- Rates: Core bonds steam ahead, but enter overbought conditions
Core bonds rallied ahead yesterday, pushing the European swap rate curve into negative territory for tenors up to 5 years. EMU economic data will probably confirm the recent gloomy picture, adding to ECB Draghi’s and Praet’s recent case to explore mitigating potential risks from the central bank’s negative interest rate policy - Currencies: uncertainty on global growth give mixed signals for FX trading
Swings in the EUR/USD and USD/JPY were modest given sharp moves in interest rate markets. The sharp decline in both US and EMU yields provides some kind of a balance for EUR/USD. Today, the EMU confidence data and German CPI might affect intraday EUR/USD trading. Will soft data push EUR/USD for a test of the 1.1187/1.12 range bottom?
The Sunrise Headlines
- US equity markets lost ground yesterday with losses up to -0.67% (Nasdaq). Asian markets are largely tracking losses on Wall Street with Japanese indices underperforming.
- UK PM May announced that she is willing to step down as Prime Minister if her deal survives a third vote this week and eventually gets ratified. Meanwhile, not one alternative option to May’s deal found majority in the UK Parliament.
- ECB chief economist Peter Praet said the Bank will need to have a solid monetary policy case to mitigate the side effects of negative interest rates (‘tiering’) on banks, brought up by president Draghi earlier.
- Kansas City Fed chief Esther George said it is appropriate to put monetary policy on hold amid ‘’notable” downside risks. She sees the biggest risk coming from slower growth globally, particularly in China, the euro zone and the UK
- Turkey took unconventional measures to prevent foreign investors of betting against the Turkish lira, days before local elections will test President Erdogan’s support. The cost of borrowing liras overnight soared past 1000%.
- US-Sino trade negotiations continue today in Beijing. US officials said talks have moved forward in all areas, incl. forced technology transfers as China has made unprecedented proposals to the US.
- Today’s US eco calendar contains this week’s jobless claims and pending home sales (Feb). The EC prints economic confidence gauges (Mar) and Germany releases CPI data. ECB’s de Guindos and an avalanche of Fed governors speak
Currencies: Uncertainty On Global Growth Give Mixed Signals For FX Trading
Uncerainty on growth indecisive for EUR/USD?
Interest rate markets signalled ever growing market concerns on global growth yesterday. Both US and European yields nosedived. Early in the session, ECB’s Draghi confirmed the soft U-turn in policy at the March meeting but also indicated that the ECB is studying measures to mitigate the side-effects negative interest rates, if necessary. The euro temporarily regained a few ticks, but EUR/USD soon returned the mid 1.1250 area. For now, the relative valuation between the euro and the dollar is not the focus for trading as growth (& rate) expectations for both regions are being scaled back. EUR/USD closed at 1.1244 (from 1.1266). The loss in USD/JPY was modest given the decline in core yields and fragile risk sentiment. The pair finished at 110.51 (from 110.64).
This morning, Asian equity indices are mostly drifting lower, with Japan underperforming. Australia and India are outperforming. Yields of most developed markets remain under pressure as doubts on global growth persist. USD/JPY is drifting back south to the low 110 area. EUR/USD regained some ground (currently in the 1.1255 area).
US data (final US Q4 GDP, jobless claims and pending home sales) are probably of second tier importance today. In the EMU the confidence indicators from the EC and German (regional) CPI will be published. In the current context, growth-related indicators (including confidence) are probably more important for global markets/FX trading rather than inflation. That said, the consensus for the German HICP (0.6% M/M and 1.6% Y/Y) is quite high and an undershoot probably won’t pass unnoticed with potentially (temporary?) implications for the EUR/USD. At the same time, the growth story will remain the focus for global trading. EUR/USD is drifting further south in the 1.2/1.15 MT trading range. Euro sentiment is fragile, but US data are also turning mixed. For now, we maintain the view that there is no compelling reason for EUR/USD break below the 1.1187/1.12 support in a sustainable way even as we understand downside risks have increased. In this respect, we continue to monitor EUR/JPY which is nearing the key 123.40/80 support area.
Overnight, sterling reversed yesterday’s intraday gain against the euro as the UK parliament failed to agree on alternative options to solve the Brexit stalemate. The impasse persists. UK PM May still has the option to bring hear deal back to parliament but it is unsure (unlikely) she will get a majority. So for now, more erratic wait-and-see trading might be on the cards for the major sterling cross rates.
EUR/USD: drifting lower in the 1.12/1.15 range. However, global uncertainty on growth makes a real trend-move not evident
