The Morning Update

Friday May 12th, 2023

Written by:
Paul Harrison

The US$ is flat, oil prices slip, equity markets are up and US yields rise as investors assess signs of progress in US debt-ceiling talks. Risk sentiment improves after President Biden & House Speaker McCarthy postponed a meeting on the debt-ceiling that was planned for today, insiders suggest the delay reflects progress in staff-level talks. Equity markets strengthened on debt-ceiling optimism and strong earnings from Cartier maker Richemont. Investors remain focused on global central banks direction on interest rates as they campaign to quell inflation. US initial jobless claims released on Thursday reached the highest levels since Oct 2021, while PPI rose less than expected, increasing expectations the Fed may look to pause interest rate hikes in to Q3. Today U.of.Michigan Consumer Sentiment and Fed's Jefferson, Bullard are participating in discussion on monetary policy at Stanford university.

In other news. UK economy grows in Q1, but March drop underscores fragility. G7 finance ministers face tricky trade-off in debating steps to counter China. Elon Musk says he's stepping down as Twitter CEO, will oversea product. Debt ceiling meeting between Biden & Congressional leaders postponed until next week. Russian diamonds could be sanctioned, potentially disrupting the global jewelry market. Cathie Wood-Linked ETF firm is shut down by Canadian regulator. Turkey heads to the polls as Erdogan faces his toughest contest yet. PwC races to contain widening Australian tax leak scandal -FT. Luxury group Richemont posts record earnings as China rebounds.

In currency markets. The US$ heads for its biggest weekly gain since February, up near 0.5% in May. ZAR hits record low as JPMorgan cuts its GDP forecast on expectations of more severe power cuts. CNY weakens to 2-month lows. Commodity currencies remain under selling pressure as the global growth outlook darkens. CNY slips 0.1%, While Asian currencies fall 0.2% on average vs US$. Trading currencies remain are mixed with SEK strengthening 0.4%, CHF & NOK are up 0.2%, while JPY is down 0.1%, NZD & MXN slip 0.2% ZAR weakens 0.65%, and AUD tumbles 1.1% vs US$.

Oil prices slip in early trading as they head for their 4th weekly drop as economic concerns in the US & China revive concern about fuel demand growth in the world's two largest oil consumers. C$ remains on the back-foot after posting its biggest daily decline in 2-months as oil and commodity prices remain under pressure as US data on Thursday increases concerns that the US & Chinese economies are slowing down. Today focus will be on Michigan Consumer Sentiment Index to help provide intraday direction to the currency markets. Support rises 1.3440 and resistance resets to 1.3550.

EURCAD is steady in early trading as markets are sidelined ahead of US data releases. MTD C$ has gain 1.4% vs EUR, but weaker commodity prices could put pressure on the C$ in the short term. Support sits at 1.4680 while resistance holds at 1.4800.

EUR drops to 1.0900 despite upbeat risk sentiment. Euro has been unable to benefit from improving risk sentiment amid a rebound in US treasury bond yields which have provided an underlying support to the US$. Resurfacing fears over a deepening banking crisis in the US is causing investors to remain cautious, staying away from risk-sensitive assets. The US$ on Thursday the US$ outperformed the single currency despite Thursday's weaker-than-expected economic data, as investors shift focus to the US debt ceiling talks. ECB official Nagel commented that it is likely to see two more hikes in July & September, but the Euro failed to benefit from the comments. Support resets to 1.0870 with resistance holding at 1.1000.

GBPEUR extends gains vs a weaker EUR after mixed UK data. In the short term Euro will be the primary driver of short term direction as it tries to gain traction on the back of ongoing hawkish ECB comments. Support sits at 1.1450 while resistance rises to 1.1550.

GBP steadies after the UK economy posts positive growth in Q1. The pound edges slightly higher after the UK avoided recession in Q1, helping the pound recover from its biggest 1-day drop on Thursday since mid-April. The BoE hiked 25bps as expected in an attempt to tackle interest rates currently sitting at 10.1%. The BoE upgraded its economic growth forecast which is a positive as the UK which currently has the highest rates of inflation of any developed economy and it also has the slowest rate of growth among the G7 richest nations. We expect an increase in safe-haven flows as US banking concerns continue to linger and will keep investors on edge. Support rises to 1.2480 while resistance holds at 1.2580.