The Morning Update

Thursday May 25th, 2023

Written by:
Paul Harrison

The US$ extends gains, oil prices weaken, equity markets are mixed, while US yields rise as markets remain risk-averse. Investors remain cautious on a combination of China growth concerns and uncertainty on the ongoing US debt-ceiling ahead of the June 1st deadline. China's recent data suggests growth will be closer to 5% in 2023, and with Beijing's reluctance to deploy large-scale stimulus we are seeing a negative impact on risk sentiment, crushing commodity prices and weakening equity markets. In the US, debt-ceiling talks continue with House Speaker McCarthy optimism that the White House would reach a deal in time to avoid a potential default before June 1st, the date by which Treasury Secretary Yellen has warned the US could run out of money to pay its bills. Fitch Ratings, put the US AAA long term foreign currency issuer default rating on negative watch on Wednesday evening. Today alongside debt-ceiling updates, focus will be on key US GDP data, US initial Jobless Claims, Pending home sales, Fed Collins & BoE Haskel speeches to help provide intraday direction to currency markets.

In other news. Shares in European chip companies jump after Nvidia upgrade. The German economy fell into recession in Q1 after weaker than expected GDP data. Central Europe firms stake positions in Ukraine reconstruction race. China hits back after Microsoft says state-sponsored group hacked critical US infrastructure-FT. EU discusses a plan to send profits from Euro 196.6 bln of frozen Russian assets to Ukraine. Saudi Arabia & Canada agree to restore full diplomatic relations after 2018 split. China, US commerce and trade chiefs confirmed to meet in the US. Nvidia close to becoming first trillion-dollar chip firm after stellar forecast.

In currency markets. The US$ extends gains on safe-haven flows hitting mid-March highs. Euro slips after Q1 GDP confirmed Germany enters recession. CNY remains under pressure near 6-month lows on concerns over faltering economic recovery. Commodity currencies remain under pressure on China economic growth concerns. CNY slips 0.15%, while Asian currencies are down 0.2% on average vs US$. Trading currencies remain under pressure with NZD & ZAR weaken 0.5%, SEK falls 0.35%, AUD slips 0.2%, CHF & NOK are down 0.15%, while JPY & MXN are flat vs US$.

Oil prices weaken over 1% in early trading as OPEC+ played down the prospect of further production cuts. C$ remains on the back-foot, weakening alongside its commodity peers as China growth continues to struggle, and the ongoing impasse on US debt ceiling talks continues to support a stronger safe-haven US$. We expect the loonie to remain under short term selling pressure as uncertainty continues, commodity prices remain under selling and the with lack of key CAD economic releases to support a stronger CAD scenario.

EURCAD falls in early trading after the Euro came under selling pressure after disappointing German GDP showed Europe's manufacturing power house has slipped in to a technical recession.

EUR consolidates below 1.0750 amid increasing risk adverse market sentiment. The ongoing US debt-ceiling standoff, China's weak growth and the news that Germany has slipped into recession combined, has increased selling pressure on the single currency. German GDP fell below expectations taking German GDP y/y Q1 down to -0.5% and German Gfk Consumer Confidence came out at -24.2 which is seen as a negative/bearish confidence outlook. We anticipate the Euro has room to weaken further towards 1.0680 under the current uncertainties around the US debt ceiling impasse. Intraday US GDP and US Jobs data will be closely watch for signs of US inflation levels.

GBPEUR extends gains retesting 5-month highs after disappointing German GDP data put selling pressure on Euro.

GBP bounces off 6-week lows despite a firmer US$. The pound bounced off fresh 6-week lows at 1.2332 as expectations grows that the BoE will hike by a full 1% by the end of 2023 according to Reuters. UK inflation levels remains the 2nd highest in the Western-Europe currently sitting at 8.7% with food prices continuing elevate inflation levels. In the short term the US$ remains in the driving seat as investors remain focused on the outcome of the US debt ceiling talks which is continuing to support the safe-haven US$ trade. Intraday US GDP & Initial jobless claims will help drive intraday direction.