Rates: German 10-yr yield tests 0.5% resistance
The German 10-yr yield tested 0.5% resistance yesterday, but a break didn’t occur (yet). Some second tier eco data are scheduled for release, but we expect more technically-inspired and sentiment-driven trading. Cycle tops in US yields seem ready for a test going into next week’s FOMC meeting.
Currencies: Dollar going nowhere as trade tensions are easing, for now.
Yesterday, major USD cross rates mostly held tight ranges. Sentiment on risk wasn’t too bad. The dollar didn’t attract any additional safe haven flows. High US interest rates also didn’t help the dollar. More consolidation might be on the cards ahead of the Fed meeting. Sterling traders keep a close eye at the EU summit in Salzburg.
The Sunrise Headlines
- US equity markets continued the positive risk sentiment yesterday with all major indices in green except for NASDAQ (-0.08%). Asian markets opened mixed today with Japan outperforming and China currently printing losses.
- At the EU-27 summit in Salzburg yesterday, UK PM May addressed fellow EU leaders to drop “unacceptable” Brexit demands. EC President Juncker stated that a Brexit-deal is still far away. The summit continues today.
- US Secretary of State, Mike Pompeo, has invited North Korea’s foreign minister to resume talks after Pyongyang stated it was willing to close key missile facilities. The aim is to reach full denuclearization by 2021.
- Argentina’s economy shrank 4.0% in the second quarter this year, the most in four years. The year-on-year GDP falls to -4.2%, compared to -3.6% in Q1. Neighbours Brazil kept their benchmark rate steady at 6.5%, as expected.
- PM of Japan, Shinzo Abe, won a ruling party leadership vote for the third straight time. Abe now starts a 3rd term as head of the ruling Liberal Democratic party, setting him on track to become Japan’s longest-serving premier.
- China’s PM Li Keqiang said his country will continue to open up markets, especially in the financial sector. Moreover, it will cut the average tariff rates on imports from the majority of its trading partners.
- Today’s eco calendar contains the Philadelphia Fed Business Outlook and Jobless Claims in the US. Consumer Confidence is released for the EMU. ECB’s chief economist Praet speaks today, as does Bundesbank President Weidman
Currencies: Dollar Going Nowhere As Trade Tensions Are Easing, For Now
USD going nowhere as trade tensions are ‘easing’
On Wednesday, the dollar continued an inconclusive trading pattern. Markets reacted muted to the ‘escalation’ in the US-China trade conflict with no meaningful safe haven bid for the dollar. US housing data were mixed and aren’t the focus for USD trading. US/German interest rate differentials held near a multi-year peak, but the spread hardly moved. EUR/USD came again close to the 1.1720 area but a test of the 1.1733 resistance still didn’t occur. Sentiment on Italy turned more neutral and was no support for EUR/USD anymore. EUR/USD closed the session little changed at 1.1673. USD/JPY ended the day at 112.28, from 112.36.
Overnight, Asian equities are trading mixed to slightly lower. Trade is moving to the background as a driver for trading. Pressure on most EM currencies is easing (slightly). For now, there are few high profile data or events to provide clear guidance. The Kiwi dollar extended this week’s rebound supported by stronger than expected Q2 growth (1.0% Q/Q and 2.8% Y/Y). NZD/USD is trading in the mid 0.66 area.
Today, the calendar is moderately interesting with the EC consumer confidence in EMU. In the US the jobless claims, Philly Fed business outlook and existing home sales will be published. The data probably won’t change the positive view on the US economy but are no market movers. So, global risk sentiment and interest rate developments will continue to guide USD trading. Sentiment is neutral/cautious. Will the dollar get any additional support as (US) interest rates are keeping an upward bias going into next week’s Fed decision? Markets are embracing the scenario of two additional Fed hikes this year. Short-term, we keep a neutral bias on EUR/USD until it becomes clear which narrative will prevail as driver for FX trading. 1.1733/50/91 resistance is the first topside reference. EUR/USD 1.1525/30 is a first intermediate support. Yesterday, EUR/GBP remained locked in a tight range close to, mostly slightly below 0.89. US CPI was higher than expected, but with no lasting support for sterling. Brexit headlines remained diffuse. Today, August retail sales are expected to decline slightly after strong July sales. Markets will keep a close eye on the comments coming from the EU Summit in Salzburg. For now, there are still few indications that the EU/UK will be able to unlock the Brexit stalemate. A surprise is always possible, but for now we don’t anticipate high profile sterling positive news.
USD making little progress despite solid interest rate support