- Rates: Risk sentiment and technical factors drive trading
Core bonds gained minor traction during US trading hours as US stock markets failed to cling to opening gains. The US 10-yr yield for third straight session failed to take out 1.94% resistance. US President Trump didn’t shed fresh views on trade talks. Risk sentiment and technical factors will continue drive trading today with Fed Chair Powell unlikely to give new insights. - Currencies: USD rally slows, but euro fails to profit
EUR/USD dropped lower in the 1.10 big future yesterday. However, the USD rebound gradually slowed as mixed comments from president Trump on trade talks cap a further rise in US yields. Even so, the dollar is holding near recent highs. EUR/USD apparently needs more positive EMU news to succeed a ST trend reversal.
The Sunrise Headlines
- WS eventually ended flat to 0.26% higher yesterday, but off intraday highs. Asian markets are lower as US-China trade deal hopes dwindle and concern about Hong Kong’s situation is intensifying. Hong Kong underperforms (-2%).
- US president Trump spurred more trade uncertainty yesterday by saying that a significant phase-one trade pact with China could come soon, but warned he will substantially raise tariffs on Chinese goods if no deal is done.
- The US is expected to postpone the deadline on whether to apply duties on EU carmakers today. This after Trump argued in May that US imports of European autos pose a national security threat.
- New Zealand’s central bank surprised investors by holding its main rate at an all-time low of 1% today. Even though the RNBZ slashed its GDP growth outlook for the year, the central bank sees no urgency to ease policy further.
- Chili’s peso slid 5% to a record low against the dollar yesterday. Widespread protests against the government, which have engulfed the country for the past weeks, intensified and prospects of any resolution dimmed.
- WH economic advisor Kudlow suggested that a 15% middle-class tax-rate is a good idea but would take much time to achieve, after it was reported that the new tax policy could be unveiled during the 2020 presidential campaign.
- In today’s economic calendar investors will keep an eye on US/UK inflation data. Fed chief Chairman Powell is set to speak in Congress where he is likely to signal again that monetary policy is on hold. Germany and Italy tap the bond market
Currencies: USD Rally Slows, But Euro Fails To Profit
Dollar rally slows, but euro doesn’t profit
Yesterday, trading in the major euro and USD cross rates was mostly technical in nature. German ZEW investor expectations improved more than expected but didn’t help the euro. EUR/USD dropped to the low 1.10 area. Later, US yields eased and the rise of the dollar stalled as US president Trump brought a guarded message on US-China trade talks. He again accused the Fed of slowing growth by not joining other central banks that are applying negative interest rates. EUR/USD closed at 1.1009 (from 1.1033). USD/JPY reversed earlier gains to finish at 109.01.
This morning, Asian equities are falling prey to profit talking. Hong Kong underperforms as the political unrest intensifies. USD/JPY hardly loses ground even as sentiment turns more cautious. EUR/USD stabilizes in the 1.1010/15 area. USD/CNY again settled north of 7.0 (7.0170 area). The kiwi dollar (NZD/USD 0.64 area) jumped more than 1% as the RBNZ left its policy rate unchanged at 1.0%. The market discounted a 75-80% chance of a rate cut. The RBNZ keeps the door open for further easing if needed but first wants to assess the impact of previous rate cuts.
Today, US Oct. CPI is expected at 1.7%Y/Y (headline) and 2.4% (core). This level shouldn’t worry markets as the Fed only considers raising rates in case of a sustained overshoot of the (symmetric) 2% target. Markets also closely watch Fed Powell’s hearing before Congress, but we expect him to repeat the message of the October 30 press conference. If anything, Powell highlighting a tentative easing of the risk factors to growth might be a slightly USD positive. The US decision on tariffs on EU cars is a wildcard.
Positive trade headlines supported US yields and the dollar. The rise in yields is slowing, but a EUR/USD rebound apparently also needs better EMU news. From a technical point of view, the Oct EUR/USD rebound ran into resistance. The pair dropped below the 1.1073 neckline, calling off the upside momentum. 1.10 marks the next ST support. We look for a ST bottoming out, but for now the USD keeps the benefit of the doubt.
Sterling is holding near recent highs (against the euro). This might be partially euro softness. At the same time, markets apparently still hope that the election will yield a solution for Brexit, with the conservative party in pole position. Today’s UK inflation probably will have little impact on sterling. Day-to-day GBP momentum remains constructive (especially against the euro). Still we assume that further EUR/GBP losses will be limited given the uncertain outcome of the election.
EUR/USD: USD remains well bid. Euro needs better EMU newsÂ
