The dollar staged a comeback yesterday, putting EM currencies (mainly BRL which suffers election fever) back under modest selling pressure. US Treasuries underperformed German Bunds. The US yield curve bear flattened with yields up to 2.5 bps higher at the front end of the curve, while German yield changes ranged between -0.4 bps and +0.5 bps. Investors adapted positions going into tonight’s speech by Fed Chair Powell after FOMC Minutes send a friendly reminder about the Fed’s rate hike intentions. US economic growth accelerated this year with the Atlanta Fed currently forecasting a continuation in Q3 (4.3% Q/Qa). Price pressures are building and the labour market is tight, prompting the Fed to probably hike rates both in September and December this year. EUR/USD fell from 1.16 to 1.1550 during Asian trading, before recovering some ground. EMU manufacturing and services PMI’s for August printed at good levels (54.6 & 54.4), but were slightly below/close to expectations. EUR/USD eventually set an intraday low around 1.1530 after Italian 5SM Di Maio threatened to stop paying EU funds if migrants aren’t redistributed. USD/JPY rose all day, closing at 111.29, compared to a 110.56 opening even if stock markets failed to cling to this week’s positive momentum, finishing with minor losses both in EMU and in the US. Sterling lost more ground as Brexit-minister Raab presented a first set of guides for businesses advising them on how to prepare for a no-deal Brexit. EUR/GBP increased from 0.8982 to 0.9009. GBP/USD fell from 1.2911 to 1.2811.
Asian bourses trade mixed overnight with Japan outperforming (+0.6%) on the back of a weaker yen. The US Note future is a tad weaker while the dollar can’t cling on to all of yesterday’s gains. US durables goods orders will be published today, but are dwarfed by Powell’s speech. We expect him to give a bullish assessment in the US economy, preparing markets for more rate hikes to come. That could force new tests of EUR/USD 1.1510 and DXY 95.50, but we wonder whether he’ll be that hawkish to trigger fresh, clean breaks. US Treasuries are nevertheless expected to underperform German Bunds. Risk sentiment (US stock markets look prone for profit taking after this week’s run to a new all-time high), stress on EM FX (BRL, ZAR) and Monday’s Summer Bank holiday in the UK complicate the picture and argue in favour of safe haven core bonds. Sterling will remain in the defensive as the brexit impasse is prolonged. EUR/GBP is about to test key 0.9031/0.9045 resistance. A sustained break higher paves the way for a return to the 2017 high (0.9307).
Luigi Di Maio, Italy’s Deputy Prime Minister, caused some disturbance yesterday. His anti-establishment 5-Star Movement party would vote to suspend funding to the EU next year unless other members of the bloc agree to take in migrants being held on a coastguard ship in Sicily.
After two days of discussions on their trade disputes, the US and China failed to achieve a major breakthrough. Both countries came with statements that the nations had constructively discussed their economic relationship. In the meantime, another round of tariffs on $16 billion worth of each other’s goods were activated.
Malcolm Turnbull stepped down as Australia’s Prime Minister, after he lost support within his own Liberal party for being too left centered. His resignation paved the way for a new vote between Treasurer Scott Morrison and Finance Minister Peter Dutton. Scot Morrison came out as victor, being Australia’s 6th PM in 10 years.
Adrian Orr, Governor of New Zealand’s central bank, has opened the central banker’s symposium yesterday in Jackson Hole, Wyomimng (US) by stating his central bank hasn’t ruled out cutting interest rates if needed to achieve its inflation target. The inflation is currently at 1.5% and below the target midpoint of the 1-3% range.