USD Rally Stalls as Markets Await Debt Ceiling Deal

• Slimmed-down US debt ceiling deal takes shape
• Nvidia short sellers lose $2.3bn in one day as stock soars after sales projections
• USD eyes third weekly gain on higher US rate expectations
• Stocks limp toward US debt denouement as Japan sparkles

FX: USD gained for a fourth straight day on Thursday. The DXY is looking good for three consecutive weeks of gains. It printed a two and half month high above 104. The 2-year yield surged higher to 4.53% and has risen ten days in a row. The 10-year yield hit 3.82% after touching a low in early May at 3.29%. Bets are shifting in Fed rate expectations as rate cuts for this year get priced out. A “skip” at the June meeting and another 25bp rate hike in July is now seen as most likely.

EUR made a new low at 1.0707 and settled at 1.0725. The rebound was limited after weak German recession data. Major support is 1.0716. GBP dropped to a seven-week low at 1.2308. The 100-day SMA sits at 1.2286. The BoE’s Haskel noted that further UK rate rises cannot be ruled out. This morning stronger than expected UK retail sales have given a lift to sterling. USD/JPY popped up to 140.23 as yield differentials exploded.

The 140 level has prompted comments from the Japanese Finance Minister that he is watching FX markets closely. The antipodean breakdown continued. AUD closed at 0.6504. The prior year-to-date low was at 0.6563. Mixed risk appetite and flat Australian retail sales have not helped. NZD made a fresh low at 0.6043. The March bottom is at 0.6084.

Stocks: US equities were mixed. The benchmark S&P 500 closed 0.88% higher The Nasdaq 100 surged north gaining 2.46% but the Dow lost 0.11%. Earnings and Nvidia were the key drivers. The giant chipmaker added nearly 25% and came close to joining the one-billion-dollar market cap club. It has become the fifth largest publicly traded company and is now more than six times the size of Intel. Declaring 52% higher than expected sales for the next quarter did the job.

Asian stocks traded modestly in the green after Nvidia’s blockbuster report. Progress in the debt ceiling talks is also helping sentiment. The Nikkei 225 outperformed and regained 31,000. Recent currency weakness and mostly softer than anticipated Tokyo CPI are the main drivers. The Hang Seng was closed.

US equity futures are flat. European equity futures are pointing to a flat open. The Euro Stoxx 50 closed up 0.1% yesterday.

Gold broke down to $1940. Surging US rates/yields are hurting the non-yielding safe haven asset.

Day Ahead – Debt Deal and US Inflation Data

There is increased optimism on the debt ceiling as a deal is hopefully getting done by the end of today. This agreement would raise the debt limit and cap federal spending for two years. The Memorial holiday in the US on Monday complicates the timings and signing off of a resolution so may be forcing an agreement.

Focus is turning back on the Fed which saw money market pricing edge towards a hike at the next FOMC meeting in June (35% chance currently) and a pricing out of rate cuts this year. The April core PCE deflator is released today. Expectations are for firm 0.3% m/m / 4.6% y/y prints. This feeds the more hawkish rhetoric for the Fed as core inflation is still not falling as quickly as it would like.

Chart of the Day – Gold Breakdown

The US dollar cotinues to rally on rising US Treasury yields. Data releases were stronger than expected yesterday with an upward revision to US Q1 GDP and lower than forecast jobless data. Along with the impending debt deal, this has seen a major repricing of Fed expectations.

Yesterday’s news hit gold as it slumped through $1959 support. That February high now becomes resistance. Support sits at the halfway point of the March rally at $1935. The 100-day SMA is here too as extra support. We are also now trading at the bottom of the long-term bull channel. Attention now turns to today’s US inflation data.