- Rates: German political risk building
Asian markets extend this week’s rally on Chinese tariff cuts on US imports, but we have the impression that the risk rally could be up for a pause after this week’s repositioning. German political risk becomes a wildcard after the CDU and FDP broke the cordon sanitaire against AFD in the region of Thuringia. National coalition leaders meet this weekend. - Currencies: Dollar shines. EUR/USD against testing key support
The dollar behaved more like a high yield/high growth currency rather than a safe haven yesterday. The US currency profited from the global risk rebound, strong US data and higher yields. EUR/USD dropped to the 1.10 area. A test of the 1.0981 key support might occur today. Political uncertainty in Germany probably won’t help the euro.
The Sunrise Headlines
- US stock markets continued the risk rebound, advancing up to 1.7% (DJI). The S&P500 and Nasdaq set new all-time highs. Asia also records broad gains (1%-3%), buoyed by China announcing tariff cuts.
- China’s Ministry of Finance said it will cut tariffs on US imports worth $75 billion starting from February 14 in a response to earlier US action. Goods included are agricultural and will see most levies cut from 35% to 30%.
- Germany’s FDP and CDU in Thuringia ended the practice of not working with the far-right by relying on the AfD for propping up their minority government, likely triggering a backlash at the national level.
- The US Senate acquitted Donald Trump on both articles of impeachment (abuse of power and obstruction of Congress) in a near party-line vote. All Democrats and Republican Mitt Romney voted guilty.
- The Polish central bank kept rates stable at 1.50% yesterday. Inflation rose to the upper end of the tolerance range in December (3.4%) but governor Glapinski is convinced it will return to target as he sees growth slowing to 3%.
- US Treasury said it will issue 20-yr bonds in the third week of February, May, August and November of each year. The first issuance will take place in May with the advisory committee recommending an initial auction size of $10-13 bn.
- Today’s economic calendar eyes rather meagre, containing only US jobless claims. Several ECB (Lagarde, Villeroy) and Fed (Kaplan) speeches are scheduled. France and Spain tap the bond market
Currencies: EUR/USD Against Testing Key Support
Alert: EUR/USD again near key support
USD strength prevailed again yesterday. The US currency again behaved more like a high yield/high growth currency rather than a safe haven. The risk rebound and the rise of core yields weighed further on the yen, but also on the euro. The price move in EUR/JPY was telling. EUR/JPY, in the past often a barometer of risk sentiment, hardly gained despite the global risk-on. Later, an exceptionally strong US ADP labour report and a solid non-manufacturing ISM only reinforced the overall USD bid. The trade weighted dollar (DXY) reached the highest level of 2020 (close at 98.30). USD/JPY finished at 109.85 (from 109.52). The euro was again the ‘by default’ loser. EUR/USD dropped to the 1.10 area, with the key 1.0989/81 support again with reach.
Overnight, the global rebound of risky assets is gaining further traction as China announced to reduce some tariffs on US imports. Asian equities are gaining up to 2.0% or even more. The yuan strengthens further below USD/CNY 7 (6.9650 area). USD/JPY is nearing the 110 barrier. The gain of the Aussie dollar is only modest (AUD/USD 0.6755). The picture for EUR/USD is indecisive, little changed near 1.10.
The eco calendar is thin today. The easing of trade tensions is in theory also good news for the EMU. However, of late this rarely helped the euro. We also keep a close eye at the German political developments. Tentative political instability in the country might become a topic for (FX) markets. After this week’s strong US data, investors probably won’t reduce USD long exposure going into the US payrolls. So, a test of the 1.0981 support is likely. Last week, a first test of this key support was rejected, but the subsequent EUR/USD rebound was short-lived. The dollar soon regained the upper hand. A break below 1.0981 would pave the way for a full retracement to 1.0879 (2019 low). A return above 1.1120 would call off the ST alert, but we don’t see a trigger for that.
Sterling initially profited further from an unexpected big upward revision of the UK PMI’s yesterday. However, GBP sentiment faltered later on headlines that the EU might impede the access of UK/London banks to its market. EUR/USD eventually closed day only marginally lower at 0.8460. There are no UK data today. However, we maintain the view that sterling can hold rather strong on better eco news, especially against a weak euro.
USD trade-weighted (DXY) sets 2020 top
