Rates: Low-volume trading pushes core bonds sideways

Global core bonds traded mixed yesterday with US Treasuries outperforming German Bunds. Both US and German yield curve flattened in a low volume trading. Investors await the outcome in the US midterm elections pushing US Treasuries in a sideway move. German Bunds are expected to edge little lower today as risk sentiment improves on new Brexit hopes.

Currencies: USD rebound blocked, awaiting the election outcome

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The recent dollar rally was stalled yesterday despite ongoing positive US eco data of late. Investors awaiting the outcome of the US mid-term elections. A divided Congress might be a temporary negative for the dollar, but probably won’t change to broader picture for the US currency. Sterling continues to profit as investors see growing chance of an EU-UK Brexit deal.

The Sunrise Headlines

  • US tech shares again underperformed its peers yesterday (Nasdaq -0.38%), while the Dow Jones (+0.76%) and the S&P (+0.56%) ended in green. Asian bourses are trading mixed. Japan outperforms (+1%).
  • The Australian central bank left its key policy rate unchanged at 1.50%, saying the soft policy stance is consistent with sustainable economic growth and with meeting the CPI target gradually and over time.
  • EU finance ministers at yesterday’s Eurogroup meeting urged Italy to amend its budget plans as the country is risking sanctions under the so called “excessive deficit procedure”. Any revised plan is due until November 13 but Italy has shown little intentions to do so
  • China’s VP Wang Qishan said its country is ready to hold discussions and work with the US to end the trade conflict. The comments are made ahead of the G20 summit later this month, where President Xi and Trump are expected to meet.
  • Iranian President Rouhani fulminated against the US oil boycott yesterday and threatened with countermeasures. Meanwhile, oil prices slipped after US sanction waivers to eight Iranian oil importing countries eased supply concerns.
  • The EU is ready to back a compromise on the Irish border in which the UK is offered an “independent mechanism” to leave any temporary EU/UK customs arrangement. May’s cabinet meets today as the pressure for a deal by the end of this month is on.
  • Today’s economic calendar consists of EMU final PMI’s and PPI. Several ECB governors are scheduled to speak. The US publishes its September JOLTS job openings, taps the bond market and braces for the midterm elections.

Currencies: USD Rebound Blocked, Awaiting The Election Outcome

USD awaits outcome of US mid-term elections

On Monday, USD trading was mainly technical in nature. Markets awaited the outcome of the US election. EUR/USD initially lost a few ticks as the rift in the EU-Italian budget talks persisted. US-German yield spreads also held near record levels. However, good US data (Friday’s strong payrolls and a solid nonmanufacturing ISM) were not enough for a retest of key USD resistance levels (DXY 97 area, EUR/USD 2018 correction low near 1.13). In the end, the USD even lost modest ground. Last week’s rise in US yields also took a breather. EUR/USD finished at 1.1407 (from 1.1388). USD/JPY closed little changed at 113.19. Overnight, Asian markets show a mixed picture. China underperforms even as Chinese officials indicated they are prepared to address pending USChina trade issues. Major USD cross rates remain in wait-and-see modus. EUR/USD trades near 1.14. USD/JPY hovers near 113.35, within reach of recent ST top. The RBA as expected kept its policy unchanged and is in no hurry to raise rates. AUD/USD is holding in the 0.72 area, off recent lows. Today, the eco calendar is thin with only the US JOLTS job openings and the final EMU services PMI’s scheduled for release. Global (FX) trading might remain in a wait-and-see modus looking out for the outcome of the US elections. A mixed outcome (Democrats gaining the majority in the House, Conservatives keeping the Senate) might be a temporary negative for the dollar. However, the outcome probably won’t change the Fed’s assessment in a profound way. So, any damage for the USD might be temporary and short-lived. We started the week with a neutral bias on EUR/USD. The USD continues to enjoy ample interest rate support, but last week’s rejected test of the 1.13 area/2018 low suggests that recent USD rebound is a bit exhausted. Some consolidation in the 1.13/1.16 range might be on the cards. Within this range, a sell-on-upticks approach remains favoured.

Sterling held a positive bias yesterday on growing indications/rumours of the UK and the EU making progress on a Brexit deal. EUR/GBP closed at 0.8747. Today, there are few UK data. Brexit headlines will continue to dominate GBP trading. Sterling obviously enjoys a ST positive momentum. However, we look out to what extent hard-line Brexiteers in the UK conservative party will be prepared to accept a comprise that will keep the UK longer in the costums union. Even so, EUR/GBP is nearing first intermatiate support in the 0.8723/0.8696 area.

USD (trade-weighted DXY): USD rally taking a breather

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