Rates: Core bonds lose ground in risk-on trading session
Core bond yield curves bear steepened in yesterday’s positive risk environment. Risks to today’s US non-manufacturing ISM are tilted to the upside, suggesting a continuation of core bond weakness. Vibes around US-Chinese trade remain positive and underpin risk sentiment on all together. The US starts its mid-month refinancing operation.
Currencies: EUR/USD blocked at 1.1180 resistance despite risk-on rebound
The dollar profited more than the euro yesterday as the risk-on repositioning raised the US-EMU interest rate differential in favour of the dollar. EUR/USD 1.1180 proved a rather tough resistance. Today, global sentiment will remain the key driver for FX trading. A return below 1.1075 would be disappointing for EUR/USD bulls.
The Sunrise Headlines
- WS climbed to records (up to 0.56%) as renewed trade optimism and upbeat earnings reports boosted risk appetite. Asian markets are following track and motor higher, with Japan outperforming (+1.87%).
- US administration officials are debating whether to remove tariffs on $112bn of Chinese imports as a concession to seal a partial trade agreement that would pause the trade war as early as this month, FT reported.
- China’s central bank has trimmed a key benchmark lending rate for the first time in three years by 5bps to 3.25% amid a protracted slowdown in the world’s second largest economy and dragging consequences of trade tensions.
- China’s services sector expanded at its slowest pace in eight months in October, the Caixin PMI (51.1 vs. 51.3 in September) showed. New orders slowed and business confidence hit a 15-month low.
- Hong Kong’s business activity fell at its sharpest pace in over two decades with the IHS Markit PMI slumping to 39.3, down from 41.5 in September. Months of political turmoil have battered the economy’s retail and tourism sector.
- Australia’s central bank appears to be in wait-and-see mode as it left its cash rate unchanged at 0.75%. The RBA stressed there are still some headwinds and left the door open for further easing, if needed.
- In today’s economic calendar markets will shift their focus to UK/US business confidence. Investors will gauge whether British and US consumers still manage to prop up their domestic/services economies. The US taps the bond market
Currencies: EUR/USD Blocked At 1.1180 Resistance Despite Risk-On Rebound
EUR/USD topside test fails despite risk rally
The risk rebound continued unabatedly yesterday. Investors still felt comfort from constructive headlines from the US China trade talks even as there was little concrete news. The risk rebound evidently was mostly visible in global equities with US indices extending their record race. The congruent rise in core interest rate was modest given the strength in equities. US yields rose more than European ones, capping recent rise of EUR/USD. The pair closed at 1.1128 (from 1.1166). USD/JPY outperformed to close at 108.58 (from 108.19). The risk-on trade persists in Asia. Press headlines suggest the US is considering rolling back some import tariffs on Chinese goods. The PBOC reduced the 1-year MLF rate by 5 bp. Chinese president Xi reiterated China’s commitment to an open economy. The yuan (USD/CNY 7.015) rebounds further despite the PBOC easing. The AUD/USD rebounds to the 0.69 area as the RBA left its policy rate unchanged at 0.75%. EUR/USD stabilizes (1.1125). USD/JPY extends gains (108.75).
Global sentiment and headlines on trade will remain the drivers for global (FX) trading today. The US non-manufacturing ISM is expected to rebound from 52.6 to 53.5 after last month’s steep decline. Yesterday, the dollar profited from a rise in US yields as markets further reduced Fed rate cut expectations. Will a good US ISM cause a (modest) further USD rebound? Yesterday’s EUR/USD price action was a bit disappointing as the 1.1180 resistance capped the upside. Even so, we keep the view that a trade-truce ultimately will support the euro more than the dollar.
The technical picture of EUR/USD remains (moderately) constructive. First intermediate resistance at 1.1179 proves rather robust. A break above 1.1250 would improve the ST picture. The downside looks better protected with first support at 1.1073. A return below this level would question the ST upward momentum.
Sterling trading stayed technical in nature. EUR/GBP is holding a tight sideways range in the lower half of 0.86, as the leaders of the main parties are kickstarting their campaign for the December 12 election. Later today, the UK services PMI is expected to print just below 50. A soft figure might support the case for an easier BoE policy stance, but we don’t expect a big sterling reaction as the focus stays on the election campaign. For now, we expect more technical wait-and-see trading.
EUR/USD: first test of 1.1180 resistance rejected even as risk rally continues
