Rates: Room for profit taking on core bond rally
The US 10-yr yield tested 2.06% on several occasions last week, but a break didn’t occur. In absence of eco data/events, we expect room for some return action higher. Any such move will be corrective in nature though with the June 19 Fed meeting in mind. US Treasuries can underperform German Bunds with the mid-month refinancing operation starting.
Currencies: Dollar decline takes a breather as US yields rebound (at least temporary)
Post-payrolls USD selling eased yesterday, as US yields rebounded. Some further consolidation might be on the cards, but in a longer term perspective, the dollar might have entered some kind of sell-on-upticks pattern. Sterling traders don’t believe BoE indications on a rate hike. EUR/GBP rebounded north of 0.89
The Sunrise Headlines
- US stock markets closed Monday’s session in green as US-Mexico tensions eased. The Nasdaq (+ 1.05%) outperformed. Asian equities follow Wall Street’s gains. China (+ 2-3%) jumps on new stimulus measures.
- Nominations for UK’s next PM closed yesterday. 10 candidates were able to secure the required backing of 8 Tories. Conservative MP’s will narrow down the list until two candidates are left. A first voting round is scheduled this Thursday.
- US president Donald Trump threatened to impose tariffs on an additional $300 bn in Chinese goods if his Chinese counterpart Xi Jinping doesn’t meet with him at the G20 summit in Japan at the end of June.
- Bank of England’s Saunders said the central bank may not wait until Brexit is resolved before raising rates, saying there would be a cost in waiting “until all the potential warning signs […] are flashing red”.
- China has eased restrictions for local governments to spend money raised by issuing special bonds. The bonds allow the authorities to invest outside their regular budgets in major infrastructure projects.
- The Greek president has accepted PM Tsipras’ request to resolve Parliament after a disastrous outcome during the European elections. Snap elections will be hold on July 7 before regular elections are due in October.
- Today’s economic calendar contains US NFIB small business optimism (May) and producer inflation figures. The April labour job report is published in the UK. The US taps the bond market.
Currencies: Dollar Decline Takes A Breather As US Yields Rebound (At Least Temporary)
USD decline slows as US yields rise (temporarily?)
Markets opened in ‘risk-on’ on Monday as the US and Mexico avoided the US to impose tariffs on imports from Mexico. In this risk rally, US yields rose off recent lows, supporting a comeback of the dollar. The trade-weighted dollar rebounded to the high 96 area. EUR/USD dipped temporary below 1.13. However, USD gains were modest as uncertainty on US-China trade persists. President Trump said to be prepared to impose additional tariffs on China if a meeting with the Chinese president at the G20 doesn’t yield substantial progress. EUR/USD closed the day at 1.1312. USD/JPY finished at 108.45.
This morning, the risk rally continues in Asia. China outperforms supported by articles/announcements indicating that China will step up fiscal and monetary stimulus to avoid a slowdown. The yuan (USD/CNY 6.91) rebounds after yesterday’s decline. The dollar is trading little changed against the euro (1.1315 area) and is gaining modestly against the yen (USD/JPY 108.60 area). The calendar only contains second tier EMU data today. In the US, NFIB small business confidence and PPI are only of intraday importance. Headlines on the US trade politics and their impact on Fed rate cut expectations remain the main factor for USD trading. On Friday, US yields touched new cycle lows, pushing EUR/USD temporarily above the 1.1324 resistance. From there, US yields bottomed as substantial Fed easing was already discounted. Yesterday, US yields and the dollar received some modest support from a positive risk sentiment in the wake of the US-Mexico agreement, but the USD rebound was far from impressive. A positive sentiment and a further rebound in US yields might temporary help to put a floor for the dollar. Longer term, the dollar might have entered some kind of sell-on-upticks pattern. The 1.1200/1.1250 looks quite solid EUR/USD support. Further sustained gains beyond 1.1324/48 still open the way to the 1.1448 target area.
Over the previous days, BoE members Haldane and Saunders indicated that the BoE might raise rates sooner than expected but the comments didn’t help sterling much. Poor monthly UK GDP data even propelled EUR/GBP above the 0.89 level. Today, UK labour market data will be published, but we doubt they will be strong enough to change fortunes for sterling as headlines on the succession of PM May will dominate trading. We expect sterling to continue fighting an uphill battle
EUR/USD: dollar decline taking a breather, but picture for the US currency remains fragile