- Rates: Stuck in no man’s land
Global core bonds are stuck in no man’s land following last month’s decision by both the ECB and the Fed to stay side-lined in “assessment mode” for the next months. More range-bound sideways action can be expected today with intraday gyrations possibly caused by US supply, new EC forecasts and central bank speakers. - Currencies: EUR/USD slide continues as doubts on EU economy continue to weigh
EUR/USD extended the gradual but protracted decline yesterday that started after last week’s Fed policy decision. The dollar remains well bid and ignores potential USD negative news as investor worries on the EU economy prevail. Sterling traders will look out for a new meeting between UK PM May and EU’s Juncker and for the BoE policy statement.
The Sunrise Headlines
- US equity markets lost limited ground yesterday in thin trading. Technology shares underperform (Nasdaq -0.36%). Asian equities are mixed with Japan underperforming. Chinese bourses are closed ( Lunar New Year holiday).
- US Fed chairman Powell said that the economy is now in a good place, in his first appearance after the January Fed policy meeting. Fed Vice Chair Quarles said labour market is ‘extremely solid’ and called China key for US growth.
- UK media reports that a 2nd vote on PM May’s Brexit deal may be pushed back to the week of Feb 25, as she’s unlikely to bring a renegotiated divorce deal back to Parliament by next week (Feb 13). May meets EC president Juncker today.
- The Reserve Bank of India has unexpectedly cut its benchmark policy rate for the first time in 18 months to 6.25%, down from 6.50%. The bank added that headline inflation is to remain soft and changed its policy stance to neutral.
- New Zealand’s jobless rate unexpectedly rose to 4.3% in the fourth quarter of last year, adding to concerns that the labor market isn’t generating inflationary pressure. The New Zealand dollar weakened with NZD/USD falling to 0.675.
- Brazil’s central bank left the benchmark interest rate at a record low of 6.5%. The Bank said that inflation remains subdued and signalled that Congress needed to approve cost-cutting measures before the bank can consider a cut.
- Today’s economic calendar contains US weekly Jobless Fed Clarida & Kaplan and ECB Mersch & Constancio speak. The Bank of England meets and the European Commission publishes its new forecasts. The US holds a 30-yr Bond auction
Currencies: EUR/USD Slide Continues As Doubts On EU Economy Continue To Weigh
USD stays in the driver’s seat
The EUR/USD slide continued yesterday. Euro selling restarted on poor German factory orders, pushing the pair well below 1.14. The Italian 30-y bond auction attracted ample interest but it was not enough to smooth investor concerns on the Italian economy and/or help the euro. Political bickering between the EU and the UK on Brexit maybe weighed on the euro, too. Later, USD strength prevailed. Remarkably, the dollar gained on higher US yields which were the result of a mediocre 10-y auction. EUR/USD finished the day at 1.1362 (from 1.1406). USD/JPY reversed earlier losses and finished almost unchanged at 109.97. This morning, Asian indices are trading mixed. Japan underperforms. The dollar maintains its recent gains. USD/JPY is again testing the 110 barrier. EUR/USD is going nowhere (1.1360 area). The Kiwi dollar (NZD/USD 0.6750 area) nosedived on disappointing New Zealand Q4 labour data. Softer data caused markets to anticipate a soft RBNZ at next week’s policy meeting. Markets are pondering the chances for a rate cut further down the road if eco data continue to disappoint. Today, the EC economic forecasts will get ample attention as markets are looking for clues on the EU economic performance in 2019 and its potential impact on ECB policy. The message from the EC forecast will probably be soft, but should that still be a surprise for markets? This afternoon, Fed’s Clarida will discussus the topic of the neutral policy rate. The US Treasury will sell 30-y bonds. Yesterday, a mediocre auction didn’t hurt the dollar. On the contrary, the USD profited, illustrating the USD-friendly market momentum. Last week, the post-Fed USD decline (EUR/USD rebound) halted very soon, mainly due to poor EMU data. The started a gradual, but protracted rebound. The day-to-day momentum is USD supportive & cautious on the euro. However, we don’t seen a strong case for EUR/USD to drop below key support coming in at 1.1290/67. We look for signs of a bottoming process.
Sterling rebounded slightly against the euro yesterday, even as political comments showed that the rift between the UK and the EU on Brexit remains very wide. Euro weakness also weighed on EUR/GBP (close at 0.8787). Today, UK PM May will meet EU’s Juncker. A breakthrough on the Irish backstop topic is unlikely. At its regular policy meeting, the BoE will almost certainly leave rates unchanged. The will probably continue to indicate that gradual rate increases are possible in case of an orderly Brexit. If any, we expect any positive impact on sterling to be limited.
EUR/USD: dollar remains well bid. At the same time euro caution persists on eco worries
