Fundamental Analysis

Dollar Succeeds Modest Gains, But No USD-Euphoria Yet

Typography
  • European equities gain up to 2% today (German Dax), reversing Friday's losses with risk sentiment improving after the US Senate tax reform vote. US stock markets open around 0.75% higher, reaching yet another record high.
  • Britain is heading for a breakthrough on Brexit talks after reaching a compromise with Ireland on the border between the Republic and Northern Ireland, the issue that threatened to derail the negotiations.
  • A deal to complete post-financial crisis capital rules for banks around the globe may be reached on Thursday. French central bank governor Villeroy indicating he is ready to accept a compromise. France has been a key hold-out for completing the Basel III rules.
  • The Bank of Japan does not plan to change its massive stimulus programme and will "immediately act" if risks to the economy undermines the momentum toward achieving its inflation target, central bank Governor Kuroda said.
  • The leaders of Germany's Social Democrats (SPD) agreed to enter talks with Chancellor Merkel's conservatives on forming a government that could end a political deadlock. The SPD set the contours of its demands in coalition talks expected to start next year with proposals on issues like the economy and immigration likely to cause friction.
  • Help-to-buy is helping the housebuilders at least: an increase in house building work meant activity increased much faster than expected in Britain's challenged construction industry during November. The construction PMI increased from 50.8 to 53.1 in November, compared with a 51 forecast.
  • Czech wage growth slowed in the third quarter but still ran at its second fastest pace since 2009 to remain the main demand driver in the overheating economy. The average gross monthly wage grew by 4.2% from a year ago in real terms in Q3, as rising inflation bit, the Czech Statistical Bureau said. Nominal wages jumped by 6.8%.

Rates

Slight optimism after US Senate tax reform vote

Global core bonds lost part (Bund) to all (US Note future) of Friday's gains. The move was limited to a one-off repositioning in the Asian or European opening with the positive US Senate tax bill vote the main incentive. It's now up to House and Senate lawmakers to find common ground for a bill, preferable before year-end. More worrying headlines on the US political scene about Mueller's investigation into Russia-links in Trump's presidential campaign team perhaps hampered a more enthusiastic reaction. Core bond trading was rather lethargic after the opening move and confined to a tight sideways range. Investors probably have Friday's payrolls and next week's FOMC meeting in mind. The European eco calendar contained only second tier and slightly disappointing data (PPI, Sentix investor confidence).

At the time of writing, the German yield curve bull flattens with yields up to 4.7 bps (30-yr) lower. Changes on the US yield curve vary between +2.9 bps (30-yr) and +4.2 bps (5-yr). On intra-EMU bond markets, 10-yr yield spreads versus German range between +1 bp and -1 bp with Spain (-3 bps) and Greece (-7 bps) outperforming.

Currencies

Dollar succeeds modest gains, but no USD-euphoria yet

Markets reacted differently to the approval of the US tax bill in the US Senate. US and European equities jumped higher. ST US yields also rose a few basis points. The dollar extended cautious gains. USD/JPY trades in the 113 area. However, the gain of the dollar against the euro is far from impressive with EUR/USD trading at 1.1840.

Asian equity markets traded mixed this after the approval of the Tax bill in the US Senate. US yields were modestly higher and so was the dollar. USD/JPY profited most and rebounded to the high 112 area. Japanese equities underperformed despite the rise of USD/JPY. EUR/USD traded in the 1.1865 area, within the range that reigned for most of last week. Ongoing noise on the Russia investigation probably prevented a bigger USD gain on the Senate vote.

There were few important eco data in Europe. European equities reacted more positive than Japanese equities. Of course European markets had still some catching up to do after Friday's fall. ST interest rate differentials between the US and Germany widened further (2-y at 2.5% +). Changes at the long end of the curve were modest. However, during the European morning session, the dollar hardly profited from the rising interest rate support or the positive risk sentiment. USD/JPY finally tried a new upside test early in US dealings and is testing the 113 big figure. EUR/USD trades currently in the 1.1840 area. So, the dollar is gaining slightly further ground, but there is no euphoria after the approval of the Senate tax bill. Especially the gains of the dollar against the euro remain mediocre and EUR/USD holds it the established sideways consolidation pattern.

Sterling profits on Bxexit breakthrough

The focus for sterling trading was on the next steps in the Brexit process as UK PM May met with EU Commission president Juncker. This morning, it was still unclear whether the meetings in Brussels would yield enough progress that the EU deems needed to move to the next stage of the negotiations. EUR/GBP initially hovered in the 0.8825 area. However, around noon there were press headlines from several sources that EU's Barnier had indicated that negotiations on the separation issues were headed for a breakthrough. Sterling jumped higher across the board as the Brexit negotiations are likely to move to the content of the new relationship between the UK and the EU post Brexit. EUR/GBP trades currently in the 0.8765 area and nears the 0.8746/33 support area. The rally of cable ran into resistance in the 1.3540 area as the dollar was also better bid across the board.

Author: KBC BankWebsite: https://www.kbc.be/dealingroom
KBC Bank
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