• Rates: Cautiousness key as trade spat simmers
    Global core bonds closed Friday’s session nearly unchanged as headlines on international trade were mixed. Sentiment is mixed overnight as investors remain cautious, awaiting the next update in the US-Sino trade dispute. The eco calendar offers no guidance. We uphold our upward bias for core bonds today.
  • Currencies: Dollar retains the benefit of the doubt, at least for now.
    At the end of last week, the dollar profited from a rise in interest rate support as US eco data printed solid. However, the dollar probably won’t get additional interest rate support as uncertainty on the trade conflict persists. For now, the dollar enjoys some kind of by-default bit. The EUR/USD 1.1110 support is again coming within reach.

The Sunrise Headlines

  • US stock markets eventually failed to overturn opening losses (-0.5%) despite a very strong May Univ. of Michigan consumer confidence. Asian bourses are mixed this morning with China underperforming as Huawei feels the trade heat.
  • Austrian President Kurz called snap elections in September after the government collapsed over a fraud-related scandal about the country’s far-right vice-chancellor Strache (head of coalition partner Freedom Party).
  • Australian PM Morrison’s Liberal-National coalition government surprisingly secured a national election win despite trailing opposition Labor for most of the past two years in the polls. AUD/USD rose back above 0.89.
  • Saudi Energy Minister al-Falih sounded in favour of keeping production cuts in place. Global oil supplies are “plentiful” and inventories need to shrink. Brent crude found its way back above $73/barrel, closing in on the cycle peak.
  • The Japanese economy grew faster than expected in this year’s 1st quarter (0.5% Q/Q vs -0.1%). However, public spending, rising inventories and net exports (imports falling faster than exports) fuelled the rise.
  • Exit polls indicated that Indian PM Modi’s BJP-led National Democratic Alliance coalition will retain power, securing 306 seats in India’s 543-seat lower house. INR and Indian stock markets rally this morning.
  • Today’s is very thin with only Belgian consumer confidence. Fed Harker, ECB Praet and BoE Broadbent are scheduled to speak..

Currencies: Dollar Retains The Benefit Of The Doubt, At Least For Now

USD maintains benefit of the doubt…

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On Friday, global risk sentiment remained fragile as China showed reluctant to continue trade talks as the US put the country under pressure with multiple, punitive measures of late. EUR/USD, USD/JPY and EUR/JPY initially developed a mild downtrend. Later in US dealings, the Michigan consumer confidence printed very strong, tilting the balance in favour of the dollar. USD/JPY rebounded to close at 110.08. EUR/USD was pushed to new intraday lows and finished the day/week at 1.1158.

This morning, Asian markets are again trading mixed as investors await the next developments in the US-China trade war. Japan Q1 GDP printed at a stronger than expected (2.1% Q/Qa), but details (consumption and investments) were weak as expected. As usual, the impact on the yen was modest. USD strength prevails this morning. USD/JPY is trading in the 110.20 area. EUR/USD hovers just above the mid 1.11 area. The Aussie dollar jumped higher (AUD/USD 0.6920 area) after the victory of the Liberal-National coalition in the parliamentary election.

Later today, the eco calendar is very thin. The Chicago Fed activity index is no market mover. At the end of last week, the decline in US yields slowed/bottomed, at least for now. This process might continue today as US equity futures show a cautiously positive start for risky assets. However, trade tensions might return at any time and markets are still pondering the consequences of the recent escalation for the global/US economy and for Fed policy going forward.

At the end of last week, the dollar outperformed the yen and the euro. However, the risk context suggests that further USD interest rate support won’t be evident. If so, it is in the first place a negative for USD/JPY. The picture for EUR/USD is more mixed. Selling pressure from EUR/JPY might make a EUR/USD rebound more difficult. Even so, we maintain the working hypothesis that the EUR/USD 1.1110 level won’t be easy to break without real negative EMU news. On Friday, sterling lost further ground as political uncertainty in the UK mounted after the Brexit talks between the government and the labour opposition collapsed. UK PM May said she will put a deal with an improved package of measures to Parliament, but it is unlikely it will be approved. The focus now turns to the contest on the leadership for the conservative party. The EU parliamentary election might show big support for hard-line Brexiteers. We assume this context to remain negative for sterling, even as the currency takes a breather this morning. EUR/GBP 0.8840 is nest resistance on the technical chart.

EUR/USD: dollar outperformance euro as decline in US yields halts, for now

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