Rates: Wait-and-see mode prolonged
Global core bonds tread water ahead of tomorrow’s FOMC meeting. Today’s thin eco/event calendar suggests more of the same. Risk sentiment faces a small setback on Asian stock markets overnight, but spillover effects to other markets are limited. A speech by ECB Praet is a wildcard.
Currencies: Is enough USD softness discounted ahead of tomorrow’s Fed meeting?
The dollar continued trading with a tentative negative bias yesterday, but in the end USD losses were modest. Today, an improving ZEW confidence might be a modest euro supportive, but we don’t expect important USD support levels to be broken as quite soft news is already discounted. Sterling remains resilient even as political visibility on Brexit remains low.
The Sunrise Headlines
- US equities finished a choppy trading session in green yesterday with gains varying from 0.25% (DJI) to 0.37% (S&P). Stocks are trading mixed in Asia as markets await tomorrow’s Fed decision
- Speaker Bercow thwarted May’s brexit strategy by blocking her plans to bring the unchanged deal to Parliament for a 3th time, arguing a same motion cannot be put to a vote repeatedly to “ensure the sensible use of the House’s time”.
- The IMF is to unlock another $11b. funding for Argentina after it concluded its third review of the country’s economic progress. Both parties reached a $56.3b financing deal last year to help Argentina recover from a severe economic crisis.
- The German government pencilled in a 1.7% spending increase in its 2020 budget. The Finance department relies on ministries cutting costs to balance the budget instead of issuing debt given the projected growth slowdown.
- The head of ECB’s bank supervision branch (SSM) Enria criticised the idea of creating national champions. He declined to comment on Deutsche and Commerzbank merger talks but added the SSM only cares about “sustainability”.
- France’s financial stability board has instructed banks to raise the counter-cyclical buffer from 0.25% to 0.5% of their French risk-weighted assets. The measure is aimed at ensuring lending if the credit cycle turns to bust.
- Today’s economic calendar contains German ZEW investor confidence, (final) US durable goods orders and the UK Labour market report. The UK Parliament’s third meaningful vote has been cancelled. ECB’s Praet is scheduled to speak
Currencies: Is Enough USD Softness Discounted Ahead Of Tomorrow’s Fed Meeting?
Enough Fed softness discounted ahead of the Fed?
USD trading was mostly technical in nature yesterday. NAHB housing confidence was softer than expected but had no noticeable impact the US dollar. Initially EUR/USD was supported by underlying USD softness ahead of tomorrow’s Fed meeting. The pair touched a ST correction top near 1.1360, but lost momentum as the US equity rally stalled. The pair closed at 1.1337 (from 1.1326). The limited intraday equity correction also weighed on USD/JPY. The pair finished at 111.43 (from 111.48).
This morning, Asian equities are running into resistance as there is no additional good news to extend the recent up-leg of the risk rebound. For now, some tentative US softness persists. USD/JPY drifting lower in the 111 big figure. EUR/USD is trading in the mid 1.13 area. AUD/USD hovers near the 0.71 level. The Australian 3-year bond yield dropped below the RBA policy rate (1.50%) as markets anticipate the next rate move of the RBA will be a rate cut. Investors in EMU will look at the ZEW investor confidence today. The current conditions index is expected to remain weak. Expectations are expected to show further signs for bottoming. A decent report might add to the feeling that the worst is behind for the German/European economy, but the jury is still out. At least the report should be good enough not undermine recent EUR/USD rally. Still, USD trading might developed in a guarded way as investors await tomorrow’s Fed policy decision/guidance. Yesterday, US yields didn’t decline any further. Is this a sign that enough Fed softness is ancipated for now? If so, the dollar decline might slow today, resulting in technical, directionless EUR/USD trading.
Last week, EUR/USD traders soon forgot the soft message from the ECB meeting. EUR/USD profited from an improving risk sentiment and expectations on a soft Fed meeting. The technical picture for EUR/USD become more stable. The 1.12 range bottom survived on USD softness. Any further sustained rebound probably also needs better EMU data. As long as the EMU picture remains foggy, more EUR/USD consolidation might be in the cards (1.12/1.14 area). Sterling traded with a negative bias early in the session yesterday. The UK currency touched intraday lows as the speaker of the House ruled out another vote on PM May’s Brexit deal. Sterling reversed part of the losses later, as UK official stressed they will ask for a Brexit delay at the EU summit later this week. Today, UK labour market data are interesting, but probably be overshadowed by Brexit headlines. We don’t expect the brexit process to be clarified soon and stay cautious on sterling. The 0.8490/0.85 area might become a ST floor for EUR/GBP.
EUR/USD: has the dollar discounted enough pre-Fed softness?
