US dollar and bond rates rise with inflation data ahead of FOMC tonight

June 18, 2014

Well well – it is always bond markets that blow the financial system to smithereens and in the sell offs we saw last night we get a glimpse into what bonds might do when Mark Carney and his BoE colleagues start hiking rates and what may happen in the US one the Fed ends it taper and moves to the next phase of reducing monetary accommodation.

The 5 point sell off in US 10 year treasuries lifted the yield to 2.65% and a capital loss for the longs of 1.96% was mirrored and exceeded in other markets with rates higher in Germany, Italy, Spain and the UK. On the continent Bunds closed at 1.41% up 4 for a capital loss of more than 3% while in Italy and Spain the 10′s closed at 2.84% and 2.71% respectively for losses of more than 2%. In the UK 10 year Gilts rose to 2.78% for a loss of 0.97%.

The catalyst was the higher than expected increase in US consumer prices which rose 0.4% in May against expectations of 0.2%. This means the year on year rate accelerated a little to 2.1% which is exactly what the Fed wants. With US factory data, released the previous night, running strongly this data helps paint a picture of a return to growth after the weather related economic weakness in Q1 and shortens the till the FOMC will be increasing interest rates.

Sure housing starts were lower giving back 6.5% in May after the big 13.2% rise in April but they are still above 1 million units and chain store sales are up 3.5% year on year.

Here at home the 10 year futures have lost 3 points to 96.255 (3.745%) while the 3′s lost 2 points to 97.16 (2.84%) – these moves have been tempered by the RBA’s dovish minutes yesterday.

Here is the question and it’s a question of import to traders in ALL markets, stocks, FX, commodities and credit – will US 10’s break higher or will they respect the trend line once again?

So the wash-up would usually have been that stocks fell but this is a market buoyed by free money – which we still have – so US stocks closed higher. The Dow rose 0.16% to 16,808, the Nasdaq was 0.37% higher at 4,337 and the S&P 500 was 4 points higher to 1,942 – a gain of 0.22%.

In Europe stocks were higher as well with the FTSE up 0.18% to 6,767, the DAX up 0.36% to 9,920 while the CAC was 0.58% to 4,536. Milanese stocks hardly budged up 0.09% while in Madrid stocks were up 0.46%.

Locally the June and September SPI 200 futures are down 3 points to 5394 and 5,350 respectively. It’s been a negative but indecisive 24 hours for Australian stocks but the $1 rise in September 62% FE iron ore swaps to $89.67 might help the market a little today.

Currency traders, like their counterparts in the bond markets, didn’t miss the importance of the pick up in US CPI with the US dollar stronger across the board. This strength saw the Aussie abort its European rally and it sits at 0.9335 this morning. Euro is lower as well back down at 1.3546 and the US dollar strength has knocked Sterling from its perch above 1.70. It sits at 1.6959 this morning.

Based on my system the Aussie has support at 0.9322. But a drop would see a decent 50 odd point cascade. Please note though on the hourlies it is consolidating its oversold status.

On commodity markets as noted above iron ore was higher for a change while September Newcastle coal fell 15 cents to $72.55. Nymex June crude fell half a percent to $106.60 while gold sits at $1,270 and silver closes in on $20 oz at $19.72 this morning. Copper gained another cent per pound to $3.06 while soybeans was the big mover on the Ags down 1.65%. Corn fell 0.51% and wheat rose 0.13%.

Today in Australia we see the release of economic leading indicators but forex traders will be focused at the other end of the day when the BoE minutes are released and then the FOMC decision early tomorrow morning.

Social

Free Daily Market Update

Live Spreads

SymbolBidAskSpread

Spread

Sign up to the latest forex news and daily FX trading setups

Get started with a FREE $50,000 demo account