- Rates: Italy to launch new 20-yr syndicated bond
The risk rally that start last week is losing pace. The upward rebound in US yields also remains limited with next week’s Fed meeting in mind. Italy profits from last week’s dovish ECB outlook and new momentum to launch a new 20-yr syndicated benchmark deal. - Currencies: will US CPI trigger further USD losses;
The rebound in US yields already ran out of steam yesterday and also blocked any USD upside momentum. US president Trump said the euro was devalued against the dollar, signaling its preference for a weaker dollar. The focus for USD trading is on the US CPI today. A soft figure might reinforce calls for a Fed rate cut and weigh on the dollar
The Sunrise Headlines
- US equity indices opened in green yet ended marginally in red yesterday, ending the recent winning streak. Asian stocks lose ground with Hong Kong underperforming (-1.6%) amidst ongoing demonstrations.
- Hong Kong protests escalate with demonstrators blocking roads and a 100+ HK businesses closed in a sign of solidarity. Protests have erupted after lawmakers announced debating legislation that would allow extraditions to China.
- US president Trump said it is him personally that is blocking a US/Sino deal from happening. He said Beijing has been backtracking on the preliminary agreement and he has ‘no interest’ in a deal unless China returns to those terms.
- Chinese inflation in May accelerated from 2.5% YoY to 2.7%. The increase was mainly driven by a surge in food prices. Pork prices rose a stunning 18.2% as the African swine fever started to take its toll. Non-food prices were up 1.6%.
- The US government trimmed the US corn harvest forecast to the lowest in four years as continuous rainfall in the Midwest keeps farmers out of the fields. The US produces about one third of world production. Corn prices jumped 5%.
- EC president Juncker warned the Conservative leadership candidates that the current withdrawal agreement ‘will not be renegotiated’, but said Brussels remained open to discuss the details of the political declaration.
- In today’s economic calendar we watch for US CPI in May. Frankfurt hosts many high-profile speakers, including IMF’s Lagarde and ECB’s Draghi, Coeuré and de Guindos. The US, Germany and (most likely) Italy tap the bond market
Currencies: Will US CPI Trigger Further USD Losses
US CPI to trigger additional USD losses?
The news flow was mixed yesterday and the dollar traded accordingly. Initially, further rebound in US yields supported the dollar, especially USD/JPY. US data were OK with a strong NFIB small business confidence, but it wasn’t enough to sustain further USD gains. President Trump indicated that the euro (and other currencies) were devalued against the dollar. The immediate reaction was limited, but the US raising doubts on the strong USD policy is a potential USD negative. Later, an intraday reversal in US yields also erased the USD gains. EUR/USD closed at 1.1326 (from 1.1312). USD/JPY ended at 108.52 (from 108.45).
This morning, Asian equities show modest losses as the US is holding a tough stance on a trade deal with China going into the G20. Hong Kong equities underperform, but the HKD jumped as tighter liquidity/higher yields raised the cost of shorting the HKD. A tentative decline in US yields keeps the US dollar in the defensive. EUR/USD is trading in the 1.1335 area. USD/JPY hovers in the mid 108 area.
Today, the US CPI will take centre stage. Both headline (1.9% from 2.0%) and core (2.1% unchanged) are expected close to the 2% target. Risks, if any, might be slightly to the downside, a potential USD negative. The rift between the EU commission and Italy on the country’s budget continues, but it isn’t clear how hard both sides will play this game. For now, the (negative) impact on the euro is modest.
At the end of last week, US yields touched new cycle lows, pushing EUR/USD temporarily above the 1.1324 resistance. US yields bottomed this week as substantial Fed easing was discounted, removing some pressure from the dollar. Still, the USD rebound was unimpressive. Longer term, the dollar might have entered a sell-on-upticks pattern. The 1.1200/1.1250 looks solid EUR/USD support. Further sustained gains beyond 1.1324/48 still open the way to the 1.1448 target area.
Sterling rebounded yesterday. UK labour data were OK despite ongoing uncertainty on Brexit. Markets still see little chance on a BoE rate hike, but the labour report gave some more credence to recent BoE warnings that a rate hike might be needed. EUR/GBP dropped to the 0.89 area. There are UK data today. Headlines from the political battle to succeed PM May will highlight uncertainty. Still we have the impression that the decline of sterling is losing some momentum. The EUR/GBP 0.90/0.91 is a tough resistance.
EUR/USD continues to test recent top as sentiment on the US currency remains fragile
