The Morning Update

Wednesday May 24th, 2023

Written by:
Paul Harrison

The US$ firms, oil prices rally, equity markets are down, while US yields are mixed as debt ceiling uncertainty grows. McCarthy & Biden remain at an impasse over the debt ceiling talks, with one of McCarthy's chief negotiators suggesting just hours after a two-hour meeting with his White House counterparts that the two side were at a standoff. The impasse increases the likelihood the House & Senate would both have to vote any any deal next week, just ahead of June 1st, the date Treasury Secretary Yellen said the US could run out of cash to pay its bills. The standoff in debt ceiling talks weighed on global equity markets which sank to 3-week lows, while the US$ index holds near 2-month highs. Today sees the FOMC Minutes, ECB President Lagarde Speech & Fed's Wallers speech will help provide intraday direction to currency markets today.

In other news. UK inflation falls to 8.7%, but food prices remain stubbornly high-FT. Ukraine war: Belgorod incursion may stretch Russia's defenses - Reuters. Big drop in German exports to China raises fears over EU's economic powerhouse-FT. Chinese hackers attacked Kenyan government as debt strains grew. Russia, China seal economic pacts despite Western disapproval. Greece to appoint caretaker PM ahead of June repeat election. Australia, India to seek closer economic ties, critical minerals cooperation. China says NATO's plan for Japan office not welcomed in Asia-Pacific.

In currency markets. The US$ index holds steady near 2-month highs as debt-ceiling worries provides safe-haven support. CNY holds to near 6-month lows on domestic economic concerns. NZD dived after the central bank signals an end to interest rate hikes. Commodity currencies remain under selling pressure as China growth concerns persist. CNY & Asian currencies are flat on average vs US$. Trading currencies are mixed with JPY & MXN are up 0.1% while CHF & NOK slip 0.2%, ZAR falls 0.4%, AUD & SEK weaken 0.6% and NZD tumbles 1.9% vs US$.

Oil prices rally near 2% in early trading on the back of Saudi energy minister warning to speculators raising the prospect of further OPEC+ output cuts, this coupled with reports of falling US stockpiles boosted oil prices. C$ falls to its weakest point in May as the US$ holds near 2-month highs as investors continue to favor the safe-haven greenback as uncertainty over the US debt-ceiling as talks remain at an impasse. With no CAD economic releases this week, markets will focus on today's FOMC Minutes, Thursdays US GDP & Friday's Durable goods data to provide currency direction.

EURCAD gains in early trading, but in the bigger picture Euro is down near 2.5% in May vs C$ as the loonie continues to find an underlying support after and he increase in domestic inflation levels raised the prospect that the BoC may adjust its pause policy.

EUR fails 1.0800 amid mixed German IFO data and increasing debt ceiling uncertainty. The German IFO survey showed a deterioration in business sentiment which dropped from 93.4 in April to 91.7 in May. The lack of progress in the US debt-limit negotiations continues to support the safe-haven US$ as risk-averse sentiment increases. Intraday focus will be ECB Lagarde's speech and the FOMC minutes to help provide intraday direction to currency markets. A break of 1.0740 opens the potential of further Euro weakness towards 1.0685 next.

GBPEUR remains steady after UK inflation levels were higher than expected, keeping pressure on the BoE to continue its rate hike policy.

GBP falls in early trading amid debt-ceiling concerns, ongoing inflation woes and Bailey speech. UK inflation rate cooled to 8.7%, hitting single digits for the first time since August 2022 which is a positive. On a negative, the UK's core inflation spiked to a new 31-year high driven by surging food prices, which is expected to keep pressure on the BoE to keep raising interest rates. The High inflation levels remains a problem for the UK government which promised at start of 2023 to halve inflation towards 5% by the end of the year. Intraday FOMC minutes could be a driver for currency markets today.