar has put on value this morning following talk from the RBNZ that while they were ‘seriously looking’ at macro-prudential policies to limit the rise in housing prices, they made no significant policy announcements and the relief has sent the NZD higher. AUD has lost out overnight following a report by Moody’s that hinted that Australian banks were due asset downgrades.
Sterling strong despite headwinds
Sterling is still solid despite the headwinds of poll after poll showing the ‘Leave’ campaign gaining strength and poor economic news. While there have been a pick-up in online polls showing gains for the Brexit camp, we have been looking at the behaviour of UKIP polling and their results in the most recent local elections as a guide to possible vote patterns in the referendum.
Polls taken for last week’s local elections continued to overstate the support for UKIP compared to their results and while that could translate into a possible overstating of ‘Leave’ support, we know that Labour, Conservative and SNP voters are all voting for the UK to leave the EU.
The Day Ahead
Chancellor of the Exchequer George Osborne will be questioned by the House of Commons Treasury Committee about a report predicting “permanent damage” to the economy in the event of a vote to leave the European Union at 2pm this afternoon.
We also receive the latest industrial and manufacturing production numbers from the UK at 09.30. Similar numbers from Europe have been poor and we continue to believe that a weak Europe and slowing demand at home means a poor outlook for industry.
Have a great day.