The Dollar Remains In The Defensive Overall – COVID-19 Headlines In Focus

Markets

Markets traded with cautious, modest risk-off bias last Friday. Eco data were few. The ongoing rise of Covid-19 infections in Europe (and elsewhere) remain a source of uncertainty for the pace of the economic recovery going forward. European equity indices on average lost about 1%. In a rather volatile session, US equities finally closed with similar losses. Core (US) yields entered calmer waters. Markets reached a new equilibrium after reversing most of brief uptick after the FOMC policy announcement on Wednesday. US yields rose marginally between 0.4 bp (2-y) and 1.5 bp (30-y). German yields changed less than 1 bp. On the FX market, the (trade-weighted) dollar showed no clear directional trend, holding close to, mostly slightly below the 93 barrier. The yen slightly profited from the risk-off mood, with USD/JPY coming ever closer to the 104.19 key support (close 104.57). EUR/USD hovered in the mid 1.18 area. Sterling initially also entered calmer waters after a volatile session on Thursday. However, the UK currency gradually came again under pressure. UK yields continue to be pressured as the debate on negative interest rates intensified after the BoE policy meeting. EUR/GBP closed at 0.9166.

Asian equities are drifting lower this morning mirroring the moves in the US on Friday. Volumes are low as Japanese markets are closed. The yuan remains well bid. (USD/CNY 6.76 area). The PBOC left its one-year Prime Loan rate unchanged at 3.85%. The more gradual/balanced approach for the PBOC compared to the likes of the Fed remains a supportive for the Chinese currency. The dollar remains in the defensive overall. The trade-weighted dollar dropped to the 92.80 area. EUR/USD is changing hands around 1.1860. USD/JPY (104.30 area) returned to Friday’s intraday lows levels and is again nearing the key 104.19 support. According the FT, the ECB launched a review on its PEPP bond buying program to examine how long it should last and to assess features like the flexibility of the program

Today’s eco calendar is thin. Belgium will tap the Bond markets selling 2025, 2031 and 2033 bonds. 2033 is a Green Bond. Later this week several central Banks (Riksbank , National Bank of Hungary (Tuesday), RBNZ, Czech National Bank (Wednesday), Norges bank, Swiss national bank (Thursday)) will hold regular policy meetings. Regarding the data, the focus will be on EMU confidence data with the PMI’s on Wednesday and IFO confidence on Thursday. From Tuesday to Thursday, Fed’s Powell will appear before Congress. On Thursday he will be joined by Treasury Secretary Mnuchin in a hearing before the Senate Banking Committee.

Regarding markets, US and German 10-y bond yields found a new ST equilibrium within the well-established ranges. The picture for the dollar is more challenging. USD/JPY is coming ever closer to the 104.19 support. This move is partially yen strength, but a clear break below this level also can filter trough in other US cross rates. Sterling continues to face quite some headwinds, too. The Brexit stalemate persists. The rise in UK Covid infections might lead to new restrictions. If this weighs further on economic activity, it could become an additional factor in the debate whether or not the Bank of England should introduce negative interest rates. Of late, sterling often resisted negative headlines quite well. However, the fear for negative interest rates probably will cap any sustained sterling gains. The EUR/GBP pair might still drift higher in the 0.90/0.93 range.

News Headlines

US president Trump said he would nominate a woman as successor to the Supreme Court Justice Ginsberg already this week. Ginsberg’s death last Friday, just six weeks before Election Day, jolted US politics with Republicans pushing to move quickly on a successor while Democrats mulling all options to keep the seat open until after the elections

UK’s finance minister Sunak is expected to extend several business supporting loan schemes as the pandemic continues to worsen. The country’s four schemes have already backed £53bn in lending to companies through government guarantees. In an interview on Friday, PM Johnson said the UK is seeing a second wave of the virus and is considering whether local lockdowns needed “strengthening”.