FTSE +6 points at 7422
DAX +24 points at 12650
CAC +2 points at 5224
Euro Stoxx +3 points at 3518
The Federal Reserve (Fed) Chair Janet Yellen squeezed the dollar lower at the first day of her semiannual testimony in front of the Congress. Yellen mentioned worries regarding the slower-than-anticipated recovery in inflation as the wage growth ‘seems somewhat low given the Fed’s 2% inflation objective’. The probability of an additional interest rate hike this year fell to 43% even though Yellen said that the Fed will continue rising rates gradually and the Fed’s balance sheet will return to ‘normal levels by 2022’.
The Dow traded at a fresh historical high of $12,580.79 and the S&P 500 advanced to $2,445.25 on expectations that the cost of borrowing would rise at a softer pace than previously anticipated.
The U.S. 10-Year yield eased to 2.30%. The US dollar was offered against all G10 majors. The antipodeans (AUD, NZD) were the biggest gainers in Asia, as carry traders returned to high yielding currencies to take advantage of the rate differential.
Japan's 5-Year yields came off 18-month highs as the Bank of Japan accelerated the 3-5 year maturity JGB purchases to fight back the rising yields. Still, the Japanese 10-Year yields firmed by 9 basis points. The yen-bears remained insensitive to the BoJ’s extra bond purchases. As a result, the yen gained against all G10 majors, except the kiwi.
The US dollar (-0.22%) lead losses against the yen. The Australian dollar (-0.05%) and the euro (-0.02%) remained on the back foot despite the rate differential.
Stronger yen prevented Nikkei (-0.01) and Topix (-0.04%) from benefiting from the rise in the global equity demand. Hang Seng (+1.13%) and ASX 200 (+1.11%) traded higher as Chinese exports rose by 11.3% year-on-year in June from 8.7% printed a month earlier. China’s trade surplus improved to $42.80 billion from $40.81 billion.
Industrial metals gained in Shanghai. The FTSE futures inched higher setting the tone for a firmer open in London.
The EUR/USD rebounded from 1.1391, the 200-hour moving average, and consolidated gains within 1.1411 and 1.1439 in Asia. Trend and momentum indicators remain positive. The single currency is back on track to challenge the 1.15 mark against the greenback, yet put options are waiting to be exercised at 1.1425/1.1400 at today’s expiry. There are no option barriers at 1.15, stops are eyed above.
Cable is in no man’s land since the Bank of England (BoE) Deputy Governor Broadbent talked down the expectations of an imminent interest rate hike and the UK’s wages growth slowed from 2.1% to 1.8% (3m/y) in May in line with expectations.
Traders are in a wait-and-see mode before next week’s inflation figure and the BoE’s inflation hearings. From the dovish standpoint, entering into a fresh bearish position seems risky, given that GBP-negative positions may suddenly get trapped in a bullish reversal if the UK’s inflation exceeds 3% in June. The May figure was 2.9% year-on-year.
The Canadian dollar rallied to a year high amid the Bank of Canada (BoC) raised the interest rate by 25 basis points to 0.75%. Although Governor Poloz urged caution, speculations of another rate hike rose significantly. The market is currently pricing in more than 70% probability for a second rate hike in 2017.
To us, the BoC will likely collect data first, and then decide whether a second rate hike would be appropriate within such a short period of time. The USD/CAD traded at 1.2681 for first time since June 2016. The daily relative strength index (23% < 30%) stepped in the overbought territory, suggesting that a correction could be healthy at the current levels. Trend and momentum indicators remain comfortably negative. Any positive correction in USD/CAD could meet fresh sellers. The next Fibonacci resistance stands at a distant 1.2942 (minor 23.56% retracement on May – July decline).