USD, AUD up as US-China Pause Tensions

USD started the week higher thanks to a relief in the US-China trade tensions and further losses in Italian bonds as the new coalition veers away from the basic budget requirement of the euro project. The odds of a Bank of Canada rate hike tumbled after soft reports Friday on CPI and retail sales. The Swiss franc was the top performer last week while the euro lagged. CFTC positioning data showed that kiwi longs have finally squared up. A new Premium trade has been adde with 3 charts & detailed note, identifying a crucial inverse H&S formation. The monthly chart is found below.

Canadian retail sales and CPI were the final two major pieces of the puzzle ahead of the May 30 BOC decision and the market was unsure what was coming. The implied odds of a hike were 42% before the data but plunged to 28% afterwards. Year-over-year CPI was up 2.2% compared to 2.3% while retail sales ex autos were a big disappointment at -0.2% m/m versus +0.5% expected.

In the aftermath USD/CAD jumped more than a cent and touched above 1.29. Also on Friday, the deadline that House leader Paul Ryan set for a NAFTA deal passed without any progress and US Trade Representative Lighthizer said the sides were nowhere near a deal.

At the moment, oil is supporting the Canadian dollar and that will continue to be a factor but no further near-term helps is coming from the BOC or trade negotiations, so the risks are tilted to the downside for the loonie (and upside for USD/CAD) . Note Canada is on holiday Monday. Here is Ashraf's latest on USDCAD.

In Europe, Italy is increasingly weighing on the common currency as jitters about a League/5-Star coalition continue after leaks last week suggested radical plans to cut debt including ECB monetization.

On the weekend, France warned its neighbour not to put regional stability at risk. The drop in EUR/CHF last week was undoubtedly impacted by safe haven flows as Italian stocks and bonds sank.For the week ahead, bonds will remain a major theme. US 10-year yields touched 3.12% on Friday before falling back to 3.05% but the better spot to watch in the short term may be US 30s and the cluster of resistance near 3.25%.

CFTC Commitments of Traders

EUR +115K vs +120K prior GBP +6K vs +9K prior JPY +4K vs -5K prior CAD -24K vs -24K prior CHF -36K vs -32K prior AUD -23K vs -17K prior NZD +2K vs +13K prior

The bonfire of the New Zealand dollar may have a bit less fuel in the week ahead as battered longs have now completely covered. The next spot to worry might be the Swiss franc, but when have speculators ever been wrong in that pair before?