Rates: US 10-yr yield tests 1.94% resistance
Core bonds slid from start to finish yesterday as China and the US agree to rollback tariffs if a phase one trade deal is signed. Yields added up to 10 bps at the long end of the curves. The US 10-yr yield tested 1.94% resistance. Ahead of the long weekend, some investors might take some chips off the table, but we wouldn’t buy into any ST core bond comeback.

Currencies: USD profits from rising interest rate support
Over the previous days the dollar outperformed supported by a further rise in US yields. The reflation trade might slow going into the weekend and that might also be the case for the dollar. Even so, the ST picture in the EUR/USD cross rate turned again more neutral as the pair dropped below the 1.1073 neckline. EUR/GBP remains in wait-and-see modus.

The Sunrise Headlines

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  • WS hit fresh records on trade hopes and gained up to 0.66% although the risk-on mode abated later in the trading session. Asian markets are trading mixed, with Singapore underperforming (-0.92%).
  • US and Chinese trade negotiators have agreed to roll back tariffs on each other’s goods in phases as key part of any deal. However, the pact faces resistance from some White House hard-liners, Reuters reported.
  • US jobless claims fell more than expected in October to 211k (consensus at 215k) from 218k in September. The positive surprise provides another sign that the resilient labour market continues to underpin the US economy.
  • Chinese exports fell less than expected (by 0.9%) in October. Imports evidenced weak domestic demand and contracted for a sixth month straight by 6.4% while trade with the US frayed and fell 21.5%.
  • President Trump decided not to impose tariffs on EU cars and auto parts next week, despite previous threats to do so, according to European Commission President Juncker.
  • Japanese prime minister Abe asked his cabined to step up fiscal support and compile a package of stimulus measures to underpin the economy and build infrastructure to cope with large natural disasters.
  • In today’s economic calendar focus will shift to preliminary US consumer sentiment data as investors will gauge whether Americans’ spending will continue to support the economy. Canada publishes employment data.

Currencies: USD Profits From Rising Interest Rate Support

Dollar enjoys additional interest rate support

EUR/USD hovered up and down yesterday, but USD strength finally prevailed. After some caution in Asia, the risk rally continued as officials confirmed the US and China intended rolling back tariffs in case a partial agreement. EUR/USD initially gained on the optimism, but the rebound stalled soon. The EC further downgrading its EMU outlook was a potential euro negative. US and European yields both rallied further, but the short-term interest rate differential still widened in favour of the dollar. EUR/USD dropped from the 1.1090 area to close at 1.1050. USD/JPY rebounded north of 109 to close at 109.28.

This morning, the risk rally looks like running into resistance after substantial gains earlier this week. The rise in global yields at least takes a pause and so does the dollar (trade-weighted dollar DXY at 98.12). USD/JPY stabilizes in the 109.25 area. The yen hardly reacted to PM Abe calling for fiscal stimulus. The RBA in the quarterly policy statement sounded quite dovish on wage growth and inflation over the policy horizon. The Aussie dollar dropped back below the AUD/USD 0.69 level.

There are only second tier data in Europe today. In the US, the University of Michigan consumer confidence is expected little changed (95.5) after a decent rebound over the previous two months. Any impact on the dollar should be limited. After the recent rally, quite some good news should be discounted, also in the interest rate markets. At least this week, the dollar profited from positive trade headlines and the rise in yields. This USD rebound might slow going into the weekend. This especially applies to USD/JPY. At same time, recent EUR/USD price action was a bit disappointing. The October rebound has stalled, and the pair dropped below the 1.1073 neckline, making the picture gain more neutral short term. The 1.10 area markets the next ST support.

The focus for sterling trading turned temporarily from the elections/Brexit to the BoE monetary policy assessment yesterday. The BoE still indicates that rates will might have to be raised slightly over the policy horizon, but two MPC members voted for a rate cut. Sterling spiked briefly lower, but the move was soon reversed. EUR/GBP closed marginally stronger at 0.8629. For today, we expect more technical trading in the lower 0.86 area as the election campaign continues.

EUR/USD dropped below ST neckline, making the ST picture again more neutral.

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