The Greenback found itself in negative territory as bond yields returned their earlier gains, possibly on profit-taking. Meanwhile, the British pound was able to get back on its feet, thanks to reports suggesting that a Brexit deal might be ready by next week.
- U.S. NFIB Small Business Index down from 108.8 to 107.9 vs. 108.9 forecast
- Canadian housing starts fell from 199K to 189K vs. 203K consensus
- U.S. IBD/TIPP Economic Optimism Index up from 55.7 to 57.8 vs. 54.6 estimate
- Dow Jones report: U.K. and EU might have a Brexit deal by Monday
- IMF cut global growth forecasts, downgraded estimates for U.S. and China
- Trump: Fed hiking rates too fast
Brexit deal ready by next week?
Market watchers got their hopes up for a Brexit deal soon as a Dow Jones report suggested that the U.K. and the EU could shake on it by Monday next week.
Citing unidentified diplomats, the report suggested that both parties are settling their differences on the Irish border backstop issue, which is a key factor in getting the divorce agreement done and dusted.
Furthermore, remarks from Irish minister Coveney fueled optimism as he downplayed the odds of a “no deal” Brexit. He did express some doubts that U.K. proposals will be enough but shared that the EU is showing willingness to adjust, possibly leading to some clarity over the next six weeks.
Coveney did clarify that November might be a more reasonable timeline for signing on a Brexit deal, explaining:
“What we do know is that the talks process has intensified this week on trying to find a way forward on the backstop but I suspect November will probably be needed as well as October to get agreement on that but we’ll know an awful lot more next Monday and Tuesday.”
He also reminded that a “no deal” situation could bring carnage, so that’s comforting.
U.K. Brexit minister Raab also had some positive things to say, confirming that negotiations have intensified and that they continue to engage with the EU on the backstop proposal. However, he did reiterate that the U.K. won’t accept anything that threatens its constitutional integrity and that they are continuing preps for a “no deal” outcome.
Bond yields retreat
The big story for the session was the drop in U.S. bond yields, with many pointing to how these returned most of their strong gains to record highs from earlier on.
- U.S. 5-year yield sank 1.9 basis points to 3.0505%
- U.S. 10-year yield fell 3 basis points to 3.2025%
- U.S. 30-year yield is down 3.9 basis points to 3.3641%
Bargain prices on bonds after the steep selloff last week may have coaxed buyers into a shopping spree, dragging bond yields down in the process. (Wondering how this affects currency prices? Make sure you check out this lesson on bond prices and yields!)
Some also blame the IMF downgrades on global growth forecasts, as well as its estimates for the U.S. and China, on account of the ongoing trade war as the reason for the slump in outlook and therefore U.S. bond yields.
It didn’t help that Trump is once again back to criticizing the Fed for hiking rates too quickly, seeding doubts that the central bank could keep up its pace of tightening. The POTUS said:
“Well, I like to see low interest rates. The Fed is doing what it thinks is necessary but I don’t like what they’re doing because we have inflation really checked, and we have a lot of good things happening. I just don’t think it’s necessary to go as fast.”
Major Market Mover(s):
Sterling had a reversal of fortunes from the earlier session when it was down in the dumps as revived optimism for a Brexit deal lifted its spirits.
GBP/USD recovered from a session low of 1.3034 to a high of 1.3149; GBP/JPY bounced off 147.35 to a high of 148.74; EUR/GBP edged lower to the .8750 area, and GBP/AUD rebounded to a high of 1.8543.
The Greenback lagged behind its peers as it faced headwinds from falling U.S. bond yields. The faster you rise, the harder you fall!
USD/JPY fell from 113.33 to a low of 112.86; EUR/USD popped up from 1.1432 to a high of 1.1504; AUD/USD bounced from a low of .7054 to a high of .7115, and USD/CAD slumped back to 1.2938.
Watch Out For:
- 11:50 pm GMT: Japanese core machinery orders m/m (-3.9% expected, +11.0% previous)
- 1:10 am GMT: FOMC official Williams’ speech at the Central Banking Forum
- 6:00 am GMT: Japanese preliminary machine tool orders (+5.1% previous)