- Rates: Risk sentiment vs eco data
Positive risk sentiment and Lagarde comments weighed on core bonds yesterday, though we’ve had some return action higher in US trading. US-Sino trade talks seem back on track, amplifying risk sentiment this morning with core bonds again under pressure. The story for today’s trading? Or will US eco data spoil the party once again? - Currencies: EUR/USD regains 1.10. US data to decide on next move
The dollar declined further yesterday as a positive sentiment on risk reduced safe haven buying. The euro was supported by a narrowing interest rate differential as Christine Lagarde sounded rather balanced on further aggressive easing. Today US ADP and ISM and tomorrow’s payrolls might decide whether there is room/need for further USD correction
The Sunrise Headlines
- WS profited from a risk-on sentiment (HK, reduced risk of no-deal Brexit) yesterday. The Nasdaq outperformed (+1.3%). Asian markets follow in lockstep, supported further by this morning’s trade news. China outperforms (+ 1.5%).
- China held phone talks with the US this morning, its Commerce Ministry said. Chinese negotiators will travel to Washington early in October to resume trade talks after parties failed to set a date for this month.
- UK PM Johnson was defeated twice in Parliament yesterday. MP’s approved legislation that forces the PM to ask for a delay if there is no deal. Johnson called for elections shortly after but did not get the required two-thirds majority.
- The central bank of Canada held rates stable yesterday (1.75%) and signalled no hurry to ease policy with the economy close to potential and inflation on target. Markets were poised for a more dovish language; the loonie rallied (1.322 USD).
- Oil prices surged yesterday as a constructive sentiment pushed investors into risky assets even though API data showed inventories rising. A barrel of Brent crude now sells at $60.7.
- Turkish president Erdogan said the economy must grow by 5% in 2020. For it to happen, central bank policy rates “will fall further”. Data earlier this week showed Turkey growing 1.2% QoQ in Q2 with August inflation at 15%.
- In today’s economic calendar we’ll watch for US jobless claims, ADP employment and the non-manufacturing ISM to be released. ECB’s de Guindos is scheduled to speak. France and Spain tap the bond market
Currencies: EUR/USD Regains 1.10. US Data To Decide On Next Move
EUR/USD regains 1.10. US data in focus
The EUR/USD rebound that started after a poor US ISM continued yesterday. The dollar weakened further, but sentiment on the euro also improved. Global sentiment turned outright risk-on reducing safe haven USD buying as political tensions in Hong Kong eased. Chinese authorities signalled further monetary easing, too. On the euro side, EMU PMI’s indicated mediocre growth but showed signs of bottoming. A no-deal Brexit was blocked in the UK Parliament. ECB president nominee Christine Lagarde acknowledged the need for a stimulating policy but also mentioned the side-effects and sees a case for fiscal stimulus. EMU yields rebounded and EUR/USD regained the 1.10 handle (close at 1.1035). USD/JPY rebounded to close at 106.39.
Overnight, US and China announced further talks on trade that might result in a higher-level meeting next month, supporting the positive risk sentiment. The yuan (USD/CNY 7.1350) and the likes of the Aussie dollar (AUD/USD 0.6815) extend their recent rebound. USD/JPY makes some cautious further progress. EUR/USD stabilizes in the 1.1030 area.
(Improved) sentiment on risk will still be an important driver for FX trading. In this respect, we look out whether the rebound in EMU yields continues. Regarding the data, the focus turns to the US (ADP, claims non-manufacturing ISM). The poor manuf. ISM alerted markets on a US slowdown. However, we don’t expect ADP/ISM today to be that weak to materially raise market speculation on a 50 bp September rate cut. Anyway, tomorrow’s payrolls will be more decisive. The USD rally was blocked earlier this week (man. ISM) and interest rate differentials narrowed slightly in favour of the euro. We look out whether this continues. ST negative momentum in EUR/USD eased, but the technical picture stays fragile and a sustained euro comeback is not evident before next week’s ECB decision. A return north of 1.11 would call off the ST negative alert for EUR/USD.
Sterling rebounded further yesterday as the House of Commons prevented the UK from leaving the EU without a deal. PM Johnson’s request for new elections was rejected (for now). In theory all options are still open, but chances on a no deal Brexit have declined materially, bringing sterling in calmer water. Recently, we assumed that quite some bad news is already discounted and stayed cautious to engage in ‘last minute’ sterling shorts. Pressure on sterling is easing, but given the lack of political visibility we don’t expect a big leap higher, yet.
EUR/USD rebounds back to previous range bottom awaiting further guidance from US data today and tomorrow
