Rates: German 10-yr yield sets new correction low
The German 10-yr yield lost final support at 0.15% yesterday. A close below today suggests a return to 0% or even lower. There’s no reason to expect a sudden amelioration in risk sentiment today, suggesting core bonds will remain underpinned while peripherals may face more selling pressure. The eco/event calendar is empty.
Currencies: Dollar continues to outperform as global uncertainty rises again.
More negative headlines on the EMU economy reinforced the established EUR/USD downtrend yesterday. Today, sentiment on risk will dominate trading. With trade tensions back on the radar, the euro will probably stay in the defensive. Sterling is holding relatively strong as the BoE confirms (albeit limited) further policy tightening if a no-deal Brexit can be avoided
The Sunrise Headlines
- US equity markets lost ground yesterday amid new concerns over international trade. Asian equities are edging lower as well with Japanese indices underperforming. Chinese bourses are still closed
- US Trade Rep. Kudlow sounded pessimistic on the US-China trade talks saying that a deal is not nearby, while US President Trump won’t meet with Chinese president Xi Jinping before the March 1 deadline. He might do so later.
- President Trump is said to sign an executive order that bans Chinese telecom equipment from the US wireless networks and will react with sanctions against western countries that do allow it, highlighting the grim mood of the trade talks.
- UK PM May and EU officials agreed to continue negotiations by the end of this month as the EU still resists to alter the Brexit deal. PM May travels to Dublin today to have talks with Irish PM Varadkar in discussions over the Irish backstop.
- St. Louis Fed chief Bullard (FOMC voting member) said US economic growth will be “considerably” slower this year and warned for inflation being too low rather than too high. He also urged caution in reducing the balance sheet.
- France recalled its ambassador to Italy as it is “meddling” in its domestic affairs. The response comes after verbal attacks of Italian populist politicians in the direction of the French government/leadership.
- Today’s economic calendar is empty in the US and contains secondary data in Germany, France and Italy. Norway prints it fourth quarter GDP results. Fed’s Daly (non-voter) is scheduled to speak
Currencies: Dollar Continues To Outperform As Global Uncertainty Rises Again
USD ouperfroms as global uncertainty rises again
Poor German production data and the EC sharply cutting the EMU 2019 growth forecast reinforced the EUR/USD downtrend yesterday. The pair touched a correction low in the 1.1325 area. The declined slowed later as US (equity) markets finally also suffered from uncertainty on global growth. Comments from White House officials that president Trump is unlikely to meet Chinese president XI Jinping before the March 1 ‘tariffs deadline’ was a further negative for US equities but was neutral for the EUR/USD balance. EUR/USD closed at 1.1341 (from 1.1361). USD/JPY settled again below the 110 mark as sentiment on risk turned negative, but yen gains remained modest. The pair closed at 109.82.
This morning, Asian indices are joining the setback in the US, Japan again underperforms. The dollar (DXY 96.60) is holding near the recent recovery top. The yen again hardly profits from the risk-off (USD/JPY 109.75 area). EUR/USD struggles to avoid more losses (1.1340 area). The Aussie dollar (AUD/USD below 0.71) stays under pressure. The RBA cut its growth forecasts as the potential impact of declining house prices on consumer spending is becoming an ever growing source of uncertainty.
There are few important data. Global risk sentiment/US-China trade issues are again coming to the forefront for global FX trading. Recent price action suggests that the dollar is best equipped to resist a new flaring up of global uncertainty. In this respect, keep an eye at the trade-weighted dollar (DXY) a break above the 96.67 neckline could add to the short-term USD positive momentum. The jury is still out but risks for a break are building. Last week, the post-Fed EUR/USD rebound halted very soon, mainly on poor EMU data. The USD started a gradual, but protracted rebound. The day-to-day momentum is USD supportive & euro-cautious. EUR/USD 1.1290/67 is next support ahead of the 1.1218 Nov low. After recent news/decline, quite some euro negative news should already be discounted. That said, for now there is no trigger in sight to reverse the USD-positive/euro negative momentum.
Sterling rebounded yesterday even as the BoE cut its growth forecasts. Sterling bulls took comfort from the BoE indicating (limited) further policy tightening remains likely in case a no-deal Brexit can be avoided. Later, the GBP rally halted as comments from Brussels indicated that the Brexit stalemate persists. With no data on the agenda, EUR/GBP trading might turn more technical in nature today. Yesterday’s price action suggests that sterling can avoid further losses above EUR/GBP 0.8820, if high profile negative headlines on Brexit can be avoided
USD (trade-weighted) nears 96.67 resistance
