Dollar Looked Past Geopolitical Tensions, Listened to US Treasury Mnuchin

Dollar and US equities came back from holiday stronger. The markets are looking through the geopolitical uncertainties in North Korea. Instead, they listened to comments from US Treasury Secretary Steven Mnuchin. Mnuchin conceded that completing tax reforms through Congress before August deadline was "highly aggressive to not realistic at this point". However, he noted that it would "probably delayed a bit" because of the healthcare. Meanwhile, he noted that the border-adjustment tax, seen as a sticking point among Republicans, could be excluded in the tax reform.

Treasury Mnuchin: Dollar strength is a good thing

Regarding the strength of US Dollar, Mnuchin noted that "as the world’s currency, the primary reserve currency, I think that over long periods of time the strength of the dollar is a good thing." And, "it’s a function of the confidence and the strength of the US economy." Nonetheless, he still agreed with President Donald Trump’s comments regarding strength of the greenback in short term. Mnuchin said that "The president’s comment – which again I agree with – is that over short periods of time the strength of the dollar creates certain issues that hurt our exports. I think that is what he has referred to, which is again factually correct."

Fed Vice Fsicher: Won’t repeat taper tantrum

Fed Vice Chair Stanley Fischer said yesterday that when unwinding of asset purchase starts, it’s unlikely to repeat the so called "taper tantrum". He referred to the development that 10 year yield jumped nearly 1% back in 2013 after the first discussion of tapering. Fischer noted that his " tentative conclusion from market responses to the limited amount of discussion of the process of reducing the size of our balance sheet that has taken place so far is that we appear less likely to face major market disturbances now than we did in the case of the taper tantrum." Fischer pointed to survey data which suggested that markets participants are now unsure how soon Fed will start shrinking the balance sheet. And they had more expectations of an early announcement date of the operations.

French election in focus

Focuses will also be on French presidential election now. Recent surge in support for far-left Jean-Luc Melenchon is seen as making the election a four way match with far right Marine Le Pen, centrist Emmanuel Macron and conservative François Fillon. Some see increasing risk of having two euro-sceptic candidates, Le Pen and Melenchon, heading to the run-off in May. The markets responded by dumping French bonds and stocks. The five year French-German yield spread has indeed jumped to the highest level since 2013. However, it’s believed that support for Melenchon mainly came within the left-wing and is approaching limit. Thus, a run-off of Le Pen and Macron is still the base case. More in French Presidential Election: Macron and Le Pen Still Favorite as Melenchon Closing to Limit

RBA concerned with employment and housing

The minutes of April RBA meeting showed that the central bank is concerned on both the employment and housing markets. And, "the board judged that developments in the labor and housing markets warranted careful monitoring over coming months. "The minutes noted that labor market conditions were "somewhat weaker than had been expected" and underemployment "remained high". And, "although forward-looking indicators of labor demand continued to suggest an increase in employment growth over the period ahead, this has been true for some time without leading to an improvement in labor market conditions." Regarding housing market, the minutes warned that "growth in housing credit continued to outpace growth in household incomes, suggesting the risks associated with the housing market and household balance sheets has been rising." At the meeting, official interest rate was left unchanged at record low at 1.50%.

BoJ Kuroda: Consumer spending picking up

BoJ Governor Haruhiko Kuroda said yesterday that consumer spending is picking up. And this is supported by steady improvements in employment and wages. And he noted that firms are likely to offer base-salary raise for staff during the current financial year. Separately, Deputy Governor Hiroshi Nakaso said that the central bank has been discussing the "means and how" of monetary stimulus exit" that could affect its revenues. But for now, BoJ’s priority is still on maintaining sustainable inflation through the massive stimulus program.

On the data front…

The economic data is empty in European session today. Canada will release international securities transactions. US will release new residential contribution and industrial production.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7565; (P) 0.7588; (R1) 0.7611; More…

AUD/USD retreats today as rebound from 0.7472 lost momentum after hitting 0.7609. Intraday bias is turned neutral first. At this point, we’re still slightly favoring the case that pull back from 0.7748 is completed at 0.7472. And rise fro 0.7158 is possibly resuming. Above 0.7609 will target 0.7678 resistance first. Break there will confirm this case and send AUD/USD through 0.7748 towards long term fibonacci level at 0.7849. On the downside, though, below 0.7530 minor support will turn bias back to the downside for 0.7472 instead.

In the bigger picture, we’re still treating price actions from 0.6826 low as a correction. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8144) and above.

Economic Indicators Update