- Rates: Fed governors to rule out possibility of negative rates
US Treasuries continued their supply-related underperformance ahead of tonight’s 10-yr Note sale. The eco calendar remains thin, but Fed governors will be grilled on the fact that the Fed Funds Future curve discounts (marginally) negative rates in 2021. We expect Fed members to categorically rule out the possibility. - Currencies: Uncertainty on easing of UK lockdown measures weighs on sterling
The dollar mostly outperformed yesterday as risk sentiment turned more cautions and as (LT) yields rose. EUR/USD drifted back sought to the 1.08 area. A brief dip lower this morning was easily reversed but the EUR/USD picture remains fragile. Sterling underperformed as the UK government failed to bring a clear message on the restart of the economy
The Sunrise Headlines
- US equities ended mixed with the DJI down 0.45% but the Nasdaq 0.7% in the green. Most Asian-Pacific markets print declines. Australia (-1.7%) underperforms amid increasing trade tensions with China.
- China suspended meat imports from four Australian companies that make up 35% of the country’s beef exports to China. Tensions between the two escalated recently as Australia called for a probe into the origins of the pandemic.
- WH advisor Kudlow and National Security Advisor O’Brien wrote to the Labor Secretary that they don’t want him to invest the government retirement fund in a fund that tracks Chinese stocks, calling it “risky and unjustified”.
- State governor Cuomo declared the critical phase of the virus in New York over and laid out plans for a phased reopening beginning on Friday. NY will be divided in 10 regions and will have to satisfy seven criteria before opening.
- Several Fed officials downplayed the potential use of negative rates. Chicago Fed’s Evans said he’s not anticipating them while Bostic from Atlanta sees sub-zero rates as one of the “weaker tools in the tool kit”.
- Germany’s main business organisation (BDI) in a paper jointly issued by its Italian and French counterparts called for more “fiscal solidarity”, adding that the pandemic risks collapsing the EU export market, affecting all member states.
- Today’s economic calendar contains US April NFIB small business optimism and CPI data. A slew of Fed and ECB speeches are due. Germany and the US tap the bond market
Currencies: Uncertainty On Easing Of UK Lockdown Measures Weighs On Sterling
EUR/GBP tries to rebound off 0.87 support
Global sentiment turned more cautious yesterday. Uncertainty on the pace of the easing of lockdown measures worldwide dented risk appetite. The dollar was in good shape with trade-weighted USD (DXY) regaining the 100 mark. The yen was a remarkable underperformer after a solid performance of the Japanese currency of late. The USD/JPY rise accelerated as US yields jumped higher later in USD dealings (close 107.66). EUR/USD drifted to the low 1.08 area. Overall USD strength and the political bickering on the ruling of the German Court on the ECB PSPP programme kept EUR/USD in the defensive (close at 1.0807).
This morning, Asian markets also started in cautious risk-off mode. Investors ponder the consequences of new local outbreaks of the corona virus. Early in Asian trading, the Aussie dollar lost half a big figure as China suspended imports for meat from four Australian abattoirs, raising fears for trade tensions to flare up. However, the move was rather easily reversed later AUD/USD is again trading in the 0.6480 area. The yen regains some ground after yesterday’s setback (USD/JPY 107.40 area). EUR/USD dropped temporarily to the 1.0785 area (AUD-driven?) but also reversed its decline (currently 1.0815).
Today, the US NFIB small business confidence and the CPI data are interesting but probably with no lasting impact on trading. Several Fed governors will speak. Given recent market pricing of negative FF rates, markets will look for clues whether negative rates are indeed an option for the Fed. For now we don’t expect the Fed to give a clear sign in that direction. The US 10-y bond auction is a wildcard. Question is whether higher yields due to big supply should be seen as USD supportive. Last week, EUR/USD dropped below 1.08 after the German court ruling, but the 1.0727 correction low was left intact. Institutional issues probably will continue to cap any sustained euro rebound. We expect EUR/USD to hold in the lower part of the 1.0727/1.1018 trading range for now.
Sterling underperformed yesterday. EUR/GBP was propelled higher to test the 0.88 area. Confusing communication of the UK government on the easing of the lockdown and persistent headlines on the stalemate in the UK-EU trade negotiations were negatives for sterling. EUR/GBP closed at 0.8762. There are no important UK data today. The EUR/GBP 0.87 area proved to be quite a solid bottom of late. Some further EUR/GBP gains are possible short-term.
EUR/USD holding tight range. Picture remains fragile
