Markets
After a spectacular Asian trading session, especially on currency markets, things turned a bit more indolent throughout European dealings. For the dollar, the new month is more of same with the shunned greenback losing against all but two of the G10 currencies. This morning’s series of high profile technical breaks hold but, for now at least, the dollar is able to prevent follow-up losses. EUR/USD jumped towards the 1.20 big figure, clearing the 1.1966 hurdle convincingly and traded within a narrow sideways pattern afterwards in the high 1.19 area. An attempt to capture 1.20 at the start of US dealings didn’t succeed but that’s probably just a matter of time. The trade-weighted USD’s mirror image developed in the 91.8 area after giving up support near 92.13. USD/JPY would like to retake the 106 big figure but fails to do so currently (105.91). Sterling staged an impressive, largely technically driven rally to the euro (spill-over effects from cable). EUR/GBP reversed an early upward trend to test the 0.89 support. That’s down from 0.893 this morning. Dollar weakness pushed cable higher once more. GBP/USD is filling bids in the 1.346 zone. We’ll be watching closely for the 2019 high at 1.3514. If breached, it could exert more downward pressure on EUR/GBP as stop-loss orders for sterling shorts are most likely to get triggered. Core bond markets are little inspiring. The German Bund slightly outperforms USTs in the wake of disappointing EMU inflation data. Prices in August unexpectedly declined at a rate of -0.2% y/y. It’s the first negative reading since 2016. Core inflation fell to 0.4% y/y (vs. 0.8% expected), the slowest pace since the creation of the EMU. There are a few statistical reasons explaining the strong decline, including a German VAT reduction and postponed discounting during summer sales. That said, the numbers do highlight the ECB’s apparent inability to push inflation higher despite massive stimulus programmes and the strong rebound of the EMU economy in the third quarter. The latter is also the case for Germany, which for that reason adjusted its growth forecasts accordingly (see headline below). The German yield curve bull flattens nonetheless, with the move starting after the HICP release. Yields decline 1.8 bps (2-yr). Peripheral spreads vs. Germany’s 10y yield narrow up to 3 bps (Italy) with Greece the exception to the rule. Greek spreads rise after the country announced a mandate for a syndicated tap of an existing 1.50% June 2030 bond. US bond yields’ marginal rise halted in lockstep with Germany’s to trade just 1 to 2 bps higher at the long end of the curve.
News Headlines
The Czech economy contracted 8.7 Q/Q and 11% Y/Y in Q2. A decline in foreign demand accounted for 7.9 percentage points of the drop with household consumption contributing another 2. A slight positive contribution came from general government expenditure (0.4 pp). According to the Czech central bank, economic activity in the coming quarters will continue to be dampened by lower external demand, a marked rise in unemployment and generally worse perception of the economic situation among Czech firms and households. The koruna temporarily gained a few ticks this morning, but EUR/CZK currently trades little changed in the 26.22 area.
The German government expects the economic decline due to the coronavirus to be less severe than earlier expected. Output is expected to shrink by 5.8% this year, compared to a forecast for a contraction of 6.3% in April. German Fin Min Altmaier said that the more moderate decline was an important sign that the country managed to stabilize domestic demand and decouple to a great extent from the global economic developments. In this respect, exports are expected to drop by 12.1% this year compared with a decline of 8.1% for imports and 3.6% for domestic demand, indicating that the economic rebound will be less depend on exports.
