- Rates: Selling pressure on core bonds persists
Buoyant risk sentiment, higher oil prices and a positive surprise from US payrolls made selling pressure on core bonds persist. The German 10-yr yield pierced final resistance, suggesting a return to the YTD high. We might see some supply-driven underperformance of US Treasuries today. - Currencies: Strong US payrolls putting a floor for the dollar
The risk rally continued last Friday. An unexpected rise in US employment pushed core yields higher and triggered a ‘data driven’ USD rebound. More technical trading USD trading might be on the cards going into Wednesday’s Fed policy decision as markets ponder the need for additional Fed stimulus
The Sunrise Headlines
- Wall Street soared up to more than 3% (DJI) after Friday’s blow-out payrolls. The Nasdaq hit a new record high intraday. Asian stocks trade well in the green. India (+1.5%) outperforms.
- China’s trade surplus widened after imports fell -16.7% y/y in May while exports declined a less-than-expected 3.3% y/y after a 3.5% rise in April. The export data suggests weakness in external demand is starting to kick in
- OPEC+ agreed on Saturday to extend the historic output curbs by a third month until end of July after ironing out differences with countries such as Iraq. Oil prices rise almost 2% (Brent $43/b).
- New Zealand’s PM Ardern said that all restrictions in the country will be lifted except for the borders curbs. New Zealand reported zero coronavirus cases for the first time since February 28.
- US president Trump threatened with possible tariffs on the EU car sector and other unspecified Chinese products if both parties do not lower their duties on US lobsters immediately.
- Polish central bank member Zyzynski said the bank’s easing cycle has ended after the latest unexpected rate cut. Zyzynski said they didn’t discuss negative rates and said the MPC isn’t considering any other unconventional measures.
- Today’s economic calendar is basically empty with only secondary data due in the EMU. ECB’s Lagarde appears in a hearing before the European Parliament. The US taps the bond market
Currencies: Strong US Payrolls Putting A Floor For The Dollar
Data-driven USD rebound
The continuation of the global risk rally initially kept the USD in the defensive on Friday. The euro still profited from further coordinated EMU stimulus after the ECB raised bond buying more than expected, further reducing intra-EMU bond spreads. Gradually, the dollar decline halted ahead of the US payrolls report. US employment unexpectedly rebounded by 2.5 mln while a further 7.5 mln job loss was expected. The report accelerated the equity rally, but this time the better prospect for the US economy and the rise in core/US yields caused a data driven USD rebound. EUR/USD finished at 1.1292 (1.1338 on Thursday). USD/JPY closed at 109.59 (from 109.15)
This morning, Asian equities gain modestly in the wake of Friday’s WS rally. A rise in oil supports some regional markets too. The China trade surplus rose sharply as exports decline less than exports. The yuan (USD/CNY 7.0850) stabilizes off recent lows against the dollar. AUD/USD again tested the 0.70 area this morning, but the test is rejected (0.6970 area). EUR/USD for now fails to regain the 1.13 level. USD/JPY eases slightly after Friday’s post-payroll spike (currently 109.45 area).
Today’s eco calendar is thin. German April production will show the full impact of the corona crisis but are outdated. Later this week, the eco calendar remains moderately interesting, with Wednesday’s Fed decision probably the key topic for (FX) trading. The Fed will reconfirm its commitment to support the economy as necessary. However, Friday’s strong payrolls (and some other constructive data of late) and easy monetary conditions due to the risk rally reduce the need for aggressive action in the very near future. This might pause the USD downtrend.
Of late, EUR/USD moved from the lower to the higher section of the 1.0727/1.1495 MT range. The strong payrolls blocked the EUR/USD rally. Some consolidation might be on the cards with EUR/USD 1.1133 (38% retracement since 1.0727) a first important support which should hold to keep the EUR/USD picture constructive MT.
On Friday, sterling succeeded a remarkable rebound. EUR/GBP dropped from the 0.90 area to the 0.89 area. The UK and EU didn’t make progress in latest round of Brexit negotiations, but some comments indicated that both parties continue to try finding common ground. Friday’s GBP rebound probably says more on the market positioning rather than on any Brexit progress. Some most further technical EUR/GBP correction might continue, but we don’t expect to move to have strong legs.
EUR/USD: rally blocked after strong USD payrolls.
