- Rates: Iran retaliates, but offers truce
Chaos returned overnight after Iran retaliated with air strikes against US bases (self-defense under UN Charter). Core bonds temporary spiked higher in thin Asian trading conditions. Iran isn’t seeking an escalation of war though. Will US President Trump accept the Iranian olive branch? If so, markets can classify the past day’s hick-up in geopolitical risk.
- Currencies: EUR/USD showed no clear reaction function in current risk-off
Yesterday, the dollar regained its composure after a poor performance on Monday. This morning, Iranian retaliation temporarily weighed on the US currency. However, the dollar rebounded as tensions eased. EUR/USD currently shows no clear reaction function. We assume 1.1125/1.1066 to provide decent support in a scenario of easing tensions.
The Sunrise Headlines
- Wall Street wavered amid escalating Middle East tensions and eventually dropped up to -0.42% (Dow Jones). Asian stock markets lose up to 1.5% this morning following Iran’s missile strike against US bases.
- Iran retaliated against the US by firing more than a dozen ballistic missiles at US-Iraqi airbases. Iran FM Zarif said his country took & concluded proportionate measures in self-defense under Art. 51 of UN Charter.
- Oil and gold prices gave back some of their earlier sharp gains this morning as Iran stated that the country isn’t seeking an escalation or war. US President Trump will make a statement later today.
- UK’s PM Boris Johnson is due to meet European Commission Chief Ursula von der Leyen today. Johnson will stress his government is only keen on mediating a free trade agreement with the block before the set December 2020 deadline.
- Outgoing BoE governor Carney warned global central banks are running out of ammo with the global economy heading toward a liquidity trap. In such a scenario, central bank efforts to combat future downturns will prove ineffective.
- Japanese real wages declined at their fastest pace in four months (-0.2% Y/Y) in November. The weak print clouds the outlook for the economy which is already under pressure from global woes and a slide in consumer spending.
- In today’s economic calendar, focus will turn to US ADP employment change data. In Europe, confidence indicators and German factory orders will be published. The US, Ireland, Portugal and Germany tap the bond market
Currencies: EUR/USD Showed No Clear Reaction Function In Current Risk-Off
EUR/USD show no clear reaction function in risk-off
EUR/USD traded (remarkable?) resilient on Monday, but faced a difficult session yesterday. 1.12 area proved a strong resistance. The data didn’t help but were not the only reason for the EUR/USD underperformance. EMU CPI (1.3%) was as expected despite higher readings in Germany and France. EUR/USD slipped to the mid 1.11 area early in US dealings, mainly on euro weakness, but we didn’t see an obvious reason. Later, the dollar profited from a solid US non-manufacturing ISM. EUR/USD closed at 1.1153 (from 1.1197). USD/JPY ended at 108.44. The USD refound its composure after a rather poor performance Monday.
Overnight, Asian markets were again unsettled by retaliatory action from Iran on US targets in Iraq. In a first reaction, equites and core yields nosedived. For FX, the picture was again mixed. USD/JPY spiked below 108. The dollar also lost a few ticks against the euro, probably on a sharp decline in US yields.The risk-off eased soon as Iran indicated that it didn’t want a further escalation. The dollar regained its composure. USD/JPY trades again near 108.35. EUR/USD trades in the mid 1.11 area. Interestingly, the on-shore yuan kept most of yesterday’s gain.
Today, the eco calendar is modestly interesting with the EC confidence in Europe and the ADP labour report in the US. EC confidence is expected to bottom further. The ADP job growth expected to rebound (160k) after a negative outlier last month. A big data surprise in probably needed to case a clear directional market reaction. USD/global FX trading will probably be dominated by the next developments in the US-Iran conflict. Will President Trump join the de-escalation narrative? Whatever the outcome, yesterday’s price action shows no clear reaction function of EUR/USD. In a LT-term perspective, we assume that easing global tensions are in favour of EUR/USD, but this assessment didn’t always work in a day-to-day perspective. We keep the working hypothesis that 1.1125/1.1066 support will hold. That said, have to admit that yesterday’s EUR/USD performance quite disappointing.
Sterling initially gained on higher UK yields as the UK debt agency indicated higher borrowing needs ithis fiscal year. However, sterling gains could not be sustained. EUR/GBP closed the session litte changed in the 0.085 area.