- Rates: Rising inflation expectations weigh on long end of core bond curves
The (very) long end of core bond curve continues to suffer even as the ECB expanded and extended its Pandemic Emergency Purchase Programme. A bottoming out of inflation expectations is currently the main trigger. The US 10-yr yield exited its narrow trading range of the past two months by turning north of the 0.78% handle. - Currencies: ECB stimulus propels euro
In theory aggressive monetary stimulus is negative for a currency. However, markets currently embraces all policy action to support growth. In this context, the bigger than expected ECB stimulus propelled EUR/USD in the MT trading range. Today, the focus turns to the payrolls. As long as the risk rally continues, there is little reason the row against the USD downtrend
The Sunrise Headlines
- Wall Street had an off-day yesterday, snapping a multi-day winning streak in some indices. The tech-heavy Nasdaq (-0.69%) underperformed. Asian stocks trade fairly muted and mixed. South-Korea outperforms (+1.5%).
- The Trump administration is increasingly hinting at another round of fiscal spending which could go as high as $1 tn. Officials said a decision on the matter isn’t likely not to happen before next month however.
- Russia and Saudi Arabia struck a tentative deal with Iraq – who had been defying its production cut target – paving the way for an extension of current output curbs until July. OPEC+ could meet as soon as this weekend.
- Australia will implement a new strict screening regime on foreign investors seeking to buy sensitive assets in telecom, energy, technology and defense-manufacturing companies. The country’s treasurer will have last-resort powers.
- Finland rejects the EC’s proposal to a recovery fund in its current form. It wants to reduce the share of grants while increasing the loans’ and cut the overall size of the package as well as the duration and repayment time.
- The final round of a four-week-streak in Brexit talks ends today, probably without an agreement despite the June 30 deadline looming. Both parties fail to overcome differences on matters such as a level playing field and fishing waters.
- Today’s economic calendar contains May US payrolls. Although the coronavirus impact on the labour market peaked in April, expected job losses amount to a further 7500k, pushing unemployment almost to 20%.
Currencies: ECB Stimulus Propels Euro
ECB stimulus propels euro
Since half May, an acceleration in the risk rally caused a protracted USD correction. At the same time, sentiment on the euro also improved as the EU made progress toward coordinated stimulus. Yesterday’s ECB decision further tilted the balance to euro strength. EUR/USD lost a few ticks in the run-up to the decision. In theory, aggressive monetary easing is negative for the euro. However, markets embrace any attempt of monetary and fiscal support to growth. In this respect, the bigger than expected ECB PEPP bond buying was seen as Europe starting a catching up move to more stimulus. EUR/USD jumped beyond 1.1292 resistance and closed at 1.1338. The rise in LT US and EMU yields continued to weigh on the yen. USD/JPY closed north of 109. EUR/JPY also jumped higher to close at 124.74, the highest level in more than a year.
This morning, Asian equities mostly show modest gains, with China underperforming and South Korea outperforming. The yuan strengthens below USD/CNY 7.10 but continues to trade relatively soft. The Aussie dollar is nearing the 0.70 level ( 0.6970 area). USD/JPY stabilizes in low 109 area. EUR/USD maintains yesterday’s gain (1.1345).
Today, investors will still ponder the impact of yesterday’s ECB action, but the focus will turn to the US payroll. ADP job losses were lower than expected and this might also be the case for the payrolls (expected decline of 7.5 mln in May). However, the reaction of the dollar to data recently wasn’t that clear/consistent. Better data might support risk rally and in this respect it shouldn’t help the dollar much.
Over the previous weeks, EUR/USD moved from the lower to the higher section of the 1.0727/1.1495 MT range. After yesterday’s ECB-inspired rally, a big part of the good news for the euro might be discounted. If so, further EUR/USD gains have to come from a further USD decline. We think that the risk rally has already gone quite far. Even so, there is no trigger to go against the USD corrective trend now. So, EUR/USD might keep recent gains with 1.1495 next topside reference on the charts.
EUR/GBP followed the rise of the euro although sterling performed well against the USD. EUR/GBP closed at 0.90. The positive risk sentiment in theory is not that bad for sterling. At the same time, the latest round of the Brexit negotiations not yielding a positive outcome continues to cloud the overall picture. We don’t expect a ST rebound of sterling against the euro short term
EUR/USD jumps on ECB policy stimulus
