Dollar Firmer But Going Nowhere Quickly

The US dollar has begun the new week on firm footing, but the tone is more consolidative than trending. The dollar-bloc currencies, led by the New Zealand dollar, are particular softer despite China’s rate cut, which sometimes has been supportive for commodity-linked currencies. Emerging market currencies did not get much of a boost either.  

The New Zealand dollar is off 1.4% amid heightened speculation of a rate cut as early as next month.  Indeed, a local bank is calling for a June and July rate cut. The New Zealand dollar initially tried to rally on the Chinese rate cut announcement but fell back on local press reports and softer electronic retail sales (typically no a market mover). The Kiwi has been sold to near two-month lows, below $0.7400. The next level of support is seen near $0.7320. However, the risk extends toward the February and March lows in the $0.7170-$0.7200 area. 

The news stream is light to start the week. The BOE meeting that was shifted from last week to today due to the election is unlikely to change the expected results. The MPC continues to be on hold. There are some thoughts the election may bring forward the first rate hike. The implied yield of the short-sterling futures curve is 3 bp higher in the front end and 4-5 bp higher in the back end. The 10-year UK gilt yield is up 4 bp, in line with core European bonds.  

If there is a residual impact from the election, it may be the FTSE, which is bucking the regional equity slide to post a modest 0.4% rise near midday in London. The move is being led by materials. Financials are the poor performing sector with a flat showing. Sterling itself is consolidating in a narrow range of about 3/4 of a cent at the upper end of the post-election spike. As the market’s attention returns to economics, sterling may be vulnerable to and disappointing data. That said, the shallowness of the pullback and intra-day technicals suggest a retest on the $1.5500-$1.5525 cannot be ruled out.