Rates: Neutral payrolls end core bond run
Friday’s neutral payrolls ended a run of weak US eco data and the accompanying rally in US Treasuries. Geopolitical headlines suggests roadblocks in US-Sino trade talks, US-North Korean nuclear discussions and EU-UK Brexit negotiations. Risk sentiment is neutral though despite these negative titles. Today’s eco calendar is empty.
Currencies: EUR/USD fails to break ‘meaningful’ technical level despite mixed US data
US payrolls were good enough last Friday to prevent a further USD correction after soft US data earlier last week. EUR/USD is trading off recent lows, but shows no convincing upside momentum. A break above the 1.1020 trend line is not evident given global investor uncertainty. Fed comments/guidance remains a wildcard
The Sunrise Headlines
- WS closed the week in green (+1.4%) after a ‘not too hot, not too cold’ job report. Overnight sentiment is rather decent despite China striking a harder tone on trade. Australia outperforms (+0.7%).
- Chinese officials are increasingly reluctant to agree to a broad trade deal pursued by US president Trump. The yuan weakened, the yen rose. Markets are hoping for a potential truce as the global economy is teetering on the edge.
- Portugal’s ruling Socialists won Sunday’s election but didn’t get a majority, meaning PM Costa again needs the support of (one of) his allies in the previous legislature. Costa warned negotiations could be “more complex” this time.
- The NY Fed will extend its repo market interventions into November. They started September, when money markets rates abruptly soared. It will inject $75bn in overnight loans every day and also conduct term-repo operations.
- Turkey will launch a military operation in the north of Syria to fend off Kurdish fighters at the border. The Kurdish YPG fought with the US against IS but is considered a terrorist organization by Turkey.
- Brexit talks have stalled and the EU expressed pessimism on reaching an agreement before Oct. 31. Meanwhile, PM Johnson is prepared to take the Benn Act, which forces him to ask for an extension, to the Supreme Court.
- Today’s economic calendar is little inspiring, leaving trading up to global sentiment ahead of key events later this week (Fed’s minutes, start of renewed trade US/Sino trade talks).
Currencies: EUR/USD Fails To Break ‘Meaningful’ Technical Level Despite Mixed US Data
Data not weak enough to cause ‘big’ USD decline
The trilogy of key US data was supposed to reach a climax with the payrolls on Friday. However, the report was mixed/less negative than the ISM’s. Job growth was close to expectations, the unemployment rate declined to a multi-decade low (3.5%) but wage growth disappointed. The dollar rebounded briefly after the report, but in the end showed no clear directional move. Fed governors mostly keep the door open for further stimulus but didn’t gave very concrete guidance on the timing. EUR/USD closed at 1.0979 (from 1.0965). USD/JPY finished the day almost unchanged (106.94) despite a nice risk rebound.
Overnight, several Asian markets are closed or trading in low volume modus. Major indices are mixed, mostly slightly higher, to a large extent ignoring a strong WS close on Friday. Press reports suggest that US-China trade talks aren’t going smoothly. High level talks are expected to resume on Thursday. The yuan is under pressure (USD/CNY 7.1480 area). EUR/USD is trading little changed in the 1.0980 area. USD/JPY is losing marginally (106.85).
The eco calendar is thin and backloaded (US CPI on Thursday, Michigan consumer confidence on Friday). USD traders will keep close in eye on the Fed communication (Fed speakers including Powell and the Fed Minutes). The US China trade talks are a wildcard (limited deal?).
Last week, the dollar eased off recent tops after poor US ISM’s and a loss of interest rate support. However, USD losses against the likes of the euro remained modest as the relative eco picture hampers any sustained euro gains. Markets anticipate further Fed easing this and next year, but the payrolls were not weak enough to trigger outright further USD losses. EUR/USD is trading off recent low (1.0879) but is holding below the trendline (today near 1.1025). We still find the EUR/USD performance disappointing. More soft US data and/or more outspoken ‘engagement’ of the Fed is probably needed for sustained EUR/USD gains. For now, we don’t anticipate a big leap higher in EUR/USD.
Sterling (EUR/GBP) is still captured in a some kind of erratic trading pattern as markets see little clues on the next steps in the Brexit sage. (Technical) negotiations with the EU are reported to be difficult after Johnson did a new proposal on the Irish backstop. Press articles also suggest that Johnson might take legal action against the law forcing him to as for delay in case of no deal. We stay cautious/reluctant on sterling longs as long as this unpredictable process continues.
EUR/USD fails to regain trendline coming in near 1.1020 despite soft US eco data
