Morning Commentary: Stability – But for How Long?

Foreign Exchange - Morning Commentary

Stability – But for How Long?

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets are attempting to stabilize after the panic attack from last Wednesday where G7 interest rates and global equities collapsed on increasing fears of a global recession. Markets seem to have priced in enough negative news in the short term as we continue to consolidate, as there appears to be a pause in the extreme volatility of last week. Equities and interest rates however continue to whip saw back and forth within narrow ranges, but remain confined to recent trading ranges as investors and traders tip toe back into the market.
 
The U.S. dollar (DXY) continues to reflect the fact that the U.S. economy remains firm and stable relative to its other key trading partners. The DXY index has risen in five of the past six sessions while the euro has fallen in six consecutive sessions. Markets continue to price in EZ economic weakness, as too many countries in the EZ are overly dependent upon exports for growth as global trade volumes continue to recede. This combined with further expectations for ECB monetary stimulus measures and Italian political turmoil have caused the euro to return its most recent lows.
 
In the very short term, continue to expect markets to consolidate within recent ranges, but market sentiment still remains very fragile. Markets will stay extremely sensitive and fearful to any short term economic data that points toward further U.S. or global economic weakness. The most recent FOMC minutes are released tomorrow and Chairman Powell speaks on Friday. Until then, expect more sideways and consolidative markets.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Asian equities were mixed but European equities have turned negative pulling all G7 interest rates lower on the session. Safe haven assets are on the rise with both the Japanese yen and Swiss franc rising today along with gold. G7 interest rates had rallied higher on Friday and Monday after the sharp sell off last Wednesday and Thursday. U.S. 10-year rates remain above 2-year rates by 5 bps today after flashing orange on Wednesday.
  • Canadian Manufacturing sales for June came in better than forecast at -1.2% versus estimates of a decline of 1.8%. May Manufacturing sales remained unchanged at 1.6%. The Canadian dollar is weaker on the news as are many other commodity linked currencies today in this “risk-off” environment.
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