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Market Comment 23rd June 2017

Carry traders seek opportunity in low US, EU rates

Carry traders seek opportunity in low US, EU rates

The US dollar is offered against all of its G10 counterparts. The antipodeans are the biggest gainers. The euro and the pound are well bid as the European traders step in.

The June flash PMI indicated that French and German manufacturers may have expanded faster than expected this month, while the activity in services may have retreated to five-month lows.  

The EURUSD is better bid today, essentially on the back of a broadly softer US dollar. But, the pair needs a stronger conviction to step out of the 1.11/1.13 range. The topside appears to be capped by a rising pressure due to decreasing euro yields. The German yield curve eased to new year-to-date lows.
 
On the downside, the minor 23.6% retracement on April - June rise, 1.1123, has been tested at the start of the week, yet not damaged on a daily closing basis. Breaking below the 1.1123/1.1100 support zone could compromise the April – June rising trend before long. The key support to the EURUSD’s positive trend stands at 1.1018 (major 38.2% retracement).  
 
  FTSE down on stronger pound, energy stocks on the back foot
 
The GBPUSD holds the ground above the 100-day moving average (1.2665). Thursday’s EU summit was not too bad for UK PM Theresa May, as she discussed the EU citizens’ rights in the UK after the Brexit. Somewhat different from her usual, sharp approach, yesterday’s dinner was certainly perceived as a good start, yet there are many details to be discussed.

In the lack of more news, the GBPUSD could resume its recovery toward 1.2824 (minor 23.6% retracement & June triple top).
 
FTSE 100 stocks are down on stronger pound. Energy stocks (-0.91%) are leading losses, followed by healthcare (-0.84%) and miners (-0.40%). The 7400p is at risk. Support is eyed at 7360p (100-day moving average).
  
 Dow to reverse three-day losses
  
The US sovereign yield curve steepened slightly.
 
The Dow Jones closed lower on Thursday for a third consecutive day. The downside pressures softened however. Financials erased 0.59% in the Wall Street, as energy stocks lost 0.22% on the back of a pause in the oil sell-off.
 
Both sectors are expected to pare losses before the weekly closing bell.
  
Financials could outperform amid the largest US banks passed the Federal Reserve’s (Fed) annual stress test. Recovery in oil prices could stop the bleeding in the energy sector.
 
The Dow is called 20 points firmer at $21’417 at the US market open.
  
 Recovery in US yield curve insufficient to dissuade long gold positions
 
Gold buyers are touted above the 100-day moving average ($1’248). The short-term resistance stands at $1’254 (minor 23.6% retrace on June decline), $1’257 (50-day moving average) and $1’262 (major 38.2% retrace).
  
 Soft US yields could encourage carry trades
 
The USD dollar pared losses against its EM counterparts, yet the bias remains in favour of the higher yielding currencies. The lack of appetite to push the world’s most popular equity indices to new record levels could drive some more capital into well remunerating money markets.
 
The USDTRY is testing the 200-day moving average (3.4945) on the downside, as the high inflation – despite a relatively stable and stronger lira, prevents Turkey’s central bank from displaying any dovishness regarding its rate policy. Removing the 200-day moving average support will bring the 3.40 level in radar for the first time since December.
 
The Mexican peso is better bid after the Banxico raised the interest rate by 25 basis points as expected. The USDMXN is set to retest the 18.00/17.90 support. Despite the recent pullback in Mexican yields, the 2-year yield spread against the US dollar stands at the top range of 2017.
 
A better carry appetite should also attract investors to antipodeans (AUD, NZD). The AUDUSD could benefit from fresh long positions into the 0.7530/0.7515, area including the 100 and 200-day moving averages and the major 38.2% retracement on May – June rise). The NZDUSD is on the track to re-test 0.7375 (February high) before extending gains to 0.7402 (November 2016 high) and 0.7485 (June 2016 high).
 
Improved carry interest encourage AUD-longs versus the EUR
 
The low euro rate environment also offers the carry traders a competitive alternative for the short leg of their strategy. Top sellers in EURAUD are touted pre-1.4845/1.4850 (minor 23.6% retracement on February / May rise & 50-day moving average) for a pullback to 1.4612 (major 38.2% retrace) and an eventual bearish reversal in continuation.
 
Loonie strengthens on data, oil
 
The Loonie had a good Thursday session. The recovery in oil prices, combined to better-than-expected April retail sales data pulled the USDCAD down to 1.3207 in Toronto.

Canada’s inflation data is due today. According to analysts, the headline inflation may have softened in May, yet the core inflation, excluding the most volatile components as food and energy prices, could have firmed from 1.3% year-on-year to 1.4%. A solid core inflation read could further revive the Bank of Canada (BoC) hawks, who are ready to buy into any positive data following BoC Governor Poloz’s hawkish comments last week. The 1.30 level is a reasonable target for mid-term traders, as long as the WTI crude holds the ground above $40/barrel. Intermediate support is eyed at 1.3200 and 1.3165 (June low).


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Market Comment 23rd June 2017

Carry traders seek opportunity in low US, EU rates

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