- Rates: US-Iran tensions ease. Q4 rate upleg to resume.
Core bond yields seem to resume their Q4 upleg with the US-Iran hiccup out of the way. Investors might be reluctant to place big directional bets today though given the thin eco calendar and with tomorrow’s payrolls looming. Will the US 10-yr yield try another attack of 1.94% resistance by the end of the week? - Currencies: EUR/USD extends correction, whatever the risk context
EUR/USD extended the downward correction from the start of the year yesterday. For now, an easing of the global tensions didn’t trigger the usual simultaneous rebound in USD/JPY, EUR/JPY and EUR/USD. The dollar remains in the driver’s seat. EUR/USD breaking below the 1.1125/1.1066 support would deteriorate the ST technical picture.
The Sunrise Headlines
- Wall Street heaved a sigh of relief amid easing US-Iran tensions and gained up to 0.67% (Nasdaq). Asian stock markets are following track, wiping out yesterday’s losses. South Korea outperforms (+3.4%)
- US president Trump tempered investors’ worries yesterday by signaling both the US and Iran seek to avoid a further conflict. The US would instead move ahead with punishing economic sanctions.
- Johnson held his first negotiation with EU Chief Von der Leyen yesterday. The British PM stressed he seeks a Canada-style free trade deal before his year-end deadline while Von der Leyen underlined any deal would come with a trade-off.
- China’s consumer inflation steadied in December to a level of 4.5% (Y/Y) putting a halt to the recent acceleration fuelled by surging pork prices. Factory-gate prices fell at a slower pace (-0.5% Y/Y) , giving the PBOC leeway for easing.
- A BoJ survey showed Japanese households’ economic confidence worsened to a five-year low of -29.8 in Q4/2019. The weak print adds to recent gloomy signs for a fragile recovery amid subdued demand and weaker consumer spending.
- The World Bank cut its global growth outlook for the fourth straight time in a row. It now expects growth picking up 2.5% in 2020 to 2.7% in 2022. The World Bank cites deteriorating prospects in China and the Euro are as dragging factors.
- Today’s economic calendar includes US initial jobless/continuing claims data and EMU unemployment numbers. Investors will be all ears to ECB/BoE/Fed speeches. The US, Spain and France tap the bond market.
Currencies: EUR/USD Extends Correction, Whatever The Risk Context
EUR/USD struggles not to fall below 1.11
Markets gradually positioned for a de-escalation in the Iran-US conflict yesterday, completely reversing the overnight safe haven positioning. Equities and bonds rebounded. Oil and gold declined. FX price moves were less straightforward. The yen rebounded and the Swiss franc bottomed. Still, the (trade weighted) USD extended gains, with the euro underperforming. Eco data might have been a part of the explanation. EMU data (German orders, EC confidence) were unconvincing while the US ADP labour report was strong. Still, the EUR/USD decline was a continuation of the 2020 price trend. After a protracted slide, EUR/USD closed at 1.1105 (from 1.1134). USD/JPY closed at 109.12 (from 108.22).
Overnight, Asian markets are joining the risk rebound. USD/JPY extends gains north of 109. Regional currencies including the won and the yuan (re)gain ground. The yuan (USD/CNY 6.93 area) gains occurred despite softer than expected Chinese price data (CPI/PPI). The move can be seen as a constructive attitude of China in the run-up to the signing of the US-China trade pact next week. EUR/USD stabilizes in the low 1.11 area but shows no signs of an imminent rebound yet.
Today, the eco calendar is thin on both sides of the Atlantic. EMU unemployment and US jobless claims won’t change the broader picture. Several Fed members speaking probably will confirm the Fed wait-and-see stance. Global sentiment will again set the tone for FX trading. After constructive price action end last year, the euro underperformed at the start of this year. The underperformance occurred both in a risk-on and a risk-off context. So, the day-to-day momentum is clearly euro negative. Short-term, the dollar apparently profits more from higher core yields rather than the euro. In the past, a constructive risk context mostly supported EUR/USD (via EUR/JPY) but for now this doesn’t work. EUR/USD has dropped within the 1.1125/1.1066 MT support area. A drop below this band would serious deteriorate the ST technical picture. It’s not our preferred scenario, but risks are building. Sterling trading was mostly technical in nature yesterday, with EUR/GBP feeling some fall-out from the EUR/USD slide. A meeting between UK PM Johnson and EC’s von der Leyen, confirmed that both parties have a highly divergent view on the trade negotiations. For now, it had no additional negative impact on sterling. Today, the calendar is thin. We assume more technical EUR/GBP trading near current levels.
EUR/USD drifting into the 1.1125/1.1066 support area. Sentiment remains fragile despite risk rebound
