- Rates: Improvement on bond markets improves ahead of FOMC
Core bonds found some vigor after last week sell-off as investors count down to tomorrow’s FOMC meeting. Fed Chair Powell repeated on several occasions that the US central bank is ready to add stimulus if necessary. The US central bank is supposedly looking into putting yield curve caps in place (at September FOMC meeting). - Currencies: EUR/USD rally taking breather. USD/JPY guiding USD lower
The USD trading showed a different pattern compared to last week. The EUR/USD rally took a breather even as sentiment on risk stayed constructive. At the same time, USD/JPY fell prey to profit taking at least partially inspired by a modest correction in US yields. Today, more technical trading ahead of tomorrow’s Fed meeting might be on the cards.
The Sunrise Headlines
- WS ended again well in the green. The DJI (+1.7%) outperformed, the S&P500 turned positive YtD and the Nasdaq set a new all-time high. Most Asian markets trade positive. Japan underperforms as the yen continues to strengthen.
- During her hearing, ECB president Lagarde defended her crisis initiatives, saying that the net effects are “overwhelmingly positive”, adding that the pandemic tools are “temporary, targeted and proportionate”.
- The Fed expanded its Main Street Lending Programme so that more companies are eligible by lowering the loan minimum. It also lowered the share of the loan banks are required to hold on their balance from 15% to 5%.
- The World Bank projects economic output to contract 5.2% in 2020 due to the coronavirus with risks tilted to the downside. It expects advanced economies to shrink 7% while EM will print their first 2.5% contraction since 1960.
- North Korea will close a liaison office shared with South Korea and dismantle other official communication including a hotline between the leaders after SK activists sent leaflets critical of Kim Jong Un across the border.
- The UK reported the lowest number of daily deaths due to the coronavirus since the lockdown. PM Johnson will present further restriction-easing plans to his cabinet later today, probably reaffirming the reopening date of June 15.
- Today’s economic calendar contains NFIB Small Business Optimism and job vacancies (April data) in the US and the final EMU GDP reading. Germany and the US tap the bond market.
Currencies: EUR/USD Rally Taking Breather. USD/JPY Guiding USD Lower
EUR/USD in consolidation modus
The overall USD performance was a bit diffuse/ambiguous yesterday even as the global risk rally continued. US equities extended their recent uptrend with the Nasdaq even setting a new all-time top. Even so, the dollar initially stayed rather well bid in the wake of Friday’s better than expected US payrolls while US yields held near recent peak levels. Later, the (trade-weighted) dollar lost modest ground. The USD decline coincided with further equity gains. Remarkably, it was mainly driven by a setback in USD/JPY and an intraday decline in US yields. USD/JPY closed at 108.43 (from 109.59 on Friday) despite the risk-on. At the same time, EUR/USD held a rather tight sideways consolidation pattern around the 1.13 pivot (close 1.1294). EMU yields declining faster than US ones might have been part of the explanation.
Yesterday’s trends mainly continue this morning. Asian equities mostly trade in positive territory (Japan is the exception). Core/US yields are easing slightly further. USD/JPY continues drifting lower and is testing the 108 big figure. AUD/USD again tried to regain the 0.70 barrier, but no sustained break occurred yet (currently 0.6995 area). NAB confidence data show signs of a gradual improvement as the impact of corona on the economy eases. The yuan holds a cautious positive bias (USD/CNY 7.0730). EUR/USD is holding near 1.13.
Today, the US the NFIB small business confidence is interesting, but is seldom a mover for USD trading. Yesterday, the EUR/USD rally lost some momentum after Friday’s US payrolls. For now, the correction is modest. We expect more technical trading ahead of tomorrow’s Fed decision. The Fed will reconfirm its commitment to support the economy. Even so, will it be enough to further sustain the risk rally and the USD down-leg? In a short term perspective, we turn a bit more neutral. EUR/USD moved from the lower to the higher part of the 1.0727/1.1495 range, but this move was blocked on Friday. Some consolidation might be on the cards with EUR/USD 1.1133 (38% retr since 1.0727) a first support which should hold to keep the EUR/USD picture constructive MT.
EUR/GBP returned temporarily north of 0.89, but the risk rally finally help the UK currency to reverse earlier losses. EUR/GBP closed at 0.8875. This morning, BRC retail sales printed rather strong. There are no other UK data today. Yesterday’s sterling performance wasn’t too bad. However, with risk rally maybe taking a breather an a persistent stalemate in the Brexit talks we consider EUR/GBP rather well protected.
EUR/USD: in consolidation modus ahead of Fed policy decision
