- Rates: Core bonds continue their slide despite risk-off
Core bonds suffered from positive Asian data and increased chances for German stimulus. The decline continues this morning even as risk sentiment is fragile. We expect the downward move to hold throughout the trading day given the lack of data. Germany’s 10y yield capped first resistance, US yields are nearing the upper bound of the sideways range. - Currencies: EUR/USD rebounds off 1.10 both on euro strength and USD softness
Yesterday, the stalemate in the major FX cross rates was finally broken. The euro profited from higher yields after the SPD leadership change raised the hope of more fiscal stimulus. At the same time the dollar was hurt by a poor US ISM and president Trump reviving the debate on import tariffs. Break above 1.11 would improve the technical picture for EUR/USD.
The Sunrise Headlines
- US equities plunged (up to -1.12%) as weak US eco data and a trade flare-up weighed on sentiment. Asian markets are tracking the slip on Wall Street with Australia underperforming (-2.19%).
- US-China trade tensions seem to flare up as China will soon publish a list of ‘unreliable entities’ that could prompt sanctions against the US. Besides, China is contemplating visa restrictions against US officials, Global Times reported.
- US president Trump continued his trade whirlwind and set forth 100% tariffs on roughly $2.4bln in French goods in response to the country’s digital tax which ‘discriminates against US companies’ according to the US trade representative.
- HK leader Carrie Lam asserted the HK Human Rights and Democracy Act signed into US law last week could do more harm than good. The act undermines business confidence amid uncertain US actions when reviewing the legislation.
- The RBA decided to keep its policy rate unchanged at 0.75% amid softened global risks but leaves the door open to further easing. The central bank is now waiting for the 3 prior cuts to gain traction in the country’s sluggish economy.
- Testifying at the European Parliament, ECB chief Lagarde vowed the ECB will be ‘resolute’ in reinstating price stability. Lagarde also underscored that an upcoming strategy review will be wide-ranging, including climate change.
- Today’s economic calendar is little inspiring with very few data releases. The UK will publish November’s construction PMI and EMU’s October PPI is due. ECB board nominees Panetta and Schnabel will be speaking in Parliament today.
Currencies: EUR/USD Rebounds Off 1.10 Both On Euro Strength And USD Softness
EUR/USD rebounds off 1.10 support
Global sentiment changed quite profoundly yesterday and this time dollar proved the be the weakest link in the chain. Initially, the USD held up well. Both US and European yields jumped higher supported by a positive risk sentiment on better Asian data. The prospect for more fiscal stimulus in Germany after the leadership change at the SPD also supported the rise in core yields, but at first had little impact on the euro. However, the trading dynamics in FX changed later. US president Trump announcing new tariffs on steel and aluminium from Brazil and Argentina and a disappointing US manufacturing ISM weighed on risky assets and pushed the dollar off a cliff. EUR/USD was squeezed higher (close 1.1079). USD/JPY closed at 108.98 (from 109.49).
This morning, Asian equities join yesterday’s correction on WS, but losses are more modest. Australia underperforms. The RBA left its policy rate unchanged at 0.75%. Previous rate cuts are supporting the property market and the RBA expects this filter through into consumer spending too. The Aussie dollar extended gains and trades near 0.6840. USD/JPY tries to regain the 109 level after yesterday’s sell-off. EUR/USD hovers in the 1.1075 area. The US considering new tariffs on European goods as a retaliation for a French tax on digital revenues of mainly US companies might weigh on the single currency. Today, the eco calendar is very thin. Global factors will dominate FX trading. Investors will also look forward to other key data including the US nonmanufacturing ISM and the payrolls later this week.
Last week, the euro stayed in the defensive and EUR/USD extensively tested the 1.0989 support. Fortunes changed yesterday. A (modest) narrowing in the USGerman interest rate differential, a soft US ISM and the debate on fiscal stimulus in German finally supported the euro and weighed on the dollar. It was a nice EUR/USD rebound, but the technical picture hasn’t really changed. A break above 1.11 would call off the ST downward alert and open the way for a retest of the 1.1179 range top.
Sterling lost modest ground against the euro yesterday. Some polls indicating a smaller lead of the Conservative party might have been in play. The rebound in EUR/GBP was also partially due to overall euro strength. A further rise of EUR/USD might still have a small upward impact on EUR/GBP. However, we expect EUR/GBP to hold a rather tight range in the 0.85 big figure going into next week’s election.
EUR/USD rebounds off 1.0980/1.10 area both on euro strength and a correction of the dollar
