• Rates: Resilience of risk rebound will be tested soon
    With US monetary and fiscal stimulus now maxed out and in place, it’s over to the economy. Monday’s risk rebound already faltered into the US close. Its resilience will be tested today with weekly jobless claims probably rising to astronomic proportions. The de facto yield curve control by the Fed suggests that US Treasuries are less vulnerable in case of new stress.
  • Currencies: EUR/USD testing 1.09 area. US jobless claims a potential USD negative?
    The dollar initially held strong yesterday but momentum faded later in the session. Today we look for more news on the fiscal response of the EU to the crisis. Further implementing the ESM/OMT construction might be OK for the euro. Of late, the dollar often profited from a risk-off context, but will this also be the case if it is triggered by awful US labour data?

The Sunrise Headlines

  • WS posted its first back-to-back gain (DJI, +2.39%) since the start of the coronacrisis as the $2tn rescue package appeared to (and did) get through Senate. The risk-on on Asian markets stalls with Japan underperforming (-4.5%).
  • ECB policymakers are said to be broadly in favour of unlocking the central bank’s hugely powerful OMT programme that allows the ECB to buy an unlimited amount of eurozone country’s sovereign debt.
  • The World Bank and the IMF called on creditors to offer immediate debt relief to the world’s poorest countries in the wake of the coronavirus pandemic as their health systems and public finances are already under mounting pressure.
  • German FM Olaf Scholz said the country pledges to use all its firepower to launch a “timely, targeted and temporary’ stimulus bill to kick-start economic growth once the coronavirus pandemic subsides, Bloomberg reported.
  • The South Korean (BOK) and South African (SARB) central banks wade into the territory of QE in an unprecedented intervention to stabilize financial markets and boost liquidity to financial institutions strained by the coronacrisis.
  • Ford was cut to junk by S&P and Moody’s. BMW was also downgraded by Moody’s with many other auto carmakers (GM, VW,…) on the watchlist as the coronacrisis creates an unprecedented and extensive shock to the industry.
  • In today’s economic calendar the US braces for a jump in jobless claims amid the fallout from the coronavirus. The BoE may take stock & EU leaders will hold a 2-day conference to discuss an action plan. Italy & US tap the bond market
  • Currencies: EUR/USD Testing 1.09 Area. US Jobless Claims A Potential USD Negative?

How will USD react to huge rise in jobless claims?

Yesterday, the dollar made a ‘remarkable’ intraday reversal. At first, USD strength coincided with an ongoing positive risk sentiment, supported by the massive fiscal and monetary efforts put in place in the US (and elsewhere).Currently it is not easy to understand intermarket links, but later in the session, the rebound in EUR/USD / correction of the USD at least coincided with a steepening of the US yield curve and interest rate differentials narrowing against the dollar. EUR/USD closed the session at 1.0882. USD/JPY closed the session little changed at 111.21.

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This morning, risk sentiment is again more fragile. There are now several fiscal and monetary lifelines in place, but it is often unclear how efficient they will be in addressing the disruption of the crisis. This also applies to the US. Whatever the driver, the yen this morning again looks like attracting some safe haven flows. USD/JPY is changing hands in the 110.65 area. EUR/USD hovers around 1.09.

With the Fed measures and the US fiscal package approved, FX markets today will look for other drivers. We look out for the US jobless claims and for the political/fiscal response of the EU leaders. In Europe, the political debate is focused on whether any help should come via combined ESM/OMT support lines or whether the EU response should be financed via corona-bonds. It is important that a decision will be taken. The ESM/OMT option, should be rather ok for the euro as it will be an efficient backstop for peripheral bond markets. In the US, we are very keen to see the reaction of global and US markets (including the dollar) on the US jobless claims. Of late, a risk-off market supported the USD. The jury is still out, but we are bit more cautious to simply expect this pattern to repeat if it is triggered by bad news on the US labour market and maybe investors doubting the viability of the US institutional framework to address this issue. Recently, we saw the 1.0880/1.09 area as a first topside EUR/USD resistance. The pair holding above that level due to negative news from the US would be significant/interesting.

Yesterday, sterling was initially supported by a better risk sentiment, with EUR/GBP even temporarily moving below 0.91. Receding optimism and the EUR/USD rebound caused EUR/GBP to close at 0.9166. Today, the BoE will probably leave its policy unchanged. Investors might look for hints on further BoE actions if they were necessary in the future. With sentiment turning more risk-off, EUR/GBP might again drift higher in the established range.

EUR/USD testing the 1.09 area. Jobless claims to be a USD negative?

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