Rates: Will Bunds continue to decline as ECB meets?
Core bonds are moving lower on the uptick in risk sentiment with the US and China showing progress in trade talks. Investor focus shifts to the ECB meeting of today. With markets already positioned on the dovish side, we expect a balanced message from Draghi given probable GDP/CPI forecast downgrades.
Currencies: ECB meeting probably won’t be a game-changer for euro trading
There was again no news topic important enough to give clear directional guidance for trading yesterday in the major FX cross rates. Today, the ECB will take center stage. Draghi might keep a cautiously positive tone, but is unlike to trigger a euro rally. Sterling rebounded as PM survived a confidence vote, but hurdles for further GBP gains remain high.
The Sunrise Headlines
- US equities ended in green on upbeat trade expectations. Nasdaq (+0.95%) outperformed. Asian stock markets are surfing along the green wave. China (+1.5%) outperforms.
- Shipments of US soybeans are heading for China following the country’s first significant purchase since both countries began imposing tariffs. The move is regarded an important gesture of China toward easing tensions.
- Theresa May survived a vote of no confidence triggered by her Conservative Party last night. She received backing of 200 party members, 117 opposed her. May cannot face another Tory triggered vote for at least a year.
- The Brazilian central bank left its benchmark rate unchanged at 6.5% saying the domestic economy is gradually recovering but the global outlook remains challenging. CPI is at “comfortable levels” despite the recent sell-off of the real.
- China detained Canadian businessman Michael Spavor on suspicion of harming the country’s state security. The announcement follows the detention on Monday of Canada’s Michael Kovrig on the same grounds, a move considered reprisal for the arrest of Huawei’s CFO Meng Wanzhou.
- EU’s economy commissioner Pierre Moscovici said it’s wrong to compare France with Italy following the former’s recent expansion of the deficit. Exceeding the 3% limit is allowed in a “limited, temporary, exceptional way” and cannot last 2 consecutive years. France’s deficit in 2017 amounted to 2.8%.
- Today’s a heyday for central bank watchers as the Swiss National Bank, Norges Bank and the ECB hold their December meeting. Also watch for statements from the European Council concerning Italy and Brexit. The US, Italy and Spain tap the bond market
Currencies: ECB Meeting Probably Won’t Be A Game-Changer For Euro Trading
ECB meeting unlikely to be a FX gamechanger
The EUR/USD trading pattern yesterday was similar to what happened of late. The news headlines caused some moderate intraday swings but wasn’t able to push the pair out of the established ranges. Early euro softness reversed on headlines that Italy might agree a 2% 2019 budget deficit. Easing tensions in the trade talks between the US and China and a positive risk sentiment were rather neutral for EUR/USD trading. US CPI data were exactly in line with expectations. The euro was also little affected by the Brexit saga (drama) as it developed in the UK yesterday afternoon. EUR/USD closed a rather dull session at 1.1369 (from 1.1317). Trading in the USD/JPY cross rate was even less inspiring. A riskon sentiment and higher US yields failed to inspire any further USD/JPY gains. The pair finished at 113.29 (from 113.38). Overnight, Asian equities join the risk rebound from the US yesterday. The dollar shows no clear directional bias. The yuan continues a cautious rebound (USD/CNY 6.8650). EUR/USD trades little changed (1.1370). USD/JPY gains a few ticks (113.45). US data (import prices and claims) later today are second tier. The focus will be on the ECB meeting. Chairman Draghi has to walk a thin line. He will probably admit risks to growth, but the new ECB-forecasts will stay strong enough for Draghi to conclude that inflation will move closer to target at the end of the policy horizon. Question is whether the market will believe this rather positive scenario. The ECB communication might help to put a floor for European yields. This is a tentative euro positive, but we don’t expect today’s meeting to be a game-changer for EUR/USD. The focus will soon turn to next week’s Fed meeting. Of late, the 1.1450/1.15 area proved to be a though resistance. We don’t see a trigger for a break ST.
Sterling trading was at the mercy of the headlines on the leadership vote within the Conservative party yesterday. Sterling started the session on a weak footing, but rebounded intraday as markets saw a good chance of PM May surviving. This is exactly what happened. Even so, sterling couldn’t maintain gains below the EUR/GBP 0.90 level. PM May will try to get new concessions from EU leaders at a summit today. However, it is unlikely that this process will yield many GBP-supportive headlines. So yesterday’s sterling rebound might be short-lived.
EUR/USD: holding in well-known territory going into ECB meeting
