- Rates: Spanish budget vote trigger for snap elections?
Risk sentiment remains positive overnight as US President Trump shows wiliness to extend the Chinese trade deal deadline (March 1). Core bonds trade a tad weaker. Peripheral spreads might see some widening today given Italian/Portuguese supply and the Spanish parliament’s budget vote. The latter might be voted down, prompting a case for snap election. - Currencies: EUR/USD rebound, but picture remains fragile
Yesterday, the overall risk rebound also triggered a short squeeze on the recent EUR/USD decline. EUR/USD rebounded off the 1.1270 support. For now, a better risk sentiment might give the euro downside protection. However, a sustained rebound probably needs a solution for on pending global/EMU event risks or better EMU eco data.
The Sunrise Headlines
- US equities spurred higher with gains over 1% yesterday on the tentative border deal and trade hopes. Asian markets are trading in green as well. Chinese indices outperforming with gains up to 2%.
- US President Trump signalled he’s open to extending the China tariff deadline (March 1) if an agreement is near while Xi Jinping is scheduled to meet the US trade delegation, with US Treasury Secretary Mnuchin, in Beijing on Friday.
- US President Trump will likely sign the preliminary border security deal this week into legislation that will avoid a new government shutdown. However, he is said to use his executive authority to fund additional border measures.
- Olly Robbins, UK’s chief Brexit negotiator, was overheard saying the UK is seeking a long extension to the Brexit deadline if Parliament refuses to pass PM May’s deal. However, May repeated that extending Article 50 makes no sense.
- New Zealand’s central bank left the official cash rate at 1.75%, as expected. The RBNZ pushed out its forecast for a rate hike to early 2021, disappointing investors that were looking for signs of policy easing. The kiwi edged higher.
- Japan’s producer prices declined more than expected in January (-0.6% M/M vs. -0.2%.). Australian Westpac consumer confidence rebounded sharply in February, from 99.6 to 103.8.
- Today’s eco calendar contains US and UK CPI inflation. The Swedish Riksbank meets. An avalanche of Fed governors speak, as does ECB governor Lane. Spanish parliament votes on the budget. PT, IT and GE tap the bond market
Currencies: EUR/USD Rebound, But Picture Remains Fragile
EUR/USD rebound off 1.1270 support area
The recent euro decline/USD rally fell prey to profit taking yesterday. EUR/USD rebounded as global sentiment improved on a tentative US budget deal and investor hopes that the US-China trade talks are heading in the right direction. ECB speakers including Weidmann, Lane, Nowotny and Knot didn’t sound overly dovish. EUR/USD briefly filled bids below the 1.1270 support, but the test was rejected and EUR/USD staged a protracted intraday rebound to close at 1.1326. USD/JPY confirmed its 110+ break, but given the rise in US yields and the positive sentiment, gains were modest (close at 110.48).
Overnight, Asian equities also rally on the positive headlines on the US-China trade talks. The yuan strengthens (USD/CNY 6.7550 area). USD/JPY (111.65) continues drifting higher. EUR/USD (1.1335 area) is gaining a few ticks. The kiwi dollar rebounded sharply as the RBNZ failed to meet dovish market expectations (rates are expected stable through 2019 & 2020, a tentative rise is pencilled from 2021). The kiwi dollar gained more than a full big figure (NZD/USD 0.6845 area). The Aussie dollar (AUD/USD 0.7130 area) also regained modest ground on decent confidence data and constructive RBA talk.
US CPI inflation is expected to ease to 1.5% (headline) and 2.1% (core) today. If anything, the report might justify the Fed’s wait-and-see stance. This might be neutral to tentatively soft for the USD. Headlines on the Spanish budget are a wildcard. Yesterday, the euro profited from a better risk sentiment. However, EMU political event risk is still in play and the fragile eco picture questions the room for the ECB policy normalisation. EUR/USD tested the 1.1270 area, but the test is rejected. However a sustained euro rebound probably needs some of the global (trade) and EMU political event risks to be solved and more comforting EMU eco data. This condition isn’t met yet. We look out for more convincing signs of a bottoming process. EUR/USD 1.1216 (Nov low) low remains next high profile support.
EUR/GBP gained a few more ticks yesterday. The move was mainly caused by the overall EUR/USD rebound. UK PM May as expected tried to convince Parliament to give her more time to reach a better deal/agreement on the Irish backstop arrangement. Today UK inflation data will be published a modest easing is expected. However, markets will mainly look forward to the developing Brexit story, starting with tomorrow’s vote in the UK Parliament. As we don’t see signs of a break-through yet, more technical driven EUR/GBP trade might be expected.
EUR/USD rebounds off 1.1290/67 support, but picture remains fragile
