• Rates: More underperformance of US Treasuries?
    We expect core US retail sales to be strong given the tight labour market and rising disposable income. This might trigger a negative reaction in US Treasuries in line with yesterday’s move following higher (wage) inflation. Stock markets can’t really profit overnight from rumours that US President Trump contemplates a 2-month extension to reach a trade deal with China.
  • Currencies: EUR/USD returns to recent lows and struggles to prevent further losses
    Tuesday’s EUR/USD rebound proved short-lived. The ongoing contrast between poor EMU data and decent US eco evidence revived a USD supportive ‘divergence trade’. EUR/USD is nearing the bottom of a MT trading range. The euro desperately needs EMU and global event risk to cool down and signs of a gradual economic improvement in EMU.

The Sunrise Headlines

  • US equities edged modestly higher yesterday with gains up to +0.46% (Dow Jones). Asian equity markets are trading mixed this morning despite rumours of a 60-day extension to the US-China trade deadline.
  • US President Trump is said to be open to extending the China tariff deadline (March 1) by 60 days, to give negotiating parties more time if they are close to a deal that addresses deep structural changes to China’s economic policy.
  • US President Trump was cautious about the preliminary border security deal. He will look at the final legislation before deciding whether to sign it but said a shutdown would be a “terrible thing”. The House votes on the proposal tonight.
  • UK Parliament decides today if it gives PM May another two weeks to secure changes to the Brexit deal. The anti-EU European Research Group is weighing to vote against May’s motion as they do not want to rule out a no-deal Brexit.
  • Chinese export unexpectedly grew 9.1% (Y/Y) in January (vs. -3.3% exp.), partly supported by front-loading before the Lunar New Year. Imports declined 1.5% (Y/Y), less than the 10.2% drop expected, resulting in a $39.16 trade surplus.
  • Japan’s economy grew 1.4% (Q/Q annualized) in Q4 last year, rebounding from a sharp contraction during a natural disaster-hit 3rd quarter (-2.6% Q/Q). The Q4 expansion was fuelled by business investment and consumer spending.
  • Today’s eco calendar contains US producer price inflation, weekly jobless claims, retail sales and the 2nd reading of EMU Q4 GDP. UK Parliament votes on more time for UK PM May, while BoE’s Vlieghe speaks

Currencies: EUR/USD Returns To Recent Lows And Struggles To Prevent Further Losses

EUR/USD rebound proves short-lived

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Tuesday’s EUR/USD rebound proved short-lived. Yesterday, EUR/USD failed to extend gains beyond the 1.1340 area. EMU production data were again weak, dampening the potential for further euro gains. Later, the dollar was supported by (slightly) higher than expected US CPI data and by solid real labour earnings. The dollar was again in the driver’s seat, profiting from higher US yield. USD/JPY closed just north of 111. EUR/USD completely reversed Tuesday’s rebound to finish at 1.1261. Overnight, Asian equities are taking a breather after recent rally. Headlines from the US China trade talks remain constructive. President Trump is rumoured considering delaying a rise in import tariffs on Chinese goods. The yuan (USD/CNY 6.76 area) stabilizes despite broad USD strength. China January foreign trade data were strong, but distorted due to the Lunar New Year. The trade weighted dollar (97.05 area) and USD/JPY (111 area) are holding near recent peaks. In the same context, EUR/USD set a minor correction low in the mid 1.12 area this morning. At 1.1275 the pair still struggles to prevent further losses. The Aussie and the Kiwi dollar maintain recent bid tone. EMU Q4 GDP is expected at a meagre 0.2% Q/Q today. End 2018 EMU eco weakness is well documented. Still, additional evidence recently often continued to weigh on the euro. In the US, PPI inflation, jobless claims and retail sales will be released. Headline US sales are expected soft (0.1%) but control group sales are expected OK (0.4%). December data are a bit outdated so we don’t expect a big reaction. That said, there is little evidence that today’s data will change the US/EMU divergence trade that weighed on EUR/USD of late. Headline risk on Spain is a wildcard. A protracted ST EUR/USD downtrend pushed EUR/USD to the lower part of the MT 1.12/1.16 trading range. A temporary rebound on Tuesday proved unsustainable. The dollar profits for ongoing (relative) eco strength. A sustained euro rebound probably needs some of the global (trade) and EMU political event risks to be solved and more comforting EMU data. This condition isn’t met. The day-to-day EUR/USD picture remains fragile. EUR/USD 1.1216 marks the Nov low. EUR/USD 1.1287 is 61% retracement 2016 low/2018 top).

EUR/GBP touched an intraday top in the 0.8790 area around the publication of softer UK price data yesterday. Later, sterling rebounded on rumours that a Brexit delay might still be an option for the government. Today, UK PM May seeks Parliamentary approval to extend negotiations with the EU, but the conservative party stays divided on tactics. Sterling trading will again develop according to the tone of the Brexit headlines. We stay sterling cautious.

EUR/USD returns to recent lows and struggles to prevent further losses


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