- Rates: Exhaustion move on bond market?
Fear of the spreading coronavirus hurt risk sentiment badly yesterday with core bonds profiting. US Treasuries significantly outperformed German Bunds with the US 10-yr yield near the all-time low. Tensions ease this morning with bonds off yesterday’s best levels. Corona sentiment remains key, but can we label yesterday’s price action as an exhaustion move?
- Currencies: Loss of interest rate support weighs on USD despite risk-off
Yesterday, the dollar underperformed against the euro and the yen. The sharp decline in interest rate support reduced the safe haven appeal of the US currency. The decline in US yields can’t go on at the same pace. As such, the USD decline might slow too. That said, the dollar might enter a more neutral trading pattern after recent strong gains
The Sunrise Headlines
- WS printed the biggest slide in 2y as a surge in corona cases outside China rattled investors. The Nasdaq underperformed (-3.71%). The selloff in Asia is slowing with Japanese equities plunging (-3.22%) in catch-up mode.
- The head of the WHO said although an increase in the number of cases outside of China is “deeply concerning”, it is still too early to label the infectious coronavirus a pandemic but countries should be “in a phase of preparedness”.
- Trump’s administration is asking Congress for $2.5bn in supplemental funding to battle the fast-spreading coronavirus. The funds would be deployed to develop, manufacture and distribute vaccines and treatments for US patients.
- The Fed’s Mester asserted although the coronavirus epidemic poses a threat to the US economy, it doesn’t yet justify any shift in monetary policy as it is still difficult to assess the magnitude of the economic consequences.
- Saudi Arabia’s energy minister Bin Salman disclosed OPEC hasn’t decided yet on whether to extend or modify its deal on output cuts as oil prices continue to grind lower amid intensified growth concerns.
- The PBOC will consider new measures to battle the coronavirus epidemic e.g. lenders will be encouraged to special loan quotas in a bid to step up support to the real economy, Bloomberg reported citing a central bank official.
- Today’s economic calendar contains US/French confidence data. A speech from Fed’s Clarida is due. Hungary decides over monetary policy. The UK, US, Italy tap the bond market. Spain is likely to issue a new 30y bond.
Currencies: Loss Of Interest Rate Support Weighs On USD Despite Risk-Off
Loss of interest rate support weighs on USD
The corona risk-off guided global FX yesterday, but parts of the market deviated from the standard script. Most striking, the dollar was in the defensive. The sharp decline in US yields reduced its relative safe haven appeal. The decline in USD/JPY wasn’t that surprising (close 110.72 from 111.61), but the USD also lost (modest) ground against the euro (1.0854 from 1.0847), which is in bad shape of late, as the Fed has much more room to cut rates than the ECB. Other risk-off repositioning was mostly in line with the standard script. Smaller, less liquid currencies suffered. The Swiss franc touched strongest level since 2015 against the euro, but EUR/CHF rebounded on suspected SNB interventions (close 1.0625).
This morning, Japan has to catch up on yesterday’s sell-off as it reopens after a holiday. The sell-off on Chinese markets slows. Korea rebounds and US equity futures also try a comeback after yesterday’s steep losses.
The yuan is trading slightly stronger (USD/CNY 7.0150). The dollar also bottoms is line with US yields (USD/JPY 110.80 area; EUR/USD 1.0850). Today, French business confidence and the details of German Q4 growth are on the agenda. In the US, consumer confidence (Conf. board) will be published. Data will probably be overshadowed by the corona-driven market dynamics. There might be an asymmetric risk for US consumer confidence, with the dollar being vulnerable to a negative surprise.
Yesterday, the USD struggled against other majors on the sharp decline in US yields. The latter can’t continue at the same pace even if markets maintain the view that the Fed will likely be forced to step in. Yesterday, we advocated that some more erratic (neutral) trading pattern in the likes of EUR/USD or USD/JPY as the corona story develops. Considering yesterday’s price action, we maintain that assessment. The EUR/USD technical picture deteriorated substantially of late, but the 1.0778 level survived. It’s too early to call of the EUR/USD alert, but the pressure is easing, at least temporarily.
Yesterday, sterling slightly underperformed both against the dollar and the euro. The risk-off and uncertainty on the UK-EU trade talks weighed on the UK currency. The market again anticipates BoE rate cut later this year to counterbalance the potential economic fall-out of corona. Today, the CBI retail data are expected solid, but we don’t expect them to change fortunes for the sterling. The ERU/GBP 0.8276 is a solid support. We expect more consolidation in the 0.8350/0.8450 range.
EUR/USD rebounds off 1.0778 support as dollar ‘suffers’ loss of interest rate support