The Fed reiterated its commitment at Wednesday’s policy meeting to keep policy extremely accommodative until its aim for inflation above 2% and maximum employment will be visible in hard data. Late last week, investors doubted that this would be enough to halt the protracted curve steepening. US yields held near recent peak levels. The rise in short-term maturities (5-y) only confirmed markets’ hesitation. At the start of the new week, markets found a new ST equilibrium. US yields even declined slightly. Still, it is no more than a tentative pause in a well-established uptrend. Eco data were few. Investors are looking forward to multiple speeches from Fed governors later this week, potentially giving some insight in the internal debate. US auctions also remain an important reality check for investor interest after the recent ‘cheapening’ of bonds. US yields are easing up to 3/4 bp for 10’s and 30’s respectively. It doesn’t even deserve the label ‘correction’, but helps to ease volatility on other markets. US equities are gaining modestly with the Nasdaq again profiting most from the calm on interest rate markets (+1.1%). European equities swing between gains and losses. Dutch ECB member Klaas Knot (on the hawkish side of the MPC spectrum), highlighted the temporary nature of accelerated ECB bond buying. If the EU makes good progress with the vaccinations, this could be good reason to start the debate on tapering bond-buying in the summer (also cf infra). The reaction of Bunds was modest. Still, they might partially explain today’s underperformance. The ECB last week stepped up its PEPP net bond purchases to € 21bln, however with little direct impact on today’s intraday price action. German yields decline up to 1.2 bp for 10 and 30-y respectively. 10-y intra-EMU spreads versus Germany widen marginally (1-2 bp).
EUR/USD struggled not to drift further in the 1.1990/1.1836 ST pattern recently on both underlying USD strength, but also euro softness. The EU fails to make decisive progress on the path to economic normalization as containment measures have to be kept in place or even reinforced and vaccinations continue to lag behind the likes of the US and the UK. Several countries including Germany preparing for additional measures suggest this narrative won’t support the euro anytime soon. Even so, global calm blocked further USD gains and helped EUR/USD regaining the 1.19 level (currently 1.1920). DXY is losing a few ticks (91.90). In a move similar to early last week, EUR/GBP also tries to move away from the 0.8540 area, changing hands near 0.8612. Discussion between the UK and the EU on exports of vaccines to the UK maybe provided a short-term trigger for profits on recent sterling gains. Even so, no meaningful technical barriers are challenged whatsoever. After the overnight self-off of the Turkish lira in the wake of the president Erdogan firing governor Agbal, EUR/TRY is looking for a new equilibrium in the 9.45 area. For now, there is no negative fall-out from the lira sell-off on other CE currencies like the zloty or the forint.
The Swiss National Bank’s (SNB) annual report showed that it spent CHF 110bn on FX interventions last year, the highest amount since 2012 (first full year of EUR/CHF 1.20 floor). The largest part of these interventions occurred earlier in 2020 with Q4 adding “only” CHF 9bn to the tally. SNB President Jordan is expected to stick to the view that interventions are possible at next week’s meeting even as the US labels the country as currency manipulator. The recent rise in global (real) yields managed to push EUR/CHF from 1.08 to north of 1.10, alleviating the pressure on the Swiss currency.
Dutch ECB governor Knot said that the discussions on how to unwind extremely accommodative measures could start later this year “if we make good progress with vaccinations. Knot is the first one to put a potential European tapering on the table even if the ECB in the short run decided to increase its buying pace. Knot clarified that the ECB wanted to prevent yield increases from being far ahead of the improvement in economic growth and inflation that they expect in the second part of this year.