A sour start to the day that was brought on by the World Bank downgrading global growth was further exacerbated by geopolitical concerns in Iraq after an offshoot al-Qaeda group took control of Mosul, the second largest city in Iraq.
A late-day rebound in equities was unable to save stocks from closing convincingly in the red, as the risk-off investment atmosphere sapped 0.35% from the S&P, while the VIX saw a spike in the front end of the curve. Despite an early morning rally in fixed income on the pessimistic global growth outlook, the 10-year US treasury yield remained resilient and was able to make it’s way back to the 2.64% level, which helped the DXY stem it’s bleeding to hold court in the high-80s.
The potential for oil supply disruption in Iraq is, as expected, having slightly more of an impact on the world price of oil, with front-month Brent outperforming its American counterpart to close above $110/barrel.  Adding further concern to an already tense situation, the Iraqi government has given the green-light for the US to conduct air strikes against al-Qaeda in the area; though the Obama administration is said to be considering a number of options at this time. The disruption of repairs to a pipeline in the area may aggravate the scramble to secure oil stocks should an escalation of military force occur, which could help Brent and WTI scamper to some of their best levels of the year. The Loonie has become more correlated with movements in oil prices since the beginning of June, with it’s rolling 30-day correlation to Brent currently sitting at 0.48; therefore, watch for oil prices to have a relatively higher impact on USDCAD than the last few months.
The overnight session has seen the commodity-bloc currencies outperform, with the Kiwi leading the charge after the Reserve Bank of New Zealand hiked rates by 25bps to 3.25%. While the move was in-line with what analysts had expected, the bullish commentary that growth was becoming self-sustaining and inflation expectations were forecast to rise saw traders jump over the increase in interest rate differentials, causing the NZDUSD spike by almost 1.5%. Even though Governor Wheeler did comment the strength of the Kiwi was unsustainable, the RBNZ showed no signs a pause in the rate tightening cycle is on the horizon, which gave investors confidence to increase their exposure to the commodity-linked currency. The Aussie has also witnessed a positive bid-tone throughout the Asian session as a by-product of the Kiwi rally, making a run at the 0.94 handle against the USD despite a bleaker employment picture for May than had been expected. The jobless rate for the Australian economy held at 5.8%, but this was a factor of a declining participation rate after the labour market destroyed almost 5k jobs in May, missing forecasts for a 10k increase.
The European session was uneventful, with traders and investors getting ready for the beginning of the World Cup as the major bourses waffle in modestly positive territory on low volume as we head into the North American cross. While Europe is heading into the end of the week rather quietly, with the EUR pivoting in the low-1.35’s against the USD, the Middle East is continuing to attract investors attention on reports that the al-Qaeda offshoot ISIS have now taken Fallujah, and are less than 100k away from Baghdad. As a consequence, Brent oil futures have risen past $112/barrel, while the discounted, lighter WTI also sees demand push it above $106/barrel.
Heading into the North American open, retail sales for American economy for the month of May just crossed the wires, missing analysts estimates coming in lower than expected. The headline reading saw only a 0.3% increase on a m/o/m basis (vs. exp 0.6%), and after stripping out autos the increase in value was only 0.1% (vs. exp 0.4%), raising concern the second quarter may not see the dramatic bounce back in GDP some were hoping for.  Mitigating some of the headline shock within the report was the fact that April’s numbers were revised well higher, with the original print of a 0.1% increase being revised to a gain of 0.5%. The DXY saw some slight selling pressure after the numbers, with the 10-yr yield on the US treasury ticking lower to 2.63% and S&P futures turning marginally negative, though the fall-out has been rather muted.
On the Canadian side of the 49th parallel, capacity utilization in the first quarter rose to 82.5%, while the national house price index increased by 0.2% over the month of April, in line with what is expected to be a moderating housing market in the coming months. The Loonie is slightly stronger against the big dollar before the opening bell, pivoting in the mid-108s after better tier-two macro economic data and the Kiwi pushes hot money flows into high-yield currencies.
With the US retail sales figures out of the way, the focus for the remainder of the day will be the Stephen Poloz press conference after the Bank of Canada releases their semi-annual Financial System Review, which highlights some of the risks faced by the Canadian economy.
Given that Poloz has done a pretty good job of bringing attention to the main risks to the overall financial system in the BoC’s interest rate statements of late (elevated levels of debt and a downturn in global demand), there is likely nothing shocking we will hear from the BoC chief later today.  That being said, since it’s an inaugural press conference for this report as the central bank adds another layer or transparency to its decision making methodology, the additional commentary from the bank should help participants better decipher what tends to be a pretty dry report. The main thing to watch for in the report and at the press conference will be if Poloz makes any mention towards how the level of the Loonie will affect export growth once global demand begins to pick up, and what the ramifications of a moderating housing industry will have on consumer debt levels and the knock-on affects towards inflationary pressures. A nod towards excess slack in the economy brought on by increased competition and sluggish global demand should keep Poloz from sounding too hawkish if addressing inflation concerns, so a reaffirming of the language in the last interest rate statement should keep the Loonie from seeing any unbridled strength.
See how to trade the UoM Consumer Confidence with EUR/USD
