Rates: Consolidation on core bond markets continues
Risk sentiment and speeches by Fed governors will probably set the tone for today’s trading session. Fed governors are expected to keep the scenario of at least 2 additional rate hikes this year alive. We have a minor downward bias for core bonds today, but within the established sideways consolidation ranges.
Currencies: Dollar stays in the defensive
Geopolitical tensions eased yesterday. US equities outperformed and US yields rose slightly. However, it couldn’t help the dollar. A mercantile approach of US president Trump supports the view that the US likes a weaker dollar. Focus for USD trading is on Fed’s Williams’ assessment today. Sterling traders will keep a close eye at the UK labour data.
The Sunrise Headlines
- US stock markets outperformed yesterday, closing up to 0.8% higher. Netflix reported strong Q1 earnings after the close, putting US equity futures in the green overnight. Asian equity indices are mixed with China underperforming.
- US President Trump revealed his latest picks to fill empty seats on the Fed Board, saying he would nominate Columbia University economist Clarida as vice chairman and Kansas banking regulator Bowman as a governor. (WSJ)
- China’s economic expansion held up in Q1 (6.8% Y/Y) amid robust consumer spending (10.1% Y/Y), underpinning global growth, while the industrial sector showed signs of modest slowdown (6% Y/Y).
- The Washington Post reports that President Trump pit the brakes on a preliminary plan to impose additional economic sanctions on Russia, walking back a Sunday announcement by US Ambassador to the UN Haley.
- China’s holdings of US Treasuries rose in February, as net new foreign purchases increased to their largest since May 2017, data from the Treasury Department showed.
- Australia’s central bank saw scant reason to raise interest rates this month given inflation remained below target and likely to remain subdued in the face of sluggish wage growth. (Reuters)
- Today’s eco calendar contains German ZEW investor confidence, US housing starts, building permits and industrial production. Fed governors Williams, Quarles, Harker, Evans and Bostic are scheduled to speak
Currencies: Dollar Stays In The Defensive
US dollar stays in the defensive
The easing of geopolitical tensions had an uneven impact on markets. Core yields initially rose a few basis points. Equities traded mixed with the US outperforming. US retail sales were close to expectations, being not strong enough to support the dollar. At the same time, US president Trump accused Russia and China to play a ‘currency devaluation game’. The Trump headlines weighed on the dollar, giving the impression that the US likes a weaker dollar. EUR/USD jumped to just below 1.24 and closed at 1.2380. USD/JPY finished at 107.12, near the intraday lows, despite a decent US equity performance and (slightly) higher US yields.
Overnight, Chinese Q1 GDP printed close to expectations (6.8% Y/Y). Retail sales were good. Industrial production disappointed slightly. The data didn’t prevent a further underperformance of Chinese equities. The dollar remains in the defensive (USD/JPY near 107, EUR/USD 1.2385). The Aussie dollar dropped from 0.7790 to the 0.7765 area as the RBA in the Minutes saw no reason for an interest rate hike in the near future.
Today, German ZEW investor sentiment is expected to ease further, confirming the easing in other EMU sentiment indicators. This might be a slightly negative for the euro. US housing data are expected to recover modestly. March production is expected soft (0.3% M/M). However, the focus in US dealings will be on Fed speeches, especially of Fed Williams and on corporate earnings. Williams will probably keep the door open for a total of four rate hikes this year. Of late the dollar showed an inconvincing picture. USD/EUR and USD/JPY held slightly above recent/ cycle lows, but didn’t profit from potentially USD supportive news, including higher US yields/interest rate differentials. This pattern might continue today. Fed speakers remain a wildcard. However, there is little reason to expect the dollar to start a real upleg. EUR/USD is perfectly holding in the 1.2155/1.2550 consolidation pattern.
Yesterday, sterling preserved last week’s gains, also against a rather strong euro. The EUR/GBP 0.8650 support remained under intense pressure. Today, the UK labour market data will be published. Average weekly earnings are expected to rise to 3.0%. Positive real wage growth might support the case for more than one BoE rate hike this year. In a longer term perspective, we assume that enough good news on Brexit is discounted for now. However, good eco data and the prospect of further BoE rate hikes might keep sterling supported short-term. 0.8541 is the next intermediate support. 0.8305 is key.
EUR/USD:drifting higher in the established range as USD doubts persist
