The fall-out from yesterday’s risk-off session was most apparent on core bond yields and the euro. The former declined 3 (30y) to 7.8 (2y) bps in the US. Bunds outperformed strongly, shedding more than 14 bps in the middle segment of the curve.
There was a striking difference though: the US decline was driven by inflation expectations whereas real yields were at work in Europe/Germany. This hammered the common currency vs an almighty dollar.
EUR/USD fell almost 2 big figures intraday. The close at 1.038 brings the 2017 low of 1.0341 awfully close. DXY finally took out the 104 barrier (104.85). It thus already surpassed the parallel 2017 high to finish at the strongest level in almost two decades.
The Japanese yen was the only one able to stand up against USD supremacy. USD/JPY eased to 128.34. Against the euro, well … EUR/JPY lost 3.5 big figures in the biggest one-day slide since 2016. The pair closed at 133.22.
Even sterling eked out gains vs the euro. EUR/GBP rose above 0.86 following slightly weaker-than-expected UK Q1 GDP numbers but that move quickly reversed. The couple finished in the low 0.85 area.
On other markets, European equities cut their losses to just 1% while WS ended mixed. Oil prices recovered from early weakness to end flat (Brent $107.45/b). The likes of wheat soared 6% in a sudden surge during US dealings.Stocks in the Asian region lick their wounds after some rough days. Gains mount to 2% (Japan, Hong Kong) and more. Equity futures indicate a 1% open in the green for Europe and the US. Core bonds take a breather after an immense surge. US yields add 2.4-3.3 bps. The Japanese yen is this morning’s biggest loser, followed by the USD. U. of Michigan consumer confidence for April is due in the US today. A retreat from 65.2 to 64 is expected. Lingering inflation worries keep confidence near levels last seen in 2011. Overall sentiment will remain the key driver for markets though.
We note the improved sentiment during Asian dealings but it’s unconvincing. Equity upticks lately are more an opportunity to sell rather than the start of a turnaround. We would also warn against reading too much in the <4 bps increase in US yields this morning. This week brought growth uncertainty to the fore and it may prove a sticky trading theme.
It is too soon to call off the core bond yield consolidation/correction. As things currently stand, the weekly US 10y yield will end with a bearish engulfer. EUR/USD remains in dire straits. A weekly close below 1.04 spells trouble and paves the way for a return to 1.0341. The technical stars for DXY are aligned for a return to 109.14 (76.4% recovery of the 2001-2008 decline) after pushing through 104 yesterday.
The Bank of Mexico yesterday as expected raised its policy rate by from 6.50% to 7.0%. The Bank kept a hawkish tone, indicating more forceful measures to achieve the inflation target. One of the five board members already voted for the policy rate to be raised by 75 bps. Core and headline inflation in Mexico in April reached 7.22% and 7.68% respectively, with headline inflation reaching the highest level since 2001. In its inflation forecast, the Bank raised the path for both core and headline inflation through 2022 and 2023, but still expects (core) inflation to return to the 3.0% target in 2024. The next meeting of the Bank of Mexico is scheduled for June 23. In a first reaction, the gains in the peso were modest. This morning, the peso gains modestly to trade near USD/MXN 20.20.Inflation in India in April accelerated faster than expected from 6.95% to 7.79 Y/Y%. Price rises in April were broad based. Costs for fuel and light rose 3.11% M/M and 10.80% Y/Y. Food prices, which are about half of the basket, jumped 1.56% M/M and 8.38% Y/Y. The Indian rupee trading near record low levels (against the dollar) worsens inflationary pressures. The Reserve bank of India raised its policy rate from 4.0% to 4.40 at an unscheduled meeting on May 4. The RBI recently also intervened in the currency market to try to slow the decline of the rupee. The next policy meeting of the RBI is scheduled at 8 June. The RBI’s upper tolerance band for inflation is 6.0%. Trading at USD/INR 77.40, the rupee still holds near record low levels.