Rates: Cautious bias given huge event risk
Losses on core bond markets remained rather limited last Friday given stellar payrolls, positive risk sentiment and higher oil prices. We start the week with a cautious (ie positive) bias for core bonds given huge event risk this week with Fed/ECB meetings, UK general elections, US retail sales, a US tariff deadline and the possible start of US House impeachment votes.

Currencies: Dollar gains only modestly after strong payrolls. Sterling rally continues
The dollar wasn’t able to take full advantage after Friday’s strong US payrolls report, indicating some investor caution on the US currency. USD/JPY even closed the day in negative territory. There is plenty of event risk this week. For now, we see limited upside for the dollar. The pre-election sterling short-squeeze simply continues.

The Sunrise Headlines

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  • US stock markets rose up to 1.22% (Dow Jones) after a strong batch of data including stellar November payrolls. Asian equities lack clear guidance this morning. Japan (+0.4%) outperforms and China underperforms.
  • Chinese exports shrank 1.1% y/y in November, data showed this weekend. It has been the seventh decline already this year. Exports to the US tumbled some 23%, the worst result since February and a 12th straight monthly decline.
  • Oil prices jumped on Friday after Saudi Arabia announced it will voluntarily cut 400 000 barrels a day (to 9.7m barrels per day), provided the OPC+ members would stick to their own production cut promises. Brent oil is trading at $64/b.
  • Germany’s SPD party members rejected an immediate leave from the coalition with Merkel’s CDU during the convention last weekend. They did back demands for more leftist stance of the ‘Grand Coalition’.
  • The US will probably exercise a veto against new WTO judges being appointed to replace two others with terms expiring soon. Doing so would render the WTO’s dispute settlement system unable to function.
  • WH trade advisor Kudlow said on Friday the US and China are trying to agree on the amount of agricultural purchases, adding that the two are in “almost-around-the-clock” negotiations but that no meeting is planned at present.
  • Today’s eco calendar is close to empty. Investors await the Fed (Wednesday) and ECB (Thursday) meetings. UK elections on Thursday and looming increased US tariffs also keeps investors also guarded. The US taps the bond market.

Currencies: Dollar Gains Only Modestly After Strong Payrolls. Sterling Rally Continues

Dollar gains only modestly on strong payrolls

USD sentiment had turned a bit more cautious last week. The payrolls could decide whether there was room for further profit taking. There wasn’t. The payrolls were very strong and rubberstamped the Fed’s assessment that no further rate cuts are needed. EUR/USD had returned to the 1.11 area, but the payrolls pushed the pair back lower in the 1.10 big figure. Still, the USD rebound wasn’t exceptional given the strong payrolls. EUR/USD closed at 1.1060 (from 1.1104). USD/JPY even reversed the initial gain and finished lower on a daily basis (108.58 vs 108.76). So, the dollar performance wasn’t that convincing after all.

Asian equities are taking a cautious start, underperforming the post-payrolls reaction on WS (gain of a about 1%). Japan Q3 GDP was upwardly revised to 0.4%. The prospect of the economy receiving fiscal aid next year pushed the 10- y Japanese yield back to 0.0%. The yen is still mainly driven by global risk, but this topic might be a slightly yen supportive too. USD/JPY hovers near 108.60. USD/JPY 108.24/107.89 is a key support. We put it on our radar. EUR/USD is holding near 1.1060.

Today, there are no important data. Later this week, the Fed and the ECB hold policy meetings and the UK will hold Parliamentary elections. As ever, headlines on the US-China trade talks will be closely monitored as the December 15 deadline when the US might impose new tariffs on Chinese goods is coming closer. Negotiations on policy amendments within the German coalition could be mildly euro supportive too.

Last week, the EUR/USD rebound was blocked at the 1.11 resistance area. However, the post-payrolls USD rebound was modest. The 1.0989/81 looks quite solide support. The jury is still out, but we slightly prefer to sell the USD on upticks.

Sterling was still captured in the well-established buy-on-dips pattern that dominated trading lately. The prospect of a Conservative election win this week continues investors to rush out of sterling short hedges. EUR/GBP is testing the 0.84 big figure this morning. The recent sterling move is driven market investor repositioning rather than (new) political news. For now, there is no reason to row against the sterling positive tide.

EUR/USD holding well within 1.10-1.11 range despite strong payrolls

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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