Fundamental Analysis

Dollar Resists Risk-off Correction

  • European equities lose up to 0.5% with the German Dax underperforming (-1%). US stock markets opened with marginal losses. The Nasdaq underperforms again (-0.3%).
  • The US economy added 190 000 jobs in the private sector in November according to payroll processor ADP, down from 235k in October. The outcome confirms ongoing strength on the US labour market and was bang in line with expectations.
  • Britain has not conducted formal sector-by-sector analyses of the impact that leaving the EU will have on the economy, Brexit minister Davis said, arguing they were not necessary yet. The comments inflamed critics of the government's handling of the complex divorce process.
  • ECB officials risk limiting their options for dealing with any unexpected acceleration in inflation if they make policy promises that extend too far into the future, Executive Board member Mersch said.
  • German industrial orders increased unexpectedly in October (0.5% M/M & 6.9% Y/Y) thanks to domestic and non-euro zone demand, suggesting this sector of Europe's biggest economy is likely to gain steam in the coming months.
  • U.S. unit labor costs were lower than initially thought, declining both in the second and third quarters of this year. The price of labor per single unit of output dropped at a 0.2% annualized rate in the last quarter (initially reported at 0.5%). ULC in de second quarter even declined at an annualized rate of 1.2%, previously reported as a 0.3% rise.


German 10-yr yield tests 0.3% support

Global core bonds traded mixed today with the US Note future slightly outperforming the German Bund. The Bund opened higher in a catch-up move, but traded sideways afterwards while the US Note future extended gains. Yesterday's commodity sell-off (industrial materials like copper) didn't continue today and losses on European equity markets were limited to the ones recorded in the opening. So risk sentiment turned neutral following risk aversion in Asia. The eco calendar added little spirit to trading with US ADP employment bang in line with forecasts at a strong 190k.

Interesting comments from ECB Mersch didn't resonate in dealings either. Mersch joins the German-Franco hawkish camp which is currently in the minority at the ECB, but could gain traction in coming months as ultradovish ECB heavyweights (Constancio, Praet and Draghi) will be replaced between mid-2018 and the end of 2019. Mersch warned about risks from pre-committing monetary policy for too long in a context of a booming economy: "If our forward guidance is reaching too far into the future, beyond the point at which reasonable predictions about the economy can be made, there's a risk that our hands will be tied needlessly. When the time comes in the course of next year when we reconsider our monetary-policy course, we should think carefully how much we pre-commit." He also openly suggested whether current monetary policy is too accommodative, arguing that the difficulty of measuring inflationary pressures might mean that the ECB is "running behind developments without being aware of it." He concludes that a drastic correction in monetary policy will be necessary in coming years in that scenario.

At the time of writing, the German yield curve bull flattens with yields 0.6 bps (2-yr) to 1.9 bps (30-yr) lower. Technically, the German 10-yr yield is currently testing important support at 0.30%. Changes on the US yield curve vary between declines of 2 to 2.5 bps across the curve. On intra-EMU bond markets, 10-yr yield spread changes versus Germany widen up to 2 bps.


Dollar resists risk-off correction

Global market were captured by a global risk-off correction today. However, the spill-overs to the interest rate and FX markets were modest. The dollar held up well despite the decline in core/US yields. USD/JPY is holding north of 112. EUR/USD even drifted to the low 1.18 area.

The US equity slide accelerated in Asia overnight, with commodity related stocks taking the lead after a sell-off of copper yesterday. Losses varied across markets, but mounted up to 2% (Japan/Hong Kong). The equity decline pressured US yields, but the damage for the dollar was contained. USD/JPY dropped to the low 112 area. EUR/USD held relatively stable near 1.1840.

The trends from Asia basically continued in Europe. European equities joined the risk-off correction from Asia. Strong German order data didn't change sentiment. As was often the case of late, changes in global risk sentiment had only a modest impact on other markets. Core yields (in the US and Europe) ceded a few basis points, but remained in well-known territory. Changes in interest rate differentials were also too small to guide FX trading. The dollar continued to perform rather well, given the circumstances. USD/JPY held north of 112 despite the decline of equities and lower core yields. EUR/USD even trended lower in the 1.18 big figure. The pair trades currently near the 1.18 big figure. The US ADP labour market report showed net 190 000 job growth in the US private sector last month, perfectly in line with consensus. Yesterday, we suggested that there were tentative signs that the big (ST) interest rate differential is gradually giving the dollar some additional downside protection. At least for now, this hypothesis survives.

Sterling resilient even as Brexit headline stay negative

Brexit headlines continued steering sterling trading today. Sterling showed some brisk swings this week as initial hope on a separation deal didn't prove justified. The UK currency trades off the recent highs reached before the press conference of UK PM May and EC head Juncker on Monday evening. In a broader perspective, the losses of sterling remain modest given the negative news flow. Today's headlines still brought little evidence that a deal could be reached anytime soon. There were renewed indications that part of PM May's party were questioning her leadership. UK Brexit minister Davis faced questions in Parliament whether the government had accurately investigated the potential consequence of Brexit. Last but not least, the DUP, supporting May's minority government, sees a deal on the Irish border as unlikely this week, the EU deadline. EUR/GBP (currently 0.8835) settled well north of 0.88, but no important technical level was broken. Cable declined back below the 1.34 barrier, but part of this move was due to cable mirroring the intraday decline of EUR/USD. So, sterling holds up quite well, suggesting that markets still see a decent change of a last minute solution ahead of next week's EU summit.

Author: KBC BankWebsite:
KBC Bank
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