Yields, Risk Appetite Drive Currencies Higher

Most of the major currencies traded higher today including the U.S. dollar. Ten-year bond yields are up more than 3bp across the globe with U.S. stocks hitting fresh record highs. While housing starts and building permits fell more than expected today, risk appetite is strong. We haven’t heard any new confrontational comments on North Korea and Fed President Powell who is the leading candidate for Fed Chair according to the betting markets follows the same mantra of slow rate hikes as Yellen which is positive for the equity market. Investors are also encouraged by stronger corporate earnings and have hope that President Trump won’t nominate someone completely unexpected. The Federal Reserve’s Beige Book report added fuel to the rally as the Fed districts reported widespread labor tightness. We could see the dollar extend its gains with USD/JPY breaking 113.50 if yields continue to rise and there are no negative headlines to offset the flow. The Philadelphia Fed survey is scheduled for release on Thursday and the sharp jump in manufacturing activity in the NY region signals similar strength in Philly region.

Sterling dropped to a low of 1.3140 before reversing to the settle the day much closer to its highs than lows. While wage growth was stronger than expected, investors did not feel that the overall report was positive enough to offset the doubt caused by yesterday’s comments from MPC officials. Jobless claims ticked up slightly but the unemployment rate remained unchanged and most importantly wage growth was revised up to 2.2% in July and remained at that pace in August. Retail sales are due for release tomorrow and this increase along with the uptick in spending reported by the British Retail Consortium suggests that spending may not have fallen in September like economists expect. Unfortunately, even if the report beats expectations, as we have seen today, Brexit and BoE concerns could prevent sterling from enjoying a meaningful rally. However on technical basis it appears to be due for one with today’s slide finding support right at the 50-day SMA.

The Australian dollar will also be in play tonight with the country’s labor market report and Chinese GDP, retail sales and industrial production numbers on tap. AUD/USD has found support above 78 cents but if significantly weaker job growth is reported tonight, we could see this key level broken. Australia added 54K jobs in August but job growth is expected to have slowed to 15K in September. According to the PMIs, employment growth in the manufacturing and service sectors slowed last month. As usual full time job growth will be more important than the headline number. Meanwhile China is expected to report slower Q3 GDP growth but stronger retail sales and industrial production. These reports should not only affect AUD but also NZD as well. After rising strongly last week, NZD/USD found solid resistance at the 20-day SMA. Investors completely shrugged off the stronger but backwards looking Q3 CPI numbers in favor of weaker manufacturing activity and lower dairy prices. Despite the fact that it bounced off the lows today, NZD still appears poised for a move back to 71 cents. The Canadian dollar on the other hand was one of the strongest performing currencies, soaring on the back of higher Canadian yields, a sharp unexpected jump in manufacturing sales and a mild increase oil prices. If USD/CAD breaks the October low of 1.2433, the next stop should be 1.2375.

Thanks to the sharp rise in German yields, euro also snapped a 4 day downtrend and found its way back up to 1.18. There were no major economic reports released today but if it manages to rise above 1.1820, we could finally see the currency gain upside traction ahead of next week’s European Central Bank monetary policy meeting.