• Rates: Fed funds discount negative US policy rates
    The Fed Funds future curve discounts (marginally) negative US policy rates from the end of the year until the end of 2021. This historic shift boosted core bonds with US Treasuries outperforming. We expect it to remain centre of attention. US payrolls will be terrible today. Moody’s might tonight decide to cut Italian debt to junk.
  • Currencies: dollar losing further interest rate support, but euro hardly profit
    The (trade-weighted) dollar corrected lower yesterday on a positive risk sentiment and on a sharp decline in US yields. However, the euro hardly profited. Institutional uncertainty weighs on the single currency. The US payrolls as such won’t be USD supportive. Even so, EUR/USD gains remain difficult as the market watches the Moody’s credit assessment on Italy

The Sunrise Headlines

  • US equity markets rose yesterday. The Nasdaq (+1.41%) outperformed and now erased all previous year-to-date losses. Asian markets rally after constructive US/Sino trade talks. Japan (+2%) outperforms.
  • Chinese VP Liu He and USTR Lighthizer held trade talks via telephone during Asian trading hours. Lighthizer afterwards said that both parties agreed that “good progress” has been made in the process of fulfilling the trade deal.
  • In a first public speech after the German court ruling, ECB’s Lagarde said she’s “undeterred” to deliver on the central bank’s mandate, adding that the ECB is an independent institution that answers only to the European Parliament.
  • Podemos leader and Spain’s deputy PM Iglesias warned that partial debt mutualisation in the EU is required for the block to continue to exist. He also joined Italy and Portugal in calling for a EU wide minimum income.
  • Portugal extended a housing measure that limits landlords in ending lease contracts. It earlier suspended rents for vulnerable households and small firms until June. Housing associations fear accumulating debt by tenants to landlords.
  • US Fed fund futures hinted at (marginal) negative rates by the end of 2020 yesterday. However, Fed’s Barkin later commented he does not see it “worth a try” in the US, instead relying on the central bank’s balance sheet capacity.
  • Today’s economic calendar contains US April payrolls with an expected job loss of 22 million and a double digit unemployment rate. Canada’s April labour report is also due. EU finance ministers meet. Moody’s bows over Italy’s rating.

Currencies: Dollar Losing Further Interest Rate Support, But Euro Hardly Profit

USD loses interest rate support. Euro hardly profits

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The euro faced rather strong headwinds this week as a ruling of the German Court might curtail the ECB to execute a flexible crisis response. EUR/USD still set a minor correction low below 1.08 early in US dealings yesterday. From there a gradual intraday come back kicked in, partially inspired by sharp decline in US yields. EUR/USD closed at 1.0834. Even so, the performance of the euro remains disappointing given the overall USD correction. The intra-day USD/interest rate reversal also pushed USD/JPY off the intraday top to close the day at 106.28.

This morning, sentiment on risk remains constructive as US and Chinese officials agreed to implement the Phase 1 trade deal in a constructive way and are prepared to cooperate on topics like health. The dollar eases slightly further (DXY at 99.75). The yuan strengthens (USD/CNY 7.750 area). USD/JPY shows no clear trend (106.40). The Aussie dollar remains well bid as the government announced an easing of the corona restrictions in a three phase approach (AUD/USD 0.6530 area).

Today, the going risk-on sentiment will still remain an important driver for FX as US-China tensions are easing, at least for now. Regarding the data, the US economy is expected to have lost about 22 mln jobs in April which might raise the unemployment rate to 16.0%. However, markets of late mostly took negative data in its stride, focusing on the reopening of the economy. Even so, it can’t be considered good news for the dollar and should keep US yields low. On the euro side of the story, investors will keep a close eye at Moody’s review of the Italian credit rating (now Baa3). A cut to junk might cause further stress on EMU bond markets and won’t help the euro. Yesterday, the EUR/USD decline slowed, but the picture remains unconvincing. We don’t expect a sustained rally short-term. In case of a Moody’s downgrade, a return to the bottom of the 1.0737/1.1018 range might be on the cards.

Sterling initially held up well after the BoE policy decision yesterday. EUR/GBP retested the 0.87 area. However, sterling soon came under pressure both against the dollar and even against the euro. A persistent stalemate in the UK-EU trade talks and the UK lagging in the restart of the economy prevents further sterling gains. A euro correction due to a Moody’s cut off the Italian credit rate will also be visible in EUR/GBP even so 0.8685/0.87 remains a strong support

EUR/USD rebound remains unconvincing. Risk of Italian rate cut might continue to weigh


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