- Rates: Significant underperformance of US Treasuries against German Bunds
The Italian spread rose back above 300 bps as several EU heavyweights suggested that Italy will have to correct its draft budget. German Bunds outperformed US Treasuries, with the latter facing a significant sell-off at the end of trading. We expect recent trading pattern to extend today given a lack of impetus from the eco/event calendar. - Currencies: USD supported by higher US yields, at least for now
Yesterday, the dollar regained pole position on FX markets. Hawkish perceived Fed Minutes propelled US yields and the dollar. The US government refraining from labelling China as currency manipulator was slightly USD positive too. Today, the eco calendar is thin. If EMU-US interest rates continue to diverge, EUR/USD might go for a retest of the 1.1432 support
The Sunrise Headlines
- US equity markets closed yesterday’s session largely unchanged, with only the Dow Jones losing some ground (-0,36%). Asian markets are opening today’s session in red, with China underperforming (-2%.
- UK PM May returned home from the EU summit in Brussels with little progress made. She told European leaders that she is willing to extend the Brexit transition period beyond 2020. The move infuriated Eurosceptic Conservatives.
- Wilbur Ross, secretary of the US Commerce Dept., said the Trump-Juncker trade agreement is on loose screws. He said that Trump’s “patience is not unlimited” after EU trade commissioner Malmström accused the US of dragging its feet.
- The FOMC meeting minutes of the September meeting showed that Fed policy makers are not hesitating to continue to raise interest rates. The central bank seeks to prevent overshooting inflation and limit the risks of financial excesses.
- The US government refrained from labelling China as a currency manipulator in its semi-annual currency report. Treasury Secretary Mnunchin warned though for lack of Chinese FX transparency and recent yuan weakness.
- Matteo Salvini, Italy’s Deputy PM, said friends from various countries are urging him to run for the European Commission presidency in May 2019. He added that he is considering it.
- Today’s eco calendar contains the Philadelphia Fed Business Outlook for October and the Initial Jobless Claims in the US. The UK releases numbers on retail sales. ECB’s Nowotny and Fed’s Bullard and Quarles speak today.
Currencies: USD Supported By Higher US Yields, At Least For Now
Will USD enjoy additional interest rate support?
Global equity markets took a cautious approach yesterday after Tuesday’s US rally. The dollar returned to pole-position. USD strength gained further momentum later. The Minutes of the September meeting showed broad support within the Fed to raise rates beyond neutral if the economy stays on track. US yields jumped north and the dollar profited from this additional interest rate support. The US government also refrained from labelling China (or any other trading partner) as a currency manipulator. This might have been a slightly USD positive, too. EUR/USD closed at 1.1501. USD/JPY also finished in positive territory at 112.65. This time, the USD/JPY was also mainly driven by interest rate differentials rather than developments on the equity markets. Overnight, Asian equities are mostly trading in negative territory. Chinese indices are again a notable underperformer. USD/CNY trades near 6.94, the weakest yuan level since early 2017. The combination of higher US yields and a risk-off sentiment this time supports the dollar. EUR/USD is drifting below the 1.15 level. USD/JPY is losing a few ticks. Maybe the yen also profits slightly from comments of BoJ’s Kuroda as he suggested that core inflation has returned to the 1.0% area (rather than 0.5%-1.0% indicated in the Sept BoJ policy statement). Later today, the EMU eco calendar is empty. US jobless claims and Philly Fed business outlook are only of intraday significance. For USD traders, the question is whether US yields will extend yesterday’s rise. If so, the dollar can keep a positive momentum. European topics (budgets, rising Italian spreads, Brexit) probably won’t yield support for the euro. In this context, some further USD strength might be the way of least resistance. The EUR/USD 1.16/1.1620 area proved to be rather tough ST resistance of late. In a context of rising USD yields, EUR/USD might go for a retest of the 1.1432 ST bottom. A break would open the way to the 1.1301 August correction low.
Yesterday, sterling initially lost some further ground ahead of the EU Brexit summit and on softer than expected September UK eco data. The summit as expected didn’t yield any progress in Brexit. PM May considering the option of longer transition period was mentioned as a positive. EUR/GBP closed the session little changed at 0.8770. Today, the UKL retail sales are expected soft (0.4% M/M). For EUR/GBP, more technical trading around current levels might be on the cards.
EUR/USD: dollar supported by rising US interest rates. Test of EUR/USD 1.1432 might be on the cards
