Sunrise Market Commentary
- Rates: Core bond sell-off resumes
The short squeeze in core bonds earlier this week seems to have done its job. Underlying negative core bond sentiment takes the upper hand again. The US Congress’ 2-yr spending deal will significantly raise US deficits and is structurally negative for Treasuries. Speeches by Fed/ECB governors and the US 30-yr Bond auction could also impact trading. - Currencies: Dollar gains traction on higher yields and expansive fiscal policy
The dollar rebound accelerated as a poor US bond action and prospects for a big US budget deficit propelled US yields. The downside of the dollar looks better protected. EUR/USD dropped below intermediate support. The BoE’s policy decision and inflation report might keep the door open for a next rate hike later this year. This might be slightly supportive for sterling.
The Sunrise Headlines
- The comeback of US stock markets stalled with indices ending mixed between flat (Dow) and -0.9% (Nasdaq) lower. Most Asian indices are in positive territory this morning with China underperforming.
- Congressional leaders said they had reached an agreement on a 2-yr budget deal, charting a path out of the turmoil over spending and immigration that had shuttered the government last month and left its long-term funding in jeopardy.
- China’s export growth (11.1% Y/Y) bested expectations in January as the value of imports (36.9% Y/Y) vastly exceeded forecasts thanks in part to the timing of the Lunar New Year and a recovery in oil prices from a year earlier.
- The Reserve Bank of New Zealand kept its official cash rate at 1.75%, and also said it expects inflation to reach the mid-point of its target two years later than forecast. Governor McDermott said the kiwi will weaken as the Fed hikes.
- Oil prices dropped to their lowest point in 2018 after US government data showed US crude stockpiles rose faster than expected last week and monthly data for domestic production surpassed all-time highs.
- Sources said that China has resumed an outbound investment scheme after a 2y hiatus, granting licenses to about a dozen global money managers, signalling that Beijing is less worried about capital outflows amid a surge in the renminbi.
- Today’s eco calendar contains the BoE’s policy meeting and US weekly jobless claims. The ECB publishes its economic bulleting and several ECB & Fed governors speak. Ireland and the US tap the bond market
Currencies: Dollar Gains Traction On Higher Yields And Expansive Fiscal Policy
EUR/USD drops below intermediate support
EUR/USD finally broke 1.2323/35 support yesterday. Later in US dealings, different factors supported the US dollar. The US 10-yr yield ticked higher after a poor 10-yr action. US Senate leaders announced a 2-yr budget deal (still to be approved) that would raise government spending by $300 bn, raising the budget deficit. The prospect of an expansionary fiscal policy and higher rates inspired further USD gains and hurt equities. EUR/USD finished the day at 1.2264. USD/JPY held north of 109 despite renewed nervousness on equity markets.
Asian equities are trading mixed with Korea and Japan outperforming, supported by the stronger dollar. China is mixed as trade data show a very sharp rise of imports. The Yuan eases after touching the highest level in more than two year yesterday. Higher US yields are keeping USD/JPY well supported (109.60 area). EUR/USD hovers near yesterday’s closing levels. The kiwi dollar (NZD/USD 0.72) weakened as the RBNZ indicated that inflation will only reach the 2.0% target in 2020.
There are few important data today. Many ECB members attend a conference in Frankfurt. We keep a close eye at the US 30-yr Bond auction. The prospect of a rising deficit supports the rise in US yields. The dollar could regain traction on higher US yields and on the prospect of an expansive US fiscal policy. Risk sentiment remains a wildcard. Yesterday’s price action suggests that the downside of the dollar is becoming better protected. ECB speakers will probably reiterate that ECB normalization will develop in a very gradual way and that FX volatility is a risk. Technical picture: the dollar decline slowed of late and EUR/USD finally dropped below 1.2323/35 support. A break below 1.2165 would call off the ST downside alert (for USD). A correction of EUR/JPY reinforced the EUR/USD decline yesterday, but this factor might ease if risk aversion cools.
The BoE decides on policy and publishes its inflation report today. The BoE might be slightly more positive on growth and keep its assessment on inflation (rise in sterling to counterbalance higher oil price?). The BoE assessment might keep the door open for a next rate hike later this year (August?). Today’s BoE communication might be slightly supportive for sterling. Of late, a break of the EUR/GBP 0.8928 resistance failed. A neutral (not too soft) BoE assessment might push EUR/GBP back lower in the established range. EUR/GBP 0.8690 remains solid support. A break probably won’t be easy as long Brexit uncertainty persists.
EUR/USD: finally drops below1.2323/35 support as dollar rebounds
