Will The Dollar Be Able To Capitalize On Safe Haven Flows?

Markets

Monday’s tentative equity correction gradually deepened yesterday. Persistently high infection levels, especially in non-developed countries (India) reminded investors that the consequences of the pandemic won’t disappear at once even as the vaccinations are further rolled out. Some ‘simple’ profit-taking on the record rally and caution at the start of the earnings season were also in play. European equities mostly closed with 2%+ losses. After a decent start, US equities finally closed 0.68% (S&P) to 0.92% (Nasdaq) lower. The risk-off restored the bid for core bonds. Contrary to last week, Bunds and Treasuries again traded in lockstep. The yield curve bull flattened with yields declining between 0.4 bps (2-y) and 4.5 bps (10 & 30-y). The US 10-y again dropped below the 1.6% support. In a similar move, German yields declined between 1.1 bp (2-y) and 3.0 bps (30-y). A test of key resistance for the EU 10-y swap (0.11%) and the 10-y German yield (-0.20%/-0.14%) is rejected. The deterioration in risk sentiment also put a floor for the USD-decline though USD gains were far from impressive. The DYX-index rebounded from sub 91 levels to close at 91.24. EUR/USD reversed initial gains to close the session little changed at 1.2044. The yen initially lost ground but finally rivalled the dollar’s safe-haven performance with USD/JPY closing little changed at 108.14. Sterling reversed part of Monday’s (impressive) rebound, with EUR/GBP closing at 0.8636 (from 0.8606).

The risk-off correction further affects Asian markets. Japan (again) and Hong Kong underperform. China avoids the global decline (CSI 300 marginally stronger). Still the yuan shows no clear directional trend against the dollar (USD/CNY 6.4985). The yen slightly outperforms the dollar (USD/JPY 108.00). EUR/USD declines marginally (1.2032).

The eco calendar remains thin, with the Bank of Canada decision the exception to the rule. The BOC is expected to slow weekly bond purchases to C$ 3 bn/week (from 4 bn) with recent strong data perhaps able to change guidance on the expected rate path. Global (equity) sentiment will continue to set the tone on FI and FX markets. US yields stabilize this morning, but the decline of the 10-y yield below the 1.6% support suggests more downside if the equity correction continues. Upside momentum in European yields also stalled. Key question is whether the dollar will be able to capitalize on safe-haven flows. For EUR/USD, the 1.1990 area now marks a first ST support. A return below this area might qualify Monday’s jump as a ‘false break’, but we’re not that far yet. UK inflation data published this morning show CPI marginally softer than expected (0.7% Y/Y), but PPI inflation higher than expected. EUR/GBP is trading little changed near 0.8635.

News headlines

Oil prices faced a setback yesterday as the US House Judiciary Committee passed a bill that could expose OPEC to antitrust lawsuits over its production cuts. It remains very uncertain though that it would pass both chambers of the US House. Adding to pressure on the oil markets were comments by Iran’s Rouhani that nuclear talks are 60%-70% completed. Progress in negotiations means a sooner return of Iranian oil to the market. A final element weighing on yesterday’s sluggish performance was the general risk off climate. Brent crude reached an intraday low of $65.5/b, coming down from $68/b.

New Zealand inflation picked up as expected in Q1, rising by 0.8% Q/Q and 1.5% Y/Y (from 1.4% Y/Y in Q4). The country’s central bank suggested a more rapid rise in its February projections (1.7% Y/Y). Core inflation was somewhat higher at 2% Y/Y. Later this year, inflation is expected to spike to the top half of the 1%-3% target range, but the RBNZ pledged not to act to such transitory pick-up. Looking into the Q1 details shows the impact of the lockdown reversals with international air transport (travel bubble with Australia), gasoline prices and purchases of second-hand motor cars contributed strongly. New housing and housing rents continue to rise as well. The government tries to dampen housing prices with macroprudential measures, but added them to the RBNZ’s policy framework as well earlier this year. NZD/USD is unchanged in the high 0.71-area this morning.