- Rates: Temporary relief from US Q1 GDP data?
Core bonds lacked inspiration yesterday, but that will change today with US Q1 GDP up for release. Bond markets are positioned to take some more bad news. However, we deem the bar of consensus (2.3% Q/Qa) rather low which could be the cue for some short term profit taking. Longer term, we hold our upward bias for bonds.
- Currencies: Dollar remains in driver’s seat ahead of US Q1 GDP release
The dollar touched the highest level in almost two years yesterday, but the rally took a breather after mixed US eco data. Today, the focus for USD trading is on the US Q1 GDP release. A solid report might confirm the US economic outperformance compared to most other major developed countries and support the USD positive momentum.
The Sunrise Headlines
- US stock markets closed mixed yesterday after staging an intraday comeback. The Dow Jones (-0.51%) underperformed. Asian equities mostly trade in negative territory. Korea is underperforming.
- Trump’s top economic adviser Larry Kudlow thinks the Fed is moving towards rate cuts, saying the “funds rate has traded a bit high”. Kudlow also said that US Q1 growth, published later today, “may be very close to 3%”.
- President Xi Jinping reiterated that China won’t engage in currency depreciation. He pledged to keep the yuan stable and wants markets to play a bigger role in setting the exchange rate. The yuan strengthened (6.73 USD/CNY).
- April inflation in Japan (Tokyo CPI) beat expectations with headline CPI at 1.4% (vs. 1.1% expected) and core measures coming in at 0.9% (vs. 0.7%). Retail sales in March matched consensus but industrial production was very disappointing.
- The ECB’s vice president de Guindos isn’t very optimistic on the EMU economy but expects the forces that were behind the 2018 slowdown will ebb, adding however that QE can be used again if required.
- Argentina’s former leftist president Fernández is gaining traction in the presidential election polls. Although no official candidate yet, markets’ fear over potential interventionist policies sent the Argentine Peso to a record low.
- Today’s economic calendar is thin yet important as markets will closely watch US GDP numbers for the first quarter this year. Investors expect Q1 growth at 2.3% QoQ (annualized), slightly up from 2.2% in 2018Q4.
Currencies: Dollar Remains In Driver’s Seat Ahead Of US Q1 GDP Release
Dollar remains in the driver’s seat
The (trade-weighted) dollar touched the highest level in almost two years early in US dealings yesterday. EUR/USD developed a similar pattern as the pair tested the 1.1119 support. However, US investors finally turned a bid more cautious. US data were mixed with solid durable goods orders but at the same time an unexpected uptick in jobless claims. It is too early to draw conclusions from a weekly claims release, but the report maybe inspired some ST USD profit taking after recent rally. US equities also struggled as corporate earning brought a balanced/mixed outcome. EUR/USD closed at 1.1132 (from 1.1155). The loss in USD/JPY was even bigger with a close at 111.63 (from 111.19).
Asian equities mostly show modest losses this morning. Japan March production data (-0.9% M/M) raised questions on the countries’ growth. At the same time, Tokyo CPI printed slightly higher than expected. USD/JPY hovers in the 111.65 area as Japanese markets prepare for the Golden Week holidays. The yuan gained a few ticks in a daily perspective (USD/CNY 6.7350 area) as the Chinese president reiterated China doesn’t intend a weakening of its currency that harms other nations. EUR/USD (1.1135 area) is holding within reach of yesterday’s low.
Today, there are again few data in EMU except for the French consumer confidence. The focus for FX/USD trading will be on the US Q1 GDP. The market expects 2.3% annualised growth. This level looks feasible and might convince markets that the US economy avoids a big slowdown. A report in line or better than expected might support recent USD positive momentum.
Poor EMU data (PMI’s) last week pushed EUR/USD to the low 1.12 area. At the same time, the dollar is supported by relative resilience of the US economy. These trends finally pushed EUR/USD below the 1.1177 MT range bottom. We expect any further USD gains to develop in a gradual way. Even so, there is no reason to row against the USD positive tide. Next support at 1.1110/19 (May/June 2017 lows) is within reach.
Sterling showed no clear trend yesterday. EUR/GBP still felt some modest negative spill-overs from EUR/USD. The pair closed at 0.8631 (from 0.86644). Even so, the Brexit process still provides little support for sterling. The negotiations between the conservative party and labour to reach a compromise on Brexit look to have stalled and it looks ever more likely that the UK will have to participate in the May EU elections. Euro and sterling weakness might keep each other in balance short-term.
EUR/USD: nearing the 1.1111/19 support area