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US economic data continues to positively surprise, with gains in PMI indicators. French political crisis helps the USD, but JPY is the strongest of the majors

Currencies / analysis
US economic data continues to positively surprise, with gains in PMI indicators. French political crisis helps the USD, but JPY is the strongest of the majors
currency charts
Source: 123rf.com

As the new week began, focus immediately turned to the bubbling political crisis in France. France’s Finance Minister said that “we will not be blackmailed” in response to Marine Le Pen’s threat to topple the government as soon as this week unless her party’s demands for changes to the Budget were met.

Overnight, French PM Barnier made a last-ditch attempt to keep the budget bill on track by offering yet another concession to Le Pen’s party before using special powers of the constitution to force through the social security part of the budget rather than hold a vote. This triggered Le Pen’s party to tweet that it would support a no-confidence vote.  A vote of no-confidence can be tabled within 48 hours. If this occurs, then Barnier’s government will collapse. In that scenario, Ministers would remain in place with a caretaker status and President Macron would need to appoint a new PM.

French assets have further underperformed, with the CAC40 index flat against a rise in all other major European bourses, with the Euro Stoxx 600 index up 0.7%.  The French 10-year government rate is up 2bps against a fall in most other European markets, the French-German 10-year spread widening another 8bps to 88bps and French yields back to trading at the same level as Greece.

EUR steadily fell during the Asian trading session and fell further overnight to a low of just over 1.0460 before finding some support and is current down 0.9% from last week’s close at 1.0485. The weaker euro spilled over into other European currencies and supported a broad-based gain in the USD.  GBP is down 0.7% to 1.2645 and the USD DXY index is up 0.7%, reversing a chunk of last week’s loss.  Over the weekend Trump threatened to impose 100% tariffs on countries that try to replace the USD as the world’s reserve currency, directed at the BRICs+ countries, although this simply repeated his rhetoric during the election campaign and there was no obvious impact on the market.

JPY has been the only major currency to outperform the USD, with USD/JPY down 0.1% to 149.60, reversing yen weakness through the NZ trading session after the currency’s strong rally last week. Japanese rates pushed higher as the market reacted to BoJ Governor’s weekend interview published in the Nikkei where he said the next rate hike is nearing in the sense that economic data are on track.

The broadly stronger USD sees NZD/USD losing some of last week’s gain to trade back below the 0.59 mark, currently 0.5875 and down 0.7% from last week’s close. The AUD has fallen by slightly more, to 0.6460, seeing NZD/AUD push up to 0.91. NZD/EUR has risen to just over 0.56, NZD/GBP is up slightly to 0.4650 and NZD/JPY is down 0.8% to 87.9.

In economic news, the US ISM manufacturing index rose by more than expected, up nearly 2pts to a five-month high of 48.4, with the new orders component rising even more to 50.4.  The manufacturing PMI was also revised nearly 1pt higher from the flash estimate to 49.7.  These indicators continued the run of stronger than expected US economic data.

The stronger data had no obvious impact on the market, with US Treasuries driven by other forces. The 10-year rate was already trading near its daily high of 4.24% ahead of the data, with traders noting heavy supply of corporate paper as a possible factor, and reversal of month-end flows, before yields sharply fell post-data to 4.19% up only slightly for the day.  The 2-year rate up 4bps to 4.19%, so the 2s10s yield curve is flat after briefly going inverted.

Yesterday, stronger China Caixin PMI manufacturing and Australian retail sales data had little impact on the market.

US equities have continued their record-breaking run, with the S&P500 currently up 0.2%, with a gain of 1% for the Nasdaq index in early afternoon trading.

In the domestic rates market, global forces supported lower NZ rates across the curve, with NZGB yields down 2-4bps, with the curve flatter out to 10-years.  The 10-year rate fell 4bps to 4.34%.  Swap rates also fell 2-4bps, with a flattening bias. The OIS market is reluctant to price in the full 50bps of easing for the February meeting, built into the RBNZ’s projections according to Governor Orr, with 43bps priced.

In the day ahead, US Fed heavy-hitters Waller and Williams will both be giving speeches during the NZ trading session this morning, ahead of NZ terms of trade data.  Australian current account and the US JOLTS labour market data round out the global economic calendar.

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Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: RBNZ
Source: CoinDesk

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