- Rates: Uplift in sentiment caps core bond rally
An amelioration of global risk sentiment pushed core bonds down yesterday. A preliminary agreement in US Congress on border security and positive signals from US-Sino trade talks are supporting optimism. Core bonds might correct further today. An empty economic calendar leaves investors awaiting for more progress on the Geopolitical topics.
- Currencies: EUR/USD is testing the 1.1267/70 support area
Recent USD rally gained further momentum yesterday. USD/JPY and the trade-weighted dollar broke important technical resistance levels. EUR/USD tested the end November/early December lows. Today, a better global risk sentiment might slow the euro decline, but for now there is probably no trigger for a sustained EUR/USD U-turn
The Sunrise Headlines
- US equities opened higher yesterday but the move lacked momentum. The Dow Jones (-0.21% underperformed). Asian markets are mixed with Chinese and Japanese indices outperforming on trade optimism and a drop in the yen.
- Trump expressed optimism about China yesterday, saying he will “make great deals” and doesn’t want China “to have a hard time”. He also still wants to meet with president Xi “very soon”, according to White House advisor Conway.
- US lawmakers reached an agreement in principle to avoid a new partial government shutdown this weekend. The compromise, to be approved by Trump and Congress, includes only $1.4bn for border security while Democrats’ efforts to limit detention beds were blocked.
- The BoJ cut longer dated bond purchases after yields declined significantly amid a global bond rally. The BoJ aims at a 10y yield target of close to 0% but has slipped to -0.04% in recent days before bouncing 15 bps after the move.
- January NFIB small business optimism (101.2), scheduled for later today but published exceptionally overnight, slipped to the weakest since the end of 2016. Less than 1 in 5 plans to hire and a mere 6% expects the economy to improve.
- The ECB’s new chief economist to be Philip Lane said this morning that policy uncertainty is currently more elevated than normal. He called for a “measured approached to all of the data” and referred to the new March forecasts for the ECB to decide where next.
- Today’s economic calendar is in no state to guide trading. We only watch for the US JOLT job openings as NFIB small business optimism was already printed. ECB’s Weidmann and Nowotny, Fed’s Powell and BoE’s Carney speak today
Currencies: EUR/USD Is Testing The 1.1267/70 Support Area
EUR/USD testing the 1.1267/70 support area
The recent USD rebound accelerated yesterday. The move was mainly technical in nature. There were few US/EMU data. The trade-weighted dollar and USD/JPY were testing key technical levels. USD/JPY cleared the 110 barrier on higher core yields and a better risk sentiment. Interest rate differentials between the US and Germany/EMU showed a mixed picture (widening at the short end, narrowing at the long end of the curve). Even so, the global USD bid finally also hit EUR/USD. The pair dropped to test the 1.1270/67 support area (late Nov/mid Dec lows). EUR/USD closed at 1.1276 (from 1.1323). USD/JPY finished at 110.38 (from 109.73). USD strength was the name of the game. Overnight, risk sentiment improved as US Congress reached a tentative deal on border security. Most major Asian equity indices are trading higher and core yields gain. Yesterday’s break higher in USD/JPY is confirmed as Japanese markets reopen after a long weekend. The BOJ reduced bond buying in a regular operation this morning, an indication that the recent decline in LT yields as gone far enough. For now, it didn’t help the yen. USD/JPY is trading in the 110.55 area. The EUR/USD decline is taking a breather (EUR/USD 1.1280 area). Today, there are again few US or EMU data. A better risk sentiment usually is at least as beneficiary for the euro as it is for the USD. However, it is unsure whether it is enough to trigger U-turn for the euro. Political event risk (Italy, Spain, trade issues) are still is playing on the background and the fragile eco picture questions the room for the ECB policy normalisation. Soon after the January Fed decision, EUR/USD was captured in a protracted downtrend as poor EMU data outweighed the soft U-turn of the Fed. The short-term momentum stays USD supportive/euro cautious. EUR/USD tested/is testing the 1.1270/67 support. The 1.1216 Nov low is the next level on the radar. After the recent decline, quite some euro negative news should be discounted. That said, we see no trigger yet to reverse the USD-positive/euro negative bias. We don’t row against the tide. Positive news on global trade or on the US-EU trade talks (autos) might provide such a trigger.
Yesterday, EUR/GBP gained a few ticks. UK eco data (Q4 GDP, Dec production) were poor and didn’t confirm last week’s relatively positive BoE assessment. Today, UK PM May will address the UK Parliament on the Brexit process and probably try to get more time to reach an amended deal with the EU. As we don’t see signs of a break-through yet, more technical order driven EUR/GBP trade near current levels might be on the cards
EUR/USD testing the 1.1290/67 support area