Technical considerations and risk sentiment coloured yesterday’s trading session. German bond yields fell, weighed down by soft (PEPP) comments by ECB executive board member Panetta. The curve bull flattened quite substantially with yields up to 4.7 bps (30y) lower. The 10y yield (-0.205%) finished at the February interim high support, a key level that has to hold for the downside alert to be called off. Peripheral spreads were left unchanged. Treasuries underperformed, remarkably enough in the wake of a solid 5y auction. Fed governor Quarles in a speech yesterday signaled he’s open to starting the tapering debate if the economy remains strong, adding he sees medium-term risks weighted to the upside. His comments only came after the UST down leg though. Anyway, US yields by the end of the day rose 0.7 bp (2y) to 1.7 bps (10y). A mixed risk sentiment and rising interest rate differentials supported a minor USD comeback. EUR/USD failed to extend gains after Tuesday’s break north of 1.2243 and instead turned south in a technical move that brought the pair sub 1.22 again. DXY support at 89.68 survived (closed at 90.05). Sterling managed a first advance vs. the euro for the week. A UK government spokesperson saying local lockdowns aren’t ruled out only hurt the pound temporarily. EUR/GPB fell from 0.866 to 0.863.
Asian-Pacific markets trade mixed this morning. The Bank of Korea upgraded growth and inflation forecasts but the SK won isn’t impressed. RBNZ Governor Orr repeated the central bank could start raising rates from 2H 2022 onwards during a radio interview. The kiwi dollar for a second day straight is the top G10 performer. Other currency moves are extremely limited in quiet trading. EUR/USD faded a move lower but remains south of 1.22. Core bonds trade flat.
The US remains in focus today with a $62 bln 7y auction, April durable goods orders and the weekly jobless claims. We doubt though whether they will be pivotal for trading. The overarching feeling over the past few days is one of doubt and not knowing where to go from here. In the run-up to the long US weekend (May 31, Memorial Day) we don’t expect to see large directional moves. Both US and German (10y) yields are near or have hit first support levels. These should hold as long as the big picture of the economic reopening remains intact. The dollar’s downside got a little more protection after yesterday’s price action. That said, we see no reason for a protracted USD revival either. EUR/USD touched 23.6% Fibonacci support (Nov 20 -” Jan 21 upleg) near 1.217 this morning. Some sideways consolidation might be in the making. EUR/GBP continues a choppy upward sloping path.
The Bank of Korea as expected today left it policy rate unchanged at 0.5%. At the same time, the bank raised its growth outlook for this year from 3.0% to 4.0%. The inflation forecast was upwardly revised from 1.3% to 1.8%. A continuation of the economic rebound might cause the BoK to prepare for gradual policy normalization. ‘We have eased our monetary policy to an unprecedented level, and it’s natural that we should adjust these measures as appropriate if the economic situation improves”, governor Lee said.
Overnight, US Trade Representative Katherine Tail and China Vice Premier Lui He held had a telephone conversation discussing difference in trade between the two countries. In a statement, the US said that both parties discussed ‘the guiding principles of the Biden-Harris administration’s worker-centered trade policy and her ongoing review of the U.S.-China trade relationship, while also raising issues of concern.’ According to sources, China in preparatory talks stressed the need of rolling back tariffs as an important factor of next steps in the relationship between the two countries. The Biden administration is conducting a review of its China trade policy as the Phase 1 deal reached early 2020 will expire at the end of 2021. Under the deal, China agreed to increase $200 bn of goods and services over 2020/21.