- Rates: Corrective short covering on core bond markets
Core bond yield curves showed corrective bull flattening yesterday. Risk sentiment and technical factors will continue to dominate trading. Stock markets hovered near highs the past couple of sessions, showing more vulnerability for corrective action lower. The German (-0.24%) and US (1.94%) 10-yr yields ran into resistance earlier this week. - Currencies: EUR/USD stays in the defensive, at risk of falling below 1.10
A modest risk off dominated global FX trading yesterday. Havens like the Swiss franc or the yen outperformed but the dollar also remains well supported. EUR/USD extends recent decline and is testing the 1.10 level. With few important data on the agenda technical consideration will dominate FX trading. For now, there is no apparent trigger available for a euro reversal.
The Sunrise Headlines
- WS ended flat to 0.33% higher yesterday, undoing opening losses. Asian markets are mixed this morning. Regional eco data are weak. Japan underperforms (-1.01%).
- US-China trade talks hit a snag have hit a snag over farm purchases as officials seek to lock down the limited trade deal US president Trump outlined last month, WSJ reported. WH trade advisor Navarro played down the rumours.
- China’s economy is looking grim as the bruising trade war is taking its toll. Fixed-asset investment growth in October is the weakest on record (5.2% y/y). Industrial output (4.7%) and retail sales (7.2%) baffled and missed estimates.
- Japan’s economy grinded to a near standstill in Q3 with growth at its weakest in a year (0.2% y/y). The dragging Sino-US trade war and soft global demand knocked exports while private consumption cooled following a higher sales tax.
- Australian employment suffered its sharpest fall (-19k) in three years in October while the unemployment rate rose to 5.3% from 5.2% in September. The softening labour market underlines the call for additional RBA stimulus.
- Oil prices got a boost for a second day after an industry report pointed to a drop in US crude inventories and OPEC said it sees potential for a “sharp” cut in crude production next year from countries outside the group.
- In today’s economic calendar EMU Q3 GDP data will be published. Investors will gauge whether the solid labour market continue to underpin UK’s retail sales. In the US jobless claims will be released and several Fed speeches are due
Currencies: EUR/USD Stays In The Defensive, At Risk Of Falling Below 1.10
EUR/USD at risk of returning below 1.10
Global FX trading was yesterday quite similar to Tuesday. Investors kept a cautious bias as they pondered the status of the US-China trade talks. Press reports that China was reluctant to commit on large purchases of US agricultural products – although later downplayed by the US – added to the uncertainty. Haven currencies like the yen and the Swiss franc outperformed. USD/JPY drifted further below 109 (close 108.82). The (trade-weighted) dollar also stayed well bid (98.40 area). EUR/USD remained in the defensive, drifting toward 1.10 mark (close at 1.1007). Fed’s Powell in his testimony before Congress kept the line from the October 30 press conference with little impact on USD/FX trading.
This morning, Asian equities are trading mixed to slightly lower. Regional data (Japan GDP, China production and retail sales, Australian job data) all printed weak. Even so, the yuan didn’t decline further (USD/CNY 7.02). USD/JPY reversed earlier weakness (108.75 area). EUR/USD struggles to hold north of 1.10. Disappointing labour data pushed AUD/USD to the 0.68 mark. Today, the calendar is moderately interesting with the German and EMU Q3 growth. EMU growth is expected at a sluggish 0.2% Q/Q. The report probably won’t help the euro, but is a bit ‘outdated’. US PPI and jobless claims probably will only be of intraday significance for USD trading. Fed’s Powell appears before the House but most likely won’t bring much news anymore. Global sentiment and headlines on trade will likely set the tone for global (FX) trading.
The rise in global yields and the prospect that the Fed might stay on hold for some time recently supported the dollar. At the same time, EMU data didn’t convince euro bulls. The October EUR/USD rally met resistance near 1.1175 and later dropped below the 1.1073 neckline. For now, the EUR/USD picture remains unconvincing, but targets of the ST double top formation are nearby (1.0967). We look for a euro bottoming but for now the USD keeps the benefit of the doubt.
The trading dynamics in sterling also didn’t change. UK data (yesterday CPI) are mostly ignored. Sterling is holding strong as the Conservative party is still seen in pole position for the December election. Today, UK retail sales probably will have to deviate substantially from consensus to have any impact on sterling. We see more EUR/GBP trading near current levels assuming that quite some good news is discounted for sterling
EUR/USD drifting toward the 1.10 psychological level
