Investors continue their search for yield in a challenging global climate, which has seen the dollar sustain recent gains of late. With US-Sino relations showing no sign of appeasing in the short-term, the US yield curve continues to take another leg lower as investors flood into US Treasuries due to their favourable risk-return profile. The 3-month 10-year spread is the most inverted since 2007. The measure is normally a precursor to a recession, but this time around shows the extent to which the flight to safety is due to political tensions and growth fears flowing from trade tensions. No fuel was thrown on the fire yesterday though when the US Treasury refrained yet again from labelling China a currency manipulator in its semi-annual FX report to Congress. There remains little in the data calendar today for the dollar.


Sterling traded relatively flat yesterday, along with the majority of its G10 peers, with little Brexit related headlines forthcoming. There are now 11 Tory leadership contenders, and if you blink there will likely be a few more. The main news that came out yesterday is that the flamboyant Commons speaker, John Bercow, announced he will continue in his current role until Brexit is resolved. Bercow’s announcement will come as little surprise in Westminster but will likely enrage Brexiteer Tory members as the speaker has been marred with the reputation of blocking Eurosceptic policy in the past. The data calendar continues to be light in the UK today.


The euro drifted lazily lower against the dollar, extending its losses overnight after tensions between Italy and the European Commission remained elevated. Italian Deputy Prime Minister Matteo Salvini called for a “fiscal shock” of tax cuts, measures that are highly likely to see Italy fall foul of European rules on fiscal deficits. Brussels is expected to issue the usual warnings and threats to Italy this week, ahead of a formal review of Italy’s debt levels next Wednesday.  This morning’s data has included decent French Consumer Spending figures, which showed a 0.8% spending increase in April. German Unemployment also surprised to the upside, with a net increase of 60,000 unemployed in May.


The Bank of Canada meets today in their first meeting since removing the last hawkish tone from the rate statement. Governor Poloz will be delighted by the progression of economic data which has confirmed the central bank’s expectations of a rebound from a dismal Q1. Record job gains and inflation sitting at target will likely be joined by rebounding GDP numbers on Friday, but the latest string of data has come too soon to move the needle for rate hike expectations. The loonie remains susceptible to dollar strength this morning, and USDCAD has recently broken its month-long trading range.

FX Elsewhere

The South African rand led losses in the EM space yesterday after Vice President Mabuza was sworn in as a lawmaker despite an enquiry over actions causing disrepute in the ANC party still ongoing. The news of Mabuza’s reinstating as a lawmaker increased the probability of him retaining the position of second in command, suggesting President Ramaphosa’s pledge to rejuvenate cabinet from Zuma’s years may show signs of being watered down already. Coupled with a risk-off environment in the EM space, and the resignation of Eskom CEO Hadebe on Friday, the rand fell over 2% against the dollar yesterday. Momentum seems to favour further rand selling, with USDZAR up near 3% at the time of writing from yesterday’s open. Ramaphosa is expected to announce his cabinet appointments today, but findings from the integration committee could delay the process throughout the day.