Rates: No escaping global risk aversion
Core bond yields trade below first support levels as the spreading of the deadly Chinese coronavirus accelerates with the Chinese government stepping up measures in effort to contain it. Better German eco data and US bond supply weigh in the balance today, but there’s no ignoring positive short term momentum.
Currencies: EUR/USD technical picture deteriorates
South was still the way of least resistance for the euro last Friday. EUR/JPY selling is weighing on the EUR/USD pair too and EMU PMI’s were not good enough to help the euro. Today, a solid German IFO is unlikely to trigger a real reversal for the euro. Sterling probably entered a wait-and-see pattern ahead of Thursday’s BoE policy decision.
The Sunrise Headlines
- WS lost ground with the S&P 500 recording its steepest drop in 3 months (-0.9%) as a second case of coronavirus left investors jittery. Asian markets are mostly red with China closed for Chinese NY. Thailand underperforms (-2.92%).
- China lengthened the Lunar NY in a bid to stem the outbreak of the coronavirus that has already cost the life of at least 80 and sickened thousands in different nations. The WHO director-general is headed to Beijing to discuss the matter.
- Saudi Arabia is keeping an eye on the impact of the coronavirus on oil markets with OPEC+ capable to respond, the energy minister stated, as intensified concerns over the accelerated outbreak of the virus have send oil below $60/b.
- Italy’s fragile coalition prevails as right-wing leader Salvini failed in his attempt to flip Emilia-Romagna, a long-time leftist stronghold. Salvini hoped to topple Italy’s coalition government and force snap elections.
- The EU contemplates scaling back barriers to imports of US foods, Bloomberg reported citing EU officials. The bloc aims to open its agricultural market more to avoid a tit-for-tat tariff war with the US and boost their trade relation.
- US president Trump told former national US security adviser John Bolton he wanted to keep aid to Ukraine frozen until the country aided investigations into Democrats, according to a draft of a forthcoming book by the former adviser.
- Today’s economic calendar contains the IFO business survey (January) due in Germany and new home sales (December) in the US. The US taps the bond market.
Currencies: EUR/USD Technical Picture Deteriorates
EUR/USD technical picture deteriorates
On Friday, global sentiment improved temporarily as WTO ‘downplayed’ the global impact of the coronavirus. Still, it didn’t change established trends in FX. USD/JPY first stabilized in the mid 109 area but resumed its downtrend in US dealings as the Corona risk-off gradually returned (close at 109.28). EUR/USD also stayed in the defensive. EMU PMIs didn’t bring the positive surprise that was needed to help the euro. The pair drifted further below the 1.1066/40 support (close at 1.1025).
During the weekend, Chinese authorities admitted that the virus isn’t under control, supporting a further risk-off this morning. Core US yields nosedived. A run to the safe haven yen pushed USD/JPY to the 109 area. Uncertainty also hits the Aussie (AUD/USD 0.6805) and the kiwi dollar (NZD/USD 0.6575 area). The offshore yuan is nearing the weakest 2020 level (6.97 area). EUR/JPY tested the 120 big figure. EUR/USD struggles near recent lows. Political tensions in Italy will probably cool as Salvini’s Lega failed to win a symbolic local election. For now,it doesn’t help the euro. EUR/USD hovers near Friday’s close. Today, German IFO confidence takes centre stage on the eco calendar. A gradual further rise is expected (97.0 from 96.3). Friday’s PMIs suggest a positive surprise is possible, but we doubt that even such an outcome will be enough to trigger a EUR/USD rebound. We keep a close eye at EUR/JPY and EUR/CHF. Selling in those crosses was a (bad) precursor for EUR/USD trading of late. Or will the declining intertest rate differential with the dollar slow the EUR/USD decline? On the USD side of the story, we watch the Fed press conference (Wednesday) and the Q4 GDP print (Thursday, risk for a soft figure?). The EUR/USD technical picture deteriorated after last week’s break below 1.1066/40. It paints a H&S pattern with targets near/below 1.09. A rebound above 1.1180 would call off the ST downside alert, but that looks difficult ST.
On Friday, the UK PMIs surprised on the upside and suggest the UK economy might profit from reduced uncertainty. Sterling enjoyed a solid bid before the release but failed to extend gains afterward. EUR/GBP closed marginally higher at 0.8428. Investors aren’t convinced that this will be enough to delay a BoE rate cut on Thursday. Markets still see about an equal chance for a rate cut or an unchanged decision. More sideways trading going into the BoE decision is likely
EUR/USD: technical alert as pair drops below key support.
