- Rates: US technical breaks confirmed in weekly close?!
Today’s empty eco calendar suggest technically- and sentiment-driven trading on core bond markets. We expect both the US 10-yr and 30-yr yields to close above this week’s broken resistance levels, suggesting more upside medium term. European markets weathered the mini Italian political crisis well, but it’s too early to declare victory for BTP’s.
- Currencies: EUR/USD decline slows. USD/JPY outperforms
Yesterday, the dollar couldn’t extend its rally against the euro even as there was still uncertainty on the program of the new Italian government and as US eco data stayed strong. With no important data on the calendar, some further EUR/USD consolidation might be on the cards going into the weekend. Monetary policy divergence is weighing on the yen.
The Sunrise Headlines
- US stock markets closed around 0.2% lower after US president Trump said that China is very spoiled on trade. Asian risk sentiment is mixed overnight with Japan and China outperforming.
- Japan’s national core CPI rose 0.7% Y/Y in April (vs 0.8% Y/Y consensus), slowing further after dropping in March for the first time since the country exited deflation in early 2017.
- China has offered President Trump a $200 bn reduction in its annual trade surplus with the US by increasing imports of American products and other steps, said a Trump administration official. (BB)
- French President Macron has issued a stark warning against hasty EU enlargement in a sign of the tough fight ahead for six western Balkan countries that want to join (FT).
- President Trump’s trade chief said the US is “nowhere near” a deal on NAFTA, effectively brushing aside an offer from House Speaker Ryan for more time to conclude a deal that could be considered in Congress this year (WSJ).
- Oil headed for a third weekly gain as tensions in the Middle East intensified and the IEA said global stockpiles have shrunk. Brent crude temporary traded above $80/barrel yesterday for the first time since end 2014.
- Today’s eco calendar only contains second tier EMU eco data and speeches by Fed governors Mester, Kaplan and Brainard.
Currencies: EUR/USD Decline Slows. USD/JPY Outperforms
EUR/USD decline slows. USD/JPY outperforms
Yesterday, the EUR/USD decline slowed. Uncertainty on the program of a nascent Italian government weighed temporarily on the euro intraday, but wasn’t able to push EUR/USD to a new 2018 low. The pair settled in the 1.18 area. Investors are looking for details on the government program first. US yields continued trending higher supported by strong US eco data (Philly Fed). However Europe copied this yield rise, providing no additional interest rate support for the dollar against the euro. USD/JPY outperformed (close at 110.77 from 110.40). EUR/USD finished the day only marginally lower at 1.1795 (from 1.1808).
Overnight, sentiment on risk isn’t too bad. Positive developments in the trade talks between the US and China might be a (slightly) positive factor for global investor sentiment. Investors apparently also feel more at ease with higher US yields as they mirror the expectation for good US growth in Q2. The tradeweighted dollar is near recent top (93.50). USD/JPY still outperforms most other USD cross rates. The pair already touched the next big figure (111). EUR/USD stabilizes in the 1.18 area.
Today, there are hardly any data in the US and Europe. Fed governors Mester, Kaplan and Brainard speak, but it is unsure they will address any specifics on the current monetary policy. So, FX traders will have to look for guidance from global risk sentiment and from the developments on bonds markets. The negotiations to form a new Italian government remains a wild card. The MT picture remains USD constructive. However, on Wednesday and yesterday, the USD rise against the euro lost momentum. US eco data might support USD gains further down the road. However, in a daily perspective some EUR/USD consolidation or even some slight profit taking on EUR/USD shorts might be on the cards. At the same time, the rise in US and EMU yields weighs on the yen as investors expect further policy divergence. The USD/JPY uptrend looks solid. Even EUR/JPY is developing a cautious bottom out pattern.
Yesterday, there was plenty of debate whether the UK will should stay in the EU customs union beyond the transition period. Initially, sterling gained slightly ground on positive headlines. However, sterling returned these gains later as UK PM failed to bring clarity on the issue as she attended the EU summit in Sofia. Today, there also no UK data. We expect technical sideways trading for EUR/GBP in the mid 0.87 area.
USD/JPY: interest rate differentials continue to move against the yen