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Fundamental Analysis

Dollar Correction Slows in Uneventful Trading Session

Typography

Headlines

US equities opened little changed, as the calendar gave little incentives to traders to take positions. European equities trade with minor losses in an uneventful session.

Chicago Fed Evans defended last week's rate hike and expects two more hikes this year. He added the economy was on a pretty good course, labour market has been strong and the Fed is a little more confident inflation is moving up. Fiscal policy could provide an important lift to inflation.

Philly Fed governor Harker would not rule out a faster or slower pace of hikes in 2017 than three that he's projected in his quarterly forecast, but he hasn't yet factored in fiscal policy. He expects balance tapering to start when rates are between 1% and 1.5%.

The ECB has urged Brussels to toughen up its sanctions procedure against governments who persistently fall foul of its economic rules. It noted that over 90% of reform recommendations had been ignored by member states in 2016.

UK PM May will file divorce papers to leave the European Union on March 29, launching two years of complex negotiations that will pit the U.K.'s need for a trade deal against the bloc's view that Britain shouldn't benefit from Brexit.

Oil prices slipped as the US trading day revved - up, with analysts focused on the sharp rise this year in American crude inventories. WTI, the US benchmark, declined 1.4% to $48.12/barrel, while Brent crude dipped 0.9% to $51.3/barrel.

Rates

Bonds lingering in sideways range

In a thinly traded, data - poor and sentiment - driven session, core bonds traded sideways with German Bunds again slightly underperforming US Treasuries. At the time of writing, US yields trade nearly unchanged for the day (yield changes ranged between - 1.1 (2 - yr) and - 0.2 bp (30 - yr)), while German yields are slightly higher (yield changes between 1.1 bp (2 - yr) and +1.4 bps (30 - yr)). On intra EMU bond markets, 10 - yr yield spreads versus Germany range between +2 bps (Belgium, see below) and - 2 bps (Spain) with outperformance of Portugal ( - 4 bps, due to S&P decision to confirm rating?) and underperformance of Greece (+7 bps due to upcoming euro group?).

Intraday, the Bund opened marginally higher. A slight Asian risk off sentiment due to a disappointing G - 20 meeting suggested spill overs of the negative sentiment. However, those spill - overs didn't materialise. Equities opened lower but stabilized soon. Oil initially also held up well. The bond bears took the drivers' seat and the Bund slid gradual lower till the end of the morning session, ignoring another selling wave of oil (which largely reversed in early afternoon). The German curve slightly bear steepened. The Belgian and Slovak bond auctions went well, but as usually didn't affect the overall market. US Treasuries did nothing worth mentioning in the European morning trade and in early US dealings. Fed speakers' comments were also unable to trigger action.

Chicago Fed Evans, 2017 voter, said the Fed is on pace for two more rate hikes in 2017. He added the economy was on a pretty good course, labour market has been strong and the Fed is a little more confident inflation is moving up. Fiscal policy could provide an important lift to inflation, according to Evans. Minneapolis Kaskhari, in an interview, largely repeated his arguments why he dissented at last week's FOMC meeting. Most important, he wants to taper the balance sheet before raising rates. Philly Fed Harker, 2017 FOMC voter, defended last week's rate hike and said he can't rule out more than 3 rate hikes this year, but at the March dot - plot he put 3 dots. Confidence has to translate into action. He added that the Fed hasn't factored in fiscal policy as details are needed.

The Belgian Debt Agency sold €3.2B of its 2027, 2038 and 2041 OLO's. Average yields amounted to 0.933%, 1.591% and 1.64% respectively. Despite its expensiveness versus peers like France, Ireland and Slovakia, the auction went well and the maximum targeted amount was sold. Interestingly, the appetite of investors for the longer 2038 and 2041 OLO's (€1.6B) was very good. The good interest in the new benchmark 10 - year was less of a surprise. The bid/covers of 1.62 and 1.6 for the long maturities was strong given the amounts sold. Given the thinness of the market today, there was some minor price concession in the aftermath of the auction. Slovakia attracted also strong demand for its 0% 2023 and 3.375% 2027 bond auction. It sold €285.4 M of both bonds with bid/covers of 3.75 and 2.84..

Currencies

Dollar correction slows in uneventful trading session

Today, in technical trading deprived of any important news, the post - Fed setback of the dollar petered out. However, it's too early to conclude that a sustained bottoming has started. EUR/USD is changing hands in the 1.0750 area. USD/JPY trades around 112.60/65.

Overnight, Asian equities traded with a slight risk - off bias. This was at least partially due to investors disappointment as the G20 communiqué didn't say anymore that the group intends to avoid all forms of protectionism. USD/JPY remained under pressure from ongoing overall USD weakness and traded in the 112.60 area, near the lowest level this month. EUR/USD hovered in the 1.0765 area, within reach of the post - Fed top (1.0782).

Trading on European markets, including FX trading, showed very little dynamics. There were no market moving data. The 'usual links' between markets were again very loose. European equities opened in negative territory, but there were limited follow - through losses. Core European yields rose minimal and the interest rate differential between US and German bonds narrowed marginally. However, there were no additional USD losses. USD/JPY even 'rebounded' off the post - Fed low and returned to the 112.80 area. EUR/USD reversed a strong open and drifted back to the 1.0750/65 area.

There was still no high profile news at the start of the US trading session. US equities also opened marginally lower, capping any further USD gains. Fed governors Evans, Kashkari and Harker gave divergent signals. EUR/USD trades currently at 1.0750/55. USD/JPY is changing hands around 112.70/75. So, the dollar didn't lose further ground after last week's post - Fed correction. However, with no news and given the narrow range of today price action, it's too early to draw any firm conclusions.

Sterling losing a few ticks on Brexit announcement

Overnight, the Rightmove House prices were decent at 1.3% M/M and 2.3% Y/Y. Sterling trading was in the first place driven by technical considerations. Even so, the housing report maybe supported the cautiously positive momentum of sterling at the start of the European session. Sterling gained a few ticks against the euro and the dollar, but trading was confined to tight ranges. Around noon, a spokesman of UK PM May announced that the UK will trigger article 50 of the Lisbon treaty on March 29. The move was no surprise. Even so, sterling reversed the intraday gains against the euro and the dollar as investors realize that a period of heightened political uncertainty might be on the horizon. EUR/GBP trades currently in the 0.8680 area. Cable is again changing hands just below 1.24.

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KBC Bank
Author: KBC BankWebsite: https://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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