The Morning Update

Tuesday May 23rd, 2023

Written by:
Paul Harrison

The US$ firms, oil prices steady, equity markets are mixed, while US yields rise on the ongoing debt-ceiling saga. The US debt-ceiling saga remains the centre of attention for global markets with time running out for US politicians to reach a deal. President Biden & House Speaker McCarthy called their discussions on Monday as productive, but an agreement remains elusive. "The president & I know the deadline, so i think we're going to talk everyday until we get this done," House Speaker McCarthy said. Alongside the US debt-ceiling talks, concern is also growing about China's weak post covid recovery, which is having a negative impact on broad range of commodity prices including copper, iron ore and oil. Today sees S&P PMI reports, Fed's Logan Speech, New US Home Sales, BoE's Haskel Speech & low-tier CAD Raw Material Price Index & Industrial Product Price which may impact intraday currency market direction.

In other news. Eurozone business growth solid in May but shows signs of easing with manufacturing decline. Saudi Arabia's energy minister warns speculators ahead of OPEC+ meeting to decide the future oil policy. The IMF says it no longer expects UK recession this year. Global container production slumps as demand for goods sinks-FT. PM calls for 'global cooperation' as annual Qatar Economic Forum kicks off.

In currency markets. The US$ edges higher on debt-ceiling concerns and expectations the Fed still may hike rates two more times in 2023. JPY slips to 6-month lows vs US$, CNY slips to 5-month lows vs US$, while Turkish Lira holds near all time lows vs US$. Commodity currencies remain on the back-foot as China's post-covid recovery continues to stall. CNY weakens 0.3%, while Asian currencies are down 0.2% on average vs US$. Trading currencies are mixed with NOK tumbling 1%, SEK falls 0.65%, AUD & NZD weakening 0.5%, CHF drops 0.35%, ZAR slips 0.1%, while MXN is flat, JPY is up 0.1% vs US$.

Oil prices are steady as Saudi Arabia's energy minister warns speculators ahead of the OPEC+ policy meeting. C$ weakens in early trading as commodity prices remain under pressure as China's recovery stalls and uncertainty over the US debt ceiling talks continues to support the safe-haven US$. In the US Fed speakers are increasing their hawkish tone suggesting that the Fed may stall in June, but anticipate two further rate hikes into H2/2023. The prospect of weaker commodity prices & increasing interest rate divergence between the Fed & BoC suggests we could see the loonie remaining under pressure heading into the summer months. Today US data will help drive intraday direction, while CAD low-tier economic releases are not likely to impact the loonie today.

EURCAD holds steady near two-month lows as risk-off sentiment keeps both currencies under pressure.

Euro remains under selling pressure after EU PMI's results. The Euro dropped below 1.0800 after EU PMI data showed that the business activity in the private sector expanded at softer pace in May. On Monday ECB policymaker Villeroy de Galhau said that he is expecting to reach the terminal rate "no later than summer". The ECB's cautious comments and the risk-averse sentiment with ongoing uncertainty with the US debt-ceiling talks is expected to keep pressure on the Euro this week. Intraday US data releases will help provide intraday direction to currency markets.

GBPEUR slips in early trading after disappointing UK PMI results edged the pound lower.

GBP breaks through 1.2400 on weaker-than-expected UK PMI data and caution ahead of BoE Bailey speech. The pound drops to fresh 6-week lows, falling 1.5% in May to date after UK Preliminary business PMI data dropped more than expected in may. Focus shifted to BoE Bailey's testimony where he said "there are risks of inflation persistence and we have responded". In past meetings Bailey said that they had reasons to expect inflation to fall sharply over the comings months. On a positive note the IMF said it did not expect the UK to enter recession in 2023. Expect the pound to remain under pressure as uncertainty remains for an agreement on the UK debt ceiling talks.