This week’s trading continues to be choppy in nature. European equity markets were looking against losses of up to 0.5% until the more positive start of US bourses. Core bonds hardly profit from the mild risk-off European environment, but do face some pressure as US investors get involved. US yields add up to 2.5 bps (30-yr), steepening the curve. German yield increase by up to 2 bps with the belly of the curve underperforming the wings. The dollar finds a better bid in the FX market. Underlying dynamics show that the decline in the US 10y real yield paused today. The divergence between sliding real yields and rising inflation expectations is the greenback’s biggest weak spot. Today’s better performance implies that the jury is still out on key dollar technical levels. More specifically we eye EUR/USD 1.1696 and DXY 94. Last week’s technical breaks, respectively below and above, are at both risk of being erased. Today’s US eco data, including positive surprises from ADP employment change (+749k vs +649k expected) and September Chicago PMI (62.4 vs 52.0 expected) fail to give the US currency additional momentum. The dollar could still be reflecting on yesterday’s chaotic first presidential debate between Biden and Trump which had more of cage fight than of an intellectual sparring. Democrats and Republicans also remain way at loggerheads over additional fiscal stimulus. Both factors could hamper the dollar even if risk sentiment falters. The single currency has its own issues. ECB Chair Lagarde said at the ECB’s Watchers conference that the central bank could also adopt a new inflation target after it concludes its internal policy review somewhere next year. The US Federal Reserve recently changed its 2% inflation target in an “average 2%” target, allowing for an inflation overshoot before normalizing policy to compensate for past sub-par inflation. Lagarde finally managed to leave high-level comments on the euro behind. We had the impression that those verbal interventions worked counterproductive with markets well aware about the central bank’s limited policy space to walk the talk. Other comments included  ECB Rehn’s depressed inflation outlook (“rate increases not even at the horizon”) and ECB Muller’s slow recovery warning. A weaker euro weighs marginally on EUR/GBP as well. The pair drifts from 0.9150 to the low 0.91. We also retain comments by Bank of England chief economist Haldane who dismissed near term negative interest rates, saying technical work will likely take months.

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Belgium has formed a new federal government. It has been 16 months since the elections shook up the political landscape in both sides of the country’s language barrier with the coronavirus complicating and eventually temporarily halting difficult coalition talks. The liberal De Croo is elected as new PM and will replace the caretaker Wilmes administration with a 7-party government known as Vivaldi as soon as tomorrow.

Turkey announced some measures that might signal an easing of market restrictions and a step to toward normalization on financial markets. The country reduced the tax on retail purchases of foreign currency to 0.2% from 1.0%. Residents holdings of foreign currency holdings stood at a near record high of $218.1 bln mid-September.  The government also reduced the withholding tax on Lira deposit accounts. The move might encourage savings in domestic currency. The lira rebounded after recent steep losses. EUR/TRY is trading in the 9.10 area from a peak around 9.21 yesterday.

According to sources, the World Trade Organization in a new ruling is authorizing the EU to impose tariffs on $4 bn of US exports in order to compensate for illegal government aid provided by the US government to Boeing. Washington already started imposing tariffs on $ 7.5 bln of imports from the EU after a similar WTO ruling on Airbus. Question now is whether the EU will start imposing tariffs before the November 3 US presidential election, which could intensify trade tensions between the two economic blocs.


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