- Rates: Fears of fresh US lockdowns hurts risk sentiment
US stock markets lost up to nearly 7% yesterday as several important US States see COVID-19 infection rates rising. Some ponder the need to install new stay-at-home orders. Core bonds thrived with US Treasuries outperforming. We’re inclined to err on the side of caution even if Asian risk sentiment improved somewhat this morning. - Currencies: dollar rebounds on risk-off correction, but for how long.
The dollar finally again attracted some safe haven buying interest as equity sold-off sharply. However, some calm already return in Asian trading this morning. For EUR/USD, quite some good news is probably already discounted for the euro, but we expected underlying USD softness to persist. EUR/USD 1.1240/60 is first relevant support.
The Sunrise Headlines
- US equities finished the worst day since the violent March sell-off up to 6.90% (DJI) lower amid fears for a second wave of the coronavirus. Asian stocks also trade in red though well off intraday lows. South Korea (-2.3%) underperforms.
- US Treasury Mnuchin said that the US shouldn’t shut down its economy again if there is second spike of infections. That decision is up to regional authorities though. Houston (Texas) already said it may reimpose stay-home orders.
- Governor Lee said the SK central bank should be prepared to gradually normalize the unprecedented steps it took once the coronavirus crisis eases, adding though that policy will stay accommodative until the economy recovers.
- EU member states have agreed to sign off on a so-called prudential filter that temporarily frees banks of taking a hit to their capital ratios and thus lending capacity in case of losses on their government debt portfolios.
- The UK will temporarily introduce a minimal customs regime at the EU borders next year to avoid additional pressure on its businesses, whether they reach a trade deal by end 2020 or not, dropping earlier plans of full border checks.
- Australia’s Chief Medical Officer said the country has eliminated Covid-19 in many parts as it registered just 38 cases over the past week. Australia has had around 7 300 cases and 102 casualties.
- Today’s economic calendar contains the US Michigan consumer sentiment for June. The UK and EMU release a slew of (outdated) industrial and manufacturing production figures.
Currencies: Dollar Rebounds On Risk-Off Correction, But For How Long
USD profit from risk-off but for how long?
Yesterday’s global trading finally resulted in an outright risk-off session. A series of negative assessments on the global economy (OECD) and the fear for a new wave of coronavirus in the US triggered an aggressive equity correction. Initially, the risk-off hardly helped the dollar. EUR/USD hovered in the upper half of 1.13. Even headlines on French president Macron considering snap presidential elections at first didn’t hurt the euro. Mounting losses on US equities (5-7%) finally caused a safe haven run on the dollar. EUR/USD longs threw in the towel. The pair closed at 1.1299. The yen (slightly) outperformed (USD/JPY close at 106.87). Smaller less, less liquidate currency also fell prey to profit recent rally.
This morning, Asian markets feel the heat of the WS sell-off, but losses are more contained and regional indices regain ground as the session develops. The nature of this ‘rebound’ is uncertain. Even so, USD/JPY already succeeded a nice intraday up-tick (currently 107.20). The Aussie dollar was hit hard yesterday, but tries to build a bottom in the 0.6800 area (0.6850 area). The corona virus is eliminated in several parts of the country, paving the way for a further reopening of the economy.
Today’s US Michigan consumer confidence is interesting given current fear of a new wave of the virus. Even so, global sentiment will be the main driver after yesterday’s sharp equity sell-off. Headlines on the development of corona in the US might still sent shivers through markets but we expect the intensity of the sell-off to ease rather soon. If so, yesterday’s EUR/USD sell-off might slow, looking for a bottom. Earlier this week, the recent impressive EUR/USD rally finally showed signs of fatigue and yesterday’s risk-off was a good reason for profit taking. On the euro side of the story, quite some good news is probably discounted. However, we expect the trend of underlying USD softness to persist. A first support comes in at EUR/USD 1.1240/60. A return below 1.1157 (38% retr) would question the EUR/USD uptrend, but we don’t expect that to happen.
Sterling suffered of the overall risk-off yesterday with EUR/GBP retesting the 0.90 area. However, some headlines on tentative goodwill in the UK-EU negotiations eased sterling selling. Today’s UK April production data will be poor. In a risk-on context EUR/BGP might return lower in the 0.8860/0.90 range, but the downside remains tough.
EUR/USD looking for a bottom after yesterday’s risk-off correction
