Rates: FOMC and Italian budget vital this week
Trading might be subdued in the run-up to this week’s main events: the FOMC meeting and the Italian 2019 budget release. First time forecasts of the 2021 policy rate will determine the short term faith of US yields. We expect the 2021 projection to at least match the 2020 one, keeping upward yield momentum alive.
Currencies: Dollar decline to slow? Fed policy decision looms.
On Friday, sentiment on risk gradually turned less positive, capping further EUR/USD gains. Today, trade tensions might again become more important for global risk sentiment. USD investors will also make up their mind on the Fed guidance at Wednesday’s policy decision. Sterling is again in the defensive as the brexit stalemate persists.
The Sunrise Headlines
- US equity markets closed last week’s trading week mixed, with technology sector underperforming. Asian exchanges opened with losses this morning as well, with Japanese and Chinese markets closed for Autumn celebrations.
- The US ($200bn) and Chinese ($60bn) tariffs kicked in today with neither sides backing down. Beijing called off talks with the US, planned for this week. Trump repeated his intentions to impose tariffs on all Chinese import (+$256bn).
- Chaos in the UK. Hard Brexiteers Boris Johnson and David Davis are backing an alternative Canada-style plan challenging May’s Chequers-plan. May, on her turn, is said to prepare for a possible election in November to save her job.
- Iran’s president Rouhani will travel to New York on Tuesday to attend the United Nations General Assembly. It remains uncertain whether Rouhani will meet US President Trump, with both countries remaining in deadlock.
- Trade talks between the US and Japan continue today, after US president Trump and his Japanese counterpart Abe held constructive talks yesterday on trade and the denuclearization process of North Korea.
- OPEC+ has answered US President Trump’s cry for lower oil prices, but failed to deliver specific output volumes. The group said it would boost output only if customers requested it. Oil prices remain elevated, paying almost $80 p/b.
- Today’s eco calendar is very thin, with German IFO business sentiment for September and a speech by ECB president Draghi at a ECON Committee Meeting in Brussels. The US holds a $37bn 2-yr Note auction
Currencies: Dollar Decline To Slow? Fed Policy Decision Looms
Dollar decline slows. Focus turns to the Fed.
On Friday, global sentiment was positive for most of the European session. Recent dominating market themes, including uncertainty on trade, stayed low profile. However, this time, the euro couldn’t benefit. EMU PMI’s showed a manufacturing led decrease but had little impact on trading. The euro ceded ground early in US dealings. This decline accelerated after a statement from UK PM May, confirming the deadlock in the brexit talks. EUR/USD tested the 1.18 area early in the session but turned south later to close the session at 1.1749. A loss of momentum on US equity markets also capped the euro. USD/JPY reversed earlier risk-on gains and finished the day at 112.60. Overnight, several Asian markets including mainland China and Japan are closed. However, trade tensions are apparently again becoming more important for global trading as China called of a new round of talks with the US. This is weighing on risky assets, including US equity futures. For now the impact on global FX is modest. The HKD is still looking for a new equilibrium after Friday’s rally. EUR/USD is hovering in the mid 1.17 area. The yen rallied sharply early this morning, but already returned to Friday’s closing levels. Later today, the IFO business confidence is expected to ease moderately (from 103.8 to 103.2) and ECB’s Draghi will speak in Brussels. However, global risk sentiment might become again more important. Markets will also look forward to Wednesday’s Fed policy decision. Especially, the 2021 dots might be important for sentiment on interest rate markets and for the dollar. The dollar probably needs a signal from the Fed that the US economic cycle will last long enough to keep 2021 policy rates more or less at the 2020 level. This is possible, but not sure. USD investors might stay in some kind of wait-and- see modus going into Wednesday’s policy decision. In a day-to-day perspective, we don’t see a strong reason for the dollar to lose further ground beyond EUR/USD 1.18.
On Friday, sterling fell off a cliff as UK PM May had to admit that Brexit negotiations were still in a stalemate. Today and later this week, Brexit will again be the extensively debated within the government/conservative party and at the congress of the labour party. It looks that chances on harder Brexit are on the rise. If so, this might keep sterling in the defensive. A return of EUR/GBP to the 0.91 area might be on the cards
DXY (USD trade-weighted): dollar decline slows ahead of Fed meeting
