HomeContributorsFundamental AnalysisDollar Decline Halts, at Least Temporary

Dollar Decline Halts, at Least Temporary

  • European equity indices got a lift from corporate results (Euro Stoxx 50 +0.42%), with room to rally after a strong lead-in from Asia picked up the mood. American equities opened on the same positive footing with the Nasdaq again outperforming (+0.47%).
  • Construction output in the Eurozone shrunk by 0.7% M/M in May (+0.3% in April), marking the second contraction in the last three months. Output rose by 2.6% Y/Y, a decline from the 3.3% (revised) figure of April. Output fell in Germany, France and Spain in May but grew in Italy – the bloc’s third largest economy.
  • Amid deepening concern in the EU over an undermining of the Polish supreme court’s independence, the European Commission said it is considering whether to ask other countries in the bloc to issue a formal warning against Warsaw’s steps to erode the rule of law.
  • US housing starts and permits both surprised to the upside. Housing starts rose from an upwardly revised 1122k in May (-2.8% M/M) to 1215k in June (8.3% M/M) while 1160k was expected (6.2%M/M). Building permits increased from 1168k (-4.9% M/M) to 1254k (7.4% M/M), 53k above the consensus (2.8% M/M).

Rates

Listless trading ahead of ECB meeting

Global core bonds (and most other assets) traded uneventful in a news poor, holiday-thinned and order-driven trading session. The price action occurred in a tight range, slightly above opening levels. The Bund evolved between 161.61 and 161.90 and changes hands now at 161.85, about 20 ticks above opening levels. News agencies ran articles about the ECB, mentioning that staff were examining options for the APP programme, but no details were given and they added that these options would not be subject of decision tomorrow. The sole EMU data release was May construction output. It disappointed, but triggered no reaction. US Treasuries moved sideways too , after a small dip in Asian trading, between 125-30 to 106-03. Even better than expected US housing starts and building permits were unable to bring some excitement. However, as the T-Note didn’t drop on stronger starts/permits, it might have been the trigger for some (temporary buying) afterwards which brought the T-Note future to opening levels and the Bund to the intraday highs.

At the time of writing, German yields are nearly unchanged (flat to -1.3 bps). Changes on the US yield curve range between flat (2-yr) and +0.6 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are negligible (0-to-1 bp).

Regarding tomorrow’s ECB meeting, we don’t expect important new decisions. That’s for the September meeting when new projections are available. Mario Draghi will likely be prudent in his comments, as after his Sintra comments, bonds sold off and the euro strengthened. That was maybe intended as investors need to be prepared, but repeating it too fast might trigger too strong market moves. Nevertheless, we expect the press to pressure Draghi on his recent rhetoric. Draghi might stress that the ECB will change policy gradually and keep a high grade of accommodation available. That should cap the rise of the euro and rates. There is nevertheless a minor chance that the forward guidance will again be tweaked to arrive at a complete neutral bias. More particularly, the ECB may skip the possibility that the ECB will buy more assets in case financial conditions worsen too much.

The German Finanzagentur started this week’s EMU bond supply with a 30-yr Bund auction (€1B 2.5% Aug2046). Total bids amounted €1.43B, which is bank in line with the average at the previous 4 30-yr Bund auction. The Bundesbank set aside €0.195 for secondary market operations resulting in an official bid cover of 1.8 (real bid cover 1.4). The auction tailed 1 cent. The auction yield (1.29%) was the highest since the end of 2015.

Currencies

Dollar decline halts, at least temporary

Trading in in the major USD cross rates shifted into holiday modus after yesterday’s steep USD losses. The inability of the US government to amend Obamacare returned to the background as a driver for USD trading and there was no other high profile market theme available. EUR/USD hovered close to, mostly slightly below 1.1550. USD/JPY initially didn’t go anywhere holding near the 112 big figure, but EUR/JPY finally pushed USD/JPY to the 111.65 area.

Overnight, Asian equities rebounded as the tensions due to the Obamacare stalemate ebbed. The dollar stabilized slightly off yesterday’s lows.

A lacklustre sentiment persisted in Europe. The dollar traded with a tentative positive bias, but the gains were negligible compered to recent losses. EUR/USD hovered close to, mostly slightly below the 1.1550 barrier. Interest rate differentials re-widened marginally, but the move was too small to trigger directional position taking just one day before the ECB (and BOJ) policy meetings. USD/JPY was almost paralyzed near the 112 level.

US housing starts and permits rebounded more than expected after several disappointing readings over the previous months. However, it didn’t inspire USD trading. In technical trading, EUR/USD lost a few more ticks and trades currently in the 1.1525/30 area. USD/JPY even returned below 112. Stop-loss EUR/JPY selling (currently 128.75) is also weighing on USD/JPY headline pair.

Sterling going nowhere

Calm also returned for sterling trading after yesterday’s inflation-driven sell-off. There were no UK eco data and we also didn’t see Brexit headlines with market moving potential. EUR/GBP basically hovered in the mid 0.88 area. The modest decline in EUR/USD also helped blocking the topside in EUR/GBP. The pair trades in the 0.8850 area. Trading in cable was also order-driven and without a clear trend (currently 1.3030). Tomorrow, the UK retail are quite interesting input for the BoE . Will the erosion in disposable income due to the decline of sterling continue to weigh on spending?

KBC Bank
KBC Bankhttps://www.kbc.be/dealingroom
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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