Fundamental Analysis

Dollar Holds Positive Bias, Despite Mixed Context

Typography
  • European equities fell off a cliff this morning despite strong EMU data. Major indices lost up to more than 1%, but reversed a big part of the losses as sentiment improved in the US. European indices decline less than 0.5%. US equities open with limited losses. The Nasdaq (-0.5%) underperforms again.
  • Global manufacturing expanded at the fastest pace in years last month and the second-best in two decades in the euro zone, driven by robust demand and bolstering the case for central banks to shift to tighter monetary policy. The EMU manufacturing PMI was upwardly revised to 60.1.
  • The IHS Markit/CIPS UK Manufacturing PMI jumped to 58.2 from an upwardly revised 56.6 in October, hitting its highest level since August 2013. The report suggests that the manufacturing sector will support the UK economy even as consumer spending is eroded by a decline in consumers' disposable income.
  • US Senate Republicans will grapple today with the possibility of adding a tax increase to sweeping legislation meant to cut taxes on businesses and individuals, aiming to win support from fiscal conservatives worried about the bill's impact on the federal deficit.
  • Hiring in Canada unexpectedly accelerated in November. The unemployment rate dropped to 5.9%; the lowest level since February 2008. Employment increased by 79,500 last month, well above economists' forecasts for a gain of 10,000 jobs. Average hourly wages also continued to accelerate, rising 2.7 percent from last year. The Canadian dollar jumped sharply higher after the report. USD/CAD trades in the mid 1.27 area.
  • US manufacturing expanded at a robust pace in November (58.2 from 58.7 vs 58.3 expected) amid a burst of production and rising orders that signal durable gains in the industry, figures from the Institute for Supply Management showed.

Rates

Bund tests 163.43 resistance in risk off sentiment

Global core bonds gain ground today with the Bund outperforming the US Note future. The US Senate's tax reform drive lost momentum last night after a congressional watchdog determined the bill would send the budget deficit skyrocketing. A vote will now take place today instead of yesterday. The delay caused some risk aversion on stock markets and supported core bonds via safe haven flows in the first hours of European dealings. The bond rally petered out around noon though and the US Note future even started losing ground. Technically, the Bund tested the upper bound of its sideways trading range (160.24-163.43) but a break didn't occur. The European eco calendar didn't influence trading with only a slight upward revision to the November manufacturing PMI.

At the time of writing, German yields decline by 0.9 bps (2-yr) to 2.6 bps (10-yr). The US yield curve flattens with yield changes varying between +0.8 bps (2-yr) and -3.6 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps (Belgium) with Greece (+3 bps) and Portugal (+5 bps) underperforming.

Currencies

Dollar holds positive bias, despite mixed context

The dollar traded with a positive bias today even as incentives from other markers were diffuse. Risk sentiment was outright negative in Europe this morning, but the dollar held up well. The US currency is gaining further ground this afternoon as US investors turn again more optimistic. EUR/USD trades in the 1.1870 area. USD/JPY trades at 112.65, near the intraday top.

Yesterday evening and overnight, the dollar showed quite a diffuse picture. USD/JPY was supported by a rise in US equities and higher US yields yesterday evening. At the same time, EUR/USD also rallied even as the interest rate differentials widened in favour of the dollar. Technical factors and end-of month repositioning might have been at work. The moves slowed this morning in Asia. USD/JPY stabilized in the mid 112 area. EUR/USD hovered in the 1.1925 area.

Risk sentiment deteriorated quite substantially soon after the open of the European equity markets. Uncertainty on the fate of the Tax Bill in the US Senate maybe played a role. However, (European) equities recently already showed tentative signs that the uptrend might become a bit exhausted. The (EMU) eco data were not to blame. The final EMU manufacturing PMI was even revised slightly higher to 60.1, a multi-year peak. However, the report couldn't stop the bleeding at that time. Core bond yields lost about 3-4 bps (10-y) but the interest rate differential between the euro and the dollar was little changed. The risk-off trade eased again as US traders entered the fray. US equities opened with only modest losses, the Nasdaq underperforming.

Of late, a decline in core yields and/or a risk-off context often weighed on the dollar, but this was not the case today. USD/JPY held up remarkably well. The pair hardly ceded any ground this morning and even set a minor top for the week this afternoon (currently around 112.65). The dollar also regained slightly ground against the euro. EUR/USD trades in the 1.1870 area. Markets (FX) closely monitor the headlines from the tax debate in the US Senate. The ISM manufacturing in the US is also interesting. However, the reaction to the UK/EMU data this morning suggests that the focus of (currency) traders is elsewhere. In globo, the dollar performed rather well today, given the price action on other markets. A harbinger of better times to come?

Sterling awaits clarity on Brexit process

Sterling trading showed no clear trend today. Over the previous days, markets saw the Brexit-glass half-full on tentative signs that the UK and the EMU were making progress on the conditions that the EU wants to be fulfilled to start negotiations on the future relation between the two parties. However, the issue of the Irish border proves to be a hard nut to crack. Markets had hoped that big progress would be announced after a meeting between EU president Donald Tusk and UK PM May scheduled for Monday 04 December. However, this scenario is becoming less likely. Sterling lost slightly ground against the euro and the dollar. EUR/GBP hovered mostly in the lower half of the 0.88 big figure (currently 0.8810). Cable is drifting back below the 1.35 barrier, but part of this decline is due to the USD rebound this afternoon. This morning, the UK November manufacturing PMI printed at a very strong 58.2 (from 56.6, 56.5 was expected), but the report had no lasting impact on sterling trading.

Author: KBC BankWebsite: https://www.kbc.be/dealingroom
KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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