- Rates: US Treasuries underperform German Bunds
German Bunds held remarkably strong yesterday despite positive risk sentiment in Europe. WS ended flat, but US Treasuries continued Monday’s slide. The same story develops overnight with thawing Sino-US trade talks strengthening the risk rebound. German Bunds might outperform further with EMU bonds facing selling pressure and ahead of tomorrow’s ECB. - Currencies: Dollar drifts higher within established ranges
The euro took a strong start yesterday, but EUR/USD 1.14 resistance again proved to be a tough hurdle. A higher US PPI and positive talk on the Sino-US trade relations finally turned out USD positive. The US CPI is a wildcard today. For now, the dollar apparently gets the benefit of the doubt going into next week’s Fed meeting.
The Sunrise Headlines
- US stock markets closed mixed yesterday after a volatile trading session. Nasdaq (+0.16%) outperforms. Asian bourses open well in green as US/China trade tensions might ease. Japanese indices outperform.
- Canada released the Huawei CFO on bail, raising hopes of easing trade tensions between the US and China. US President Trump already signalled he thinks this is a good thing “for what will be the largest trade deal ever made”.
- In a disagreement over a year-end spending bill, US President Trump told Democratic leaders he would be proud to shut down the US government later this month if he doesn’t get funding for a wall on the Mexican border.
- UK PM May is back in MP’s crosshairs after she delayed the Brexit vote and hinted a new vote will not take place before January ’19. Rumours now say Tory rebels had secured the 48 votes needed to trigger a confidence vote.
- Japanese PPI’s decreased in October to 2.3% (YoY) from 3.0% in October. The month-on-month figure printed -0.3%, down from 0.4% a month before and below expectations of -0.1% and the biggest drop since August 2016.
- Italian Deputy PM and leader of the League Party, Matteo Salvini, is said to be seeking new elections in March 2019, according to local Italian media. Meanwhile, PM Conte said to seek a 2019 budget deficit of 2.05%-2.08%
- Today’s economic calendar is rather thin with the November CPI’s in the US and the Industrial Production result for the EMU in October. ECB’s Hakkarainen is speaking in Frankfurt. The US Treasury holds a $24bn 10-yr Note auction
Currencies: Dollar Drifts Higher Within Established Ranges
Dollar drifting higher within established ranges
EUR/USD initially rebounded yesterday, supported by an improved risk climate and a better than expected German ZEW, but the gain could not be sustained. The 1.14 big figure was a tough resistance. Later, the USD received support from stronger than expected US PPI data and positive comments from US president Trump on the US China trade talks. French and Italian spending plans were potentially euro negative. EUR/USD finished the day at 1.1317 (from 1.1356). The gain in USD/JPY was more modest (close at 113.38).
Asian investors also considered the positive comments from US president Trump on the trade talks enough a reason to turn more positive on risk overnight. Positivism on trade currently outweighs the Brexit chaos and the risk of a US government shutdown as a driver for global markets. In an interview, US president Trump called the Fed not to raise interest rates next week. For now, his call has little impact on US yields or on the dollar. The dollar remains well supported despite the overall risk-on context (DXY 97.40 area; EUR/USD 1.1325 Regarding the data, US CPI inflation takes centre stage today. Core inflation is expected to rise a ‘trend-like’ 0.2% M/M and 2.2% Y/Y. Headline CPI is seen easing from 2.5% Y/Y to 2.2%. We have no strong arguments to deviate from the consensus. A negative surprise from headline (oil) might hamper a rise in US yields and in the dollar. Global sentiment and technical factors will also again play an important role. Brexit remains in the headlines and is a tentative euro negative (against the dollar). We consider an easing of the China/US trade tensions as neutral for EUR/USD. The topside in EUR/USD showed tough resistance in the 1.14+ area of late. Given the recent sharp decline in US yields, the market maybe has still some ‘less dovish’ repositioning to do in the run-up to the Fed meeting. This might keep the dollar well supported with the established ranges. (EUR/USD 1.12/1.15)
Sterling remained in the defensive yesterday as Monday’s decision to delay the Brexit vote reduced the visibility of the Brexit process even further. Sterling held near a 3-month low against the euro and tested the 1.25 barrier against the dollar. Currently, the debate whether or not there will be a confidence vote on PM May’s position only adds to uncertainty. We still so no reason to row against the current negative sterling tide.
EUR/USD: Dollar drifting higher going into the Fed policy decision
