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Currencies: Dollar Struggles To Extend Gains As Global Market Volatility Remains High

Sunrise Market Commentary

  • Rates: Core bonds hardly profit as US stocks take another dive
    Core bonds made an intraday U-turn yesterday as US stock markets suffered another huge blow (-4%), but gains remained rather limited. It confirms underlying bearish sentiment. Spill-over effects to other markets are in general muted. Today’s eco calendar is empty, so all eyes will be again on bourses.
  • Currencies: Dollar struggles to extend gains as global market volatility remains high
    Yesterday, EUR/USD tried to extend its decline after Wednesday’s break, but the move had no strong momentum. The dollar still has difficulties to play its save have role even as US yields remain elevated. Sterling jumped as the BoE signaled a steeper rate hike path, but the gains could not be sustained. EUR/GBP 0.8690 remains a very solid support

The Sunrise Headlines

  • A late-afternoon rout sent S&P (-3.75%) to its lowest close since November. That leaves the S&P 500 benchmark 10% below its Jan. 26 record high. Volatility roared back with the VIX surging more than 20%. Asian stock markets lose up to 2.5% with China underperforming (up to -5%).
  • US Congress missed a midnight deadline, failing to fund the government for a second time this year as a two-year bipartisan budget deal encountered delays in the Senate. A new vote is scheduled later today.
  • A fast-growing mutual fund has told investors that it will not charge them to redeem what is left of their money, after losing more than 80% of its value in the wake of this week’s turbulence. It’s the biggest one-week drop for a mutual fund recorded in 20 years.
  • China’s producer and consumer inflation eased as expected in January. The PPI rose 4.3% Y/Y in January, the smallest rise in 14 months. CPI rose by 1.5% Y/Y.
  • Australia’s central bank said the economy is some way off full employment and inflation returning to the midpoint of its target, signalling policy will stay on hold.
  • Moody’s, the last of the major credit rating agencies to keep Portugal’s debt in "junk" territory, considers it on the verge of regaining investment grade thanks to the country’s economic and fiscal improvements.
  • Today’s eco calendar is thin with only UK industrial production data and UK trade balance.

Currencies: Dollar Struggles To Extend Gains As Global Market Volatility Remains High

EUR/USD decline slows even as volatility persists

The dollar maintained a positive momentum yesterday morning, but dynamics eased during the day. Some EUR/USD follow-trough selling occurred after the break below 1.2323. EUR/GBP selling after the BoE pushed EUR/USD to an intraday low in the 1.2215 area. From there, the euro decline/USD rally stalled, despite risk aversion. EUR/USD returned higher in the 1.22 big figure and closed the day at 1.2247. The return of volatility finally also triggered yen buying. USD/JPY dropped below 109. EUR/JPY tested 133 support, but a sustained break didn’t occur. The moves in the FX majors stay modest given the swings on other markets.

Risk aversion still dominates Asian trading. Regional indices are losing up to 5%. Japan slightly outperforms. USD/JPY dropped temporary to the 108.50 area, but aggressive BOJ bund buying reinforces the Bank’s will to maintain an easy policy, slowing the rise of the yen. USD/JPY trades again around 109. EUR/USD is going nowhere in the 1.2250 area. The yuan stabilizes after yesterday’s correction against the dollar.

There are no important data in the US and Europe today. So, global factors will continue to dominate FX trading. Of late, the swings in the major USD cross rates were modest given the turmoil on other markets. The combination of higher core yields and an aggressive risk-off finally turned out USD positive. That said, the safe haven appeal of the dollar was far from impressive. It more looked like some cautious by default USD buying. We assume that this pattern can continue as long as the current global repositioning continues. 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). We continue to monitor the EUR/JPY price action. A further risk-off correction in EUR/JPY might also put downward pressure on EUR/USD. However, in this respect, yesterday’s price action was inclusive. The EUR/JPY decline was blocked at the key 133 support area.

Sterling jumped higher as the BoE indicated that rates will probably have to be raised faster than anticipated. Most of the rebound was reversed later as a new wave of risk-off repositioning weighed on sterling. Markets probably also realized that the Brexit-cliff isn’t out of the way. EUR/GBP closed the session only marginally lower at 0.8803. UK production and trade balance data will be published today. Yesterday’s price action confirmed our working hypothesis that the 0.8690 support probably won’t be easy to break without big progress on Brexit.

EUR/USD: few follow-through gains despite Wednesday’s break lower.

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KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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