- Rates: Downside risks to US CPI inflation
US stock managed an intraday rebound, but we don’t think that the correction lower already ran its course. We remain in favour of core bonds. Downside risks to today’s US CPI reading could trigger further outperformance of US Treasuries against German Bunds. A speech by NY Fed governor Williams is interesting following dovish clues from his colleagues. - Currencies: Dollar underperforms as trade tensions intensify
The FX trends of earlier this week continued. The dollar underperformed against the euro and yen as the US currency lost further interest rate support. Trade tensions will continue to dominate global (FX) trading. For now, there is no reason to fight the established trading pattern. A softer than expected CPI might be an additional USD negative
The Sunrise Headlines
- US equity markets partly recovered from intraday losses yesterday as US President Trump received “a beautiful letter” from China president Xi Jinping. Asian shares are performing mixed with Chinese indices outperforming.
- The US officially proceeded to raise tariffs on $200 billion of Chinese imports to 25% this morning, although trade talks are continuing today in Washington. China said it is forced to retaliate without specifying how it will do so.
- Atlanta Fed President Raphael Bostic said that higher tariffs on Chinese imports could force US businesses to pass on the costs to consumers, suggesting that price pressures are building and that it could affect the economy.
- The US seized a North Korean cargo ship on suspects of violating on imposed economic sanctions. The move is meant to ramp up pressure on Pyongyang following their recent short-range, smaller missile tests.
- South Africa’s ruling African National Congress (ANC) will secure just enough votes to give President Ramaphosa a definitive mandate. With 70% of the votes counted, the ANC leads with 57%, down from the 62% at the previous elections.
- Japanese wages dropped by the most in almost for years. Total labour cash earnings for March declined with 1.9% (Y/Y), well below the expected -0.5% decline. Real cash earnings dropped 2.5%, more than the -1.1% expectation.
- Today’s economic calendar is fully equipped with consumer inflation data (Apr) in the US, labour data (Apr) in Canada and Q1 GDP results in the UK. Norway prints CPI’s (Apr) as well. An avalanche of ECB and FED governs speak
Currencies: Dollar Underperforms As Trade Tensions Intensify
USD underperforms as trade tensions intensify
EUR/USD initially showed now clear bias yesterday as investors were looking for the next steps in the US-China trade dispute. Sentiment remained risk-off but again didn’t help the dollar. During the US session, US yields declined further, substantially narrowing the US-German interest rate spread. This finally caused a new USD downleg. EUR/USD jumped beyond the 1.1215/20 ST resistance but closed the day at 1.1215, off the intraday top. USD/JPY drifted further below 110 to close at 109.74. Even so, the gain of the yen remained modest given the degree of global uncertainty.
This morning, the additional US tariffs have been implemented. China indicated it will retaliate. Asian equities initially tried to regain some of this week’s loss, but are trading very volatile. The reaction of the major FX/USD cross rates is quite similar to earlier this week. The dollar is losing modest ground against the euro and the yen (EUR/USD 1.1225/30 area; USD/JPY 109.65 area). The decline of the yuan slowed, at least for now (USD/CNY in the 6.81 area).
There are second tier eco data in Europe today, but the US April CPI is interesting. Both core and headline CPI are expected to rise to 2.1%. This consensus expectations look reasonable. That said, the dollar reaction still might be a bit asymmetrical, with the US currency more sensitive to a negative surprise than to a positive surprise. However, trade tensions will again dominate global FX trading. For now, there is no reason to expect the recent pattern of USD underperformance to continue as US yields stay under pressure. Some gradual further EUR/USD gains in the 1.11/1.14 range are possible shortterm. Still it remains a bit unnatural to see the euro outperforming in a context of global trade uncertainty.
EUR/GBP extended this week’s rebound yesterday. The move was partially EUR/USD inspired as the pair jumped higher during the US trading session. At the same time, there was little reason for sterling optimism as the Brexit negotiations between the government and the labour opposition still didn’t yield any concrete progress. Today, the UK Q1 GDP growth is expected at a strong 0.5% Q/Q. However, this strong performance was probably mainly Brexit related (stock building etc). The impact on sterling should be limited. Maybe the UK currency might lose some further ground in case of a negative surprise.
EUR/USD: USD underperforms as uncertainty on trade persists.
