Analysts at Westpac explained that the focus in Europe was the finalising of a coalition agreement in Italy between populist 5 Star and right-wing Lega.
“Markets have begun to react to the potential fiscal blowout from the tax-cutting right and welfare spending populists with both parties being avowed Euro-sceptics. The 10 year Italian government bond yield jumped 16 basis points whereas the 10 year German bund yield fell 4bp. Moreover, EUR was the weakest G10 currency, falling from around 1.1850 to 1.1764 – a five-month low – before steadying around 1.1800. Italian equities closed -2.3%.
The US 10yr treasury yield remained elevated, rising in the NY afternoon to 3.10%, a fresh high since 2011. 2yr yields rose 2bp to 2.59% – the highest since 2008. Fed fund futures yields continued to price two more hikes this year (one in June) plus about 40% chance of another (which would be one each quarter). US data had little impact – Apr housing starts -3.7% but with Mar revised higher, Apr industrial production +0.7%.
USD/JPY probed lower in the risk-averse London morning, testing 110.05, but bounced to 110.35 in late NY as treasury yields rose.
Commodity currencies had a good session, recovering most of Tuesday’s lost ground, helped by a bounce in oil and copper prices. AUD/USD had dipped about 25pips on the soft Australian wages data but recovered to 0.7475 inside a couple of hours and continued in London and NY trade to 0.7520. NZD/USD similarly bounced off 0.6851 (a six-month low) to around 0.6900, up 0.5% on the day. AUD/NZD preserved recent gains, ranging sideways between 1.0855 and 1.0900. USD/CAD fell 0.7%.
Sterling was broadly range-bound near 1.3500. The May BoE Agents’ Report continued to signal weakness in both retail and service sector turnover and investment intentions. Although British manufacturing exports continue to be well supported and specific labour tightness was reported, the overall tone of the report was that Q1 softness was not merely weather-related and showed some persistence.”