- Rates: 2019 Fed rate cut no longer discounted
Core bonds lost more ground with US Treasuries underperforming German Bunds. Markets no longer discount a Fed rate cut this year. Positive risk sentiment, fresh supply and higher oil prices add to the recent change in settings, originally inspired by Fed chair Powell comments and strong US eco data. Today’s eco calendar is thin. US central bank speeches are wildcards. - Currencies: EUR/USD holding within reach of 1.15 resistance
EUR/USD lost only marginal ground yesterday despite poor EMU eco data. The dollar continues trading with a soft bias. A positive risk sentiment and expectations for a softer, more flexible Fed going forward are blocking more sustained USD gains. Recent technical rebound of sterling proved short-lived as the brexit process enters a next key phase.
The Sunrise Headlines
- US equity markets climbed higher again yesterday with all major indices gaining around 1% as US-Sino trade talks move in the right direction. Asian equities opened in green as well with Chinese equities outperforming.
- Mid-level trade talks between the US and China were extended for a third day, adding optimism to ongoing progress. US President Trump is said to seek an agreement in the near future in hopes of boosting financial markets.
- US President Trump addressed the US people on the US-Mexico border issue. He urged Congress to provide billions more to combat illegal migration but did not declare a national emergency to bypass Congress, as some initially feared.
- UK PM May lost her first Parliamentary vote of 2019 as the House of Commons defeated her on an amendment to the finance bill. That amendment would allow the UK government to raise taxes in the event of a no-deal Brexit.
- The World Bank has cut its growth outlook for the global economy. It sees the downside risks to the world economy as more acute. The bank expects a global growth of 2.9% in 2019, down from the 3.0% projection in June.
- The Chinese government is preparing measures to boost the consumption of cars and household appliances. The move is aimed to revive automobile demand, as it slowed down for the first time this year in over twenty years.
- Today’s economic calendar contains Minutes of the previous Fed meeting. The Polish and Canadian central banks meets. Fed Bostic, Evans and Rosengren and BoE Carney speak. The US, Germany, Ireland and Portugal tap the bond market.
Currencies: EUR/USD Rebound Still Blocked At 1.15 Resistance
EUR/USD 1.15 level stays within reach
Global sentiment improved yesterday as US policy makers said that progress is being made in the US-China trade talks. Stocks rebounded further and core (US & EMU) yields rose. The impact on the dollar was again modest given the price moves in interest rates and equities. A risk-on sentiment often favours the euro (and other ‘risk currencies’) more than the dollar. However, the impact of the global risk rally on EUR/USD was mitigated by poor EMU/German data. The widening of US/German interest rate differentials also prevented further EUR/USD gains. At the same time, USD/JPY gained only modestly despite higher US yields and a risk-on sentiment. For now, FX markets (especially the USD) stay in some kind of wait-and-see modus. EUR/USD finished at 1.1441 (from 1.1474). USD/JPY closed the day at 108.75 (from 108.72).
The risk rally continues overnight as the US and China are extending trade talks. President Trump taking no new steps on the financing of the wall with Mexico in its television address yesterday also eased investors’ concerns. Chinese equities outperform a broader regional rally, supporting the yuan (USD/CNY near 6.8390). Commodity currencies are profiting from a rebound in the oil price with the Canadian dollar extending its rally. The dollar is losing a few ticks. EUR/USD is trading near 1.1450. USD/JPY hovers in the high 108 area. There are few eco data in EMU and in the US today. Markets will keep an eye at Fed speakers and at the minutes of the December Fed meeting. Markets will look for more indications on Fed policy flexibility. Also keep an eye at the auction of 10-y US Treasuries. Yesterday’s sale of 3-y bonds received only mediocre investor interest. A difficult sale of LT US bonds might raise LT US interest rates, but probably won’t help the dollar. Yesterday, we advocated a cautious stance on the dollar and saw the downside in EUR/USD rather well protected as markets anticipate a softer, flexible Fed. We hold that view. For now, the established ranges remain in place, but if the risk rebound continues, a retest of the 1.15 area remains possible. The 1.1621 mid-Oct top is next reference. Recent ‘sterling strength’ proved short-lived yesterday as the political debate on Brexit returned to the forefront. UK PM May lost a vote in Parliament limiting her (financial) room of manoeuvre in case of a no-deal Brexit. Uncertainty on the next steps in the brexit process probably will cause investors to stay cautious on sterling long exposure going into next week’s brexit vote (scheduled for Jan 15).
EUR/USD: holding up well despite poor EMU eco data
