- Rates: Will the bond rally resume after yesterday’s easing?
The rally in global core bonds took a breather yesterday. Yields rose a few basis points. US Treasuries underperformed despite disappointing US housing data and weaker consumer confidence. Risk sentiment remains key for trading today with an avalanche of ECB members, incl. president Draghi, taking the stage and consumer confidence in France and Italy.
- Currencies: Dollar outperformance despite soft data
Yesterday USD-trading faced conflicting signals. The dollar profited from higher interest rate differentials even as US data were mostly weaker than expected. The euro didn’t profit from a risk-on context. Today, the eco calendar is thin. Will ECB governors bring a more balanced view on the economy. If so, it might give the euro some downside protection
The Sunrise Headlines
- Main US equity indices closed 0.5% to 0.7% higher yesterday. Asian risk sentiment is more mixed this morning with Japan and Korea underperforming and China outperforming.
- The ‘appreciable risk’ that Brexit might not happen at all pushed Boris Johnson in the direction of supporting PM May’s ‘pseudo-Brexit’. Brexit hardliner Rees-Mogg made a similar shift earlier. They want the PM’s resignation in return.
- New Zealand’s central bank (RBNZ) left its policy rate unchanged at 1.75%, but governor Orr said that the more likely direction of their next move is down. NZD/USD fell from 0.77 to 0.76 with markets discounting an Aug19 rate cut.
- Chinese industrial profits slumped by the most since 2011 in Jan & Feb (-14% Y/Y) with the auto industry, ferrous metal producers and the chemical industry underperforming. Lunar New Year played a minor negative role.
- Stephen Moore, who is likely to be nominated by US President Trump for a vacant seat on the Fed board called in favour of immediately reversing course by slashing rates by half a percentage point.
- The Turkish central bank conducted ‘back-door’ operations to prop up the falling currency. The currency entered sell-off mode ahead of local elections. EUR/TRY currently trades just north of 6, compared with 6.6 on Monday.
- Today’s eco calendar contains second tier data. Several ECB heavyweights speak at the central bank’s conference. Germany and the US tap the bond market. The UK parliament holds indicative votes on Brexit scenario’s
Currencies: Dollar Outperformance Despite Soft Data
USD outperforms even as risk sentiment improves
Global market stress eased yesterday. Equities and yields rebounded after last week’s correction. EMU data (German/French confidence) were mixed. US data (including consumer confidence) were mostly weaker than expected. Contrary to last week it didn’t spark any further risk-off positioning. Yields rose early in the session but softened later. At the end of the day, the US-German spread had still widened, supporting the dollar. The euro didn’t profit from relative better data or a better risk sentiment. Growing Brexit uncertainty might have been a minor negative for the euro. EUR/USD closed at 1.1266 (from 1.1312). USD/JPY closed at 110.64, near the session top. Dollar strength prevailed.
This morning, Asian equity indices are trading mixed. Uncertainty on the health of the global economy persists and the potential outcome of the US-China trade talks remains vague. USD/JPY (110.60 area) maintains yesterday’s gain. EUR/USD (1.1260 area) remains in the defensive. The kiwi dollar nosedived as the RBNZ in its policy statement indicated that the next move in the policy rate is more likely to be a cut. NZD/USD tumbled from the 0.69+ area to the 0.68 pivot.
Today, the eco calendar is thin with only confidence data from EMU member states. In the US, the trade balance often provides conflicting data for FX trading. Plenty of ECB governors will speak, including president Draghi and chief economist Peter Praet. The ECB already ‘finetuned’ its guidance at the March meeting, but markets will be keen to hear the speakers’ view on growth and on inflation(expectations). A balanced message from the conference in Frankfurt might in theory be slightly supportive for the euro. Admittedly, at least yesterday, the dollar outperformed in a context that wasn’t per se USD supportive. Brexit also remains a wild-card for euro trading. EUR/USD is drifting further south in the 1.2/1.15 MT trading range. Euro sentiment remains fragile, but US data are also turning more mixed. For now, we maintain the view that there is no compelling reason for EUR/USD break below the 1.1187/1.12 support in a sustainable way even as we understand downside risks have increased.
Sterling gained modest ground yesterday as pro-Brexcit conservative party members showed preparedness to support May’s Deal. However, uncertainty on Brexit remains high with today’s indicative votes in Parliament. Question is whether Brexiteers having a bigger weight on the UK negotiation process will be a positive for sterling over time. For now, we avoid sterling long exposure as long as the binary risk remains as high as it is now
EUR/USD: dollar outperforms euro even as sentiment on risk improves and as US data disappoint