Rates: Bund outperforms with important technical break
The German 10-yr yield lost 0.62% support. The break suggests a return to 0.46%/0.48% support (gap open/62% retracement). US politics continue to play first fiddle, filling the eco/event void between now and next week’s FOMC meeting. At this moment, it generates more safe haven flows into German Bunds instead of US Treasuries.
Currencies: Euro eases, but USD isn’t in great shape either
EUR/USD drifted south yesterday as the ECB indicated that there is still a lot work to do to reach the inflation target. Today’s eco data probably won’t change the dynamics on the FX markets. We expect EUR/USD to hold the recent consolidation pattern going into the Fed meeting. USD/JPY looks more vulnerable
The Sunrise Headlines
- US stock markets ended mixed yesterday with the Dow Jones outperforming (+0.5%). Asian risk sentiment is mixed overnight with Japan underperforming (-0.5%) on a stronger yen.
- Nato closed ranks against Russian President Putin as the US unveiled new sanctions and joined France and Germany to back Britain’s accusations against the Kremlin for the poisoning of a former Russian spy on UK soil. (FT)
- Sources say special Counsel Mueller has subpoenaed the Trump Organization for documents related into his investigation into whether Trump’s associates colluded with Russia’s efforts to interfere in the 2016 presidential election.
- US President Trump has decided to replace his national security adviser, H.R. McMaster, but the move is not expected to be made immediately, the Washington Post reported. The White House denied the report.
- The head of the US Chamber of Commerce warned the Trump administration that unilateral tariffs on Chinese goods could lead to a destructive trade war that will hurt American consumers and US economic growth.
- Investors are underpricing the risk of higher interest rates globally and need to seek adequate compensation for that risk, Deputy Governor of the RBA, Debelle, said.
- Today’s eco calendar contains US housing starts, building permits, industrial production and Michigan consumer confidence. Final EMU inflation will also be published.
Currencies: Euro Eases, but USD isn’t in great shape either
Euro declines, but dollar isn’t in good shape either
Earlier this week, USD softness prevailed due to US political uncertainty. The USD still wasn’t in great shape, but euro softness became more dominant yesterday. EUR/USD declined in the 1.23 big figure. Of late, interest rate differentials were often ignored, but 2-yr German/US spreads reached a new cycle peak. Finally, this provided some downside protection for the dollar against the euro. EUR/USD closed the session at 1.2305. From a technical point of view, the established ranges remain intact. The picture of USD/JPY remained fragile. Despite a late session rebound, the pair still closed the session at 106.34.
Overnight, BOJ governor Kuroda was reapproved for another term of five year. However, the focus in Japan is currently on the land scandal, questioning the political future of PM Abe and even more of Fin Min Aso. For now, the political noise, both in the US and Japan, is weighing on USD/JPY and on Japanese equities. USD/JPY dropped again below the 106 level. The loss of the dollar against the euro stays very modest (EUR/USD near 1.2315).
The final EMU CPI is expected at a low 1.2% Y/Y today. US housing starts building permits, production, and Michigan consumer confidence will also be published. These reports probably won’t change investor expectations for next week’s Fed meeting. This week, the euro came under modest pressure as a gradual ECB approach questions the timing of a first rate hike in 2019. At the same time, USD political uncertainty remains a factor, too. The EUR/USD decline might ease. A break below the 1.2273 correction low probably won’t be that easy. At the same time, rising interest rate differentials make holding USD shorts quite costly. For now, we assume more consolidation in the 1.2155/1.2450 range going into next week’s Fed meeting. Downside pressure in USD/JPY and EUR/JPY might also help to cap the topside in EUR/USD, even in case off broader USD weakness.
Technical considerations continued to dominate sterling trading. Cable was blocked ahead of the 1.40 resistance. EUR/GBP drifted south in line with EUR/USD. There are no UK eco data today. Tensions between Russia and the UK have little impact on sterling. Technically inspired trading for EUR/GBP around current levels might be in the cards.
EUR/USD eases slightly on reduced rate hike expectations, but stays within established range
