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Currencies: Dollar Holding Strong Even As US Yields Nosedive

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Fundamental analysis of Forex market
  • Rates: US 10yr/3m spread at lowest level since global financial crisis
    US yields fell hard yesterday, with the 10-yr yield falling below key support levels, paving the way for a return to the 62%- retracement level (2.06%). The US 10yr/3m falling to levels not seen since the global financial crisis further dims risk sentiment today, supporting core bonds. Today’s eco calendar only offers secondary data.
  • Currencies: Dollar holding strong even as US yields nosedive
    Trade tensions are reinforcing the global risk-off correction. The US expanded the list of countries it is monitory on currency manipulation and US yields are declining. Even so, the dollar is holding strong. Today, eco data are second tier. How much more loss of interest rate support can de dollar sustain before it will weigh on its performance?

The Sunrise Headlines

  • Trade and growth uncertainty grabbed US equities by the throat yesterday. The Dow Jones underperformed (-0.93%). Most Asian stocks follow the US in lockstep, with Korea leading the losses.
  • Bond rates were also slapped with the New Zealand 10y trading at a 1.70% record low. The German 10y (-0.16%) eyes the all-time low of -0.20%. The US 3M-10y yield curve inverted, hovering near mid 2007 levels.
  • In the latest twist of the trade war, China could restrict access of US companies to the country’s rare-earth resources used for making electronics and defense products.
  • The EU gathering to discuss the next leaders of the EU’s institutions showed differences between key players Merkel and Macron. Current EU Council president Tusk expects a decision to be made at the June 21 summit.
  • China is not a currency manipulator, the US Treasury again concluded in its semi-annual report. However, conditions to be labelled as such have softened. Five nations, including Italy and Ireland, were added to the watch list as a result.
  • US home prices decelerated for a 12th straight month in March, printing at 2.68% YoY (0.1% MoM). Conference Board consumer confidence (134.1) surprised on the upside and is just 3.8 points shy of its cycle high.
  • Today’s economic calendar is of second tier importance. The Bank of Canada convenes. German unemployment data, Swedish and (final) French GDP are due in Europe. The US and Germany tap the bond market.

Currencies: Dollar Holding Strong Even As US Yields Nosedive

The dollar faced conflicting signals, but retained the benefit of the doubt. European equities failed to build on Asian gains. Even so, the euro received temporary support from decent EU confidence and money supply data, holding in the high 1.11 area. Later, US consumer confidence was strong but didn’t help market sentiment. US Equities reversed earlier gains as trade tensions persisted. A classic risk-off move developed with core yields, USD/JPY, EUR/USD and EUR/JPY declining. A substantial narrowing in the US-German interest rate differential didn’t help the euro. EUR/USD closed at 1.1160. USD/JPY finished at 109.38.

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This morning, risk-off weighs on Asian equities, but losses remain orderly. Trade tensions are taking centre stage as the US published a list of countries it is monitoring on FX manipulation. China is stepping it rhetoric on the use of rare earths as a weapon in the trade war. The USD is holding strong, even as US yields are declining sharply. USD/CNY (6.9150 area) is testing recent top. EUR/USD is trades near 1.1165. USD/JPY hovers in the 109.25 area. Today, the eco calendar only contains second tier EMU and US data. The sharp decline in US yields and the flatting yield curve suggests markets are expecting difficult times ahead with multiple Fed rate cuts. For now, US-German spread narrowing didn’t support EUR/USD much, as the situation in EMU remains fragile, too. Still, we are cautious on sustained USD gains, especially as there are ever more signs that the US wants a weaker dollar. Last week, EUR/USD tested the 1.1110 support, but no sustained break occurred. A broader USD up-move was capped as investors anticipate more Fed rate cuts as trade tensions might hurt US growth, too. Next week’s key US data will bring an update in this debate. In the meantime, the EUR/USD downside looks again better protected. Some modest/limited gains in the 1.1110/1.1324 range are possible with intermate resistance at 1.1265.

Sterling still hovered near recent lows against the euro and the dollar as uncertainty on Brexit and on the succession of PM May persisted. However, there was again little high profile news on the issue. EUR/GBP hovered in the 0.8800/0.8840 area. Today, more technical trading could be on the cards for sterling. A further deterioration of global sentiment is probably no help for sterling. Will EUR/GBP finally break the 0.8840 resistance area

USD-trade-weighted (DXY): dollar holding strong even as US yields decline sharply

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