- Rates: Heavy EMU bond supply continues with Belgium and Italy
Spain had a bumper bond sale yesterday, drawing over €50bn bids at the syndicated launch of a new 10-yr Obligacion (€10bn printed). Belgium (10y) and Italy (30y) will try their luck today. A complex of second tier eco data/central bank speeches/earnings/US-China trade signing is due today and unlikely to give a strong directional signal for trading. - Currencies: EUR/USD captured in erratic trading pattern. USD to lose yield support?
EUR/USD in technical trading reversed an intraday dip yesterday. Some investor caution on the meaning of the US-China trade deal and easing core yields are mildly USD negative this morning. Will the dollar lose further interest rate support? EUR/GBP tested the post-election top near 0.86, but no break occurred. UK price data might guide sterling trading today.
The Sunrise Headlines
- Most US stock markets erased minor intraday gains after the US dashed hopes for a removal of Chinese import tariffs. Nasdaq (-0.24%) underperformed. Asia slips in lockstep with China leading the losses (-0.8%).
- The US probably won’t lift the existing levies on Chinese imports until after the November elections. Removing them depends on Beijing’s compliance with commitments made in the partial trade deal, expected to be signed today.
- Ireland’s Varadkar announced snap general elections to take place on February 8. Varadkar took over as PM of a minority government from Enda Kenny in 2017 and seeks a stronger mandate ahead of the upcoming trade talks with the UK.
- The US Labor Department is planning to restrict news media’s early access to key economic data and thus their ability to prepare analyses in advance. The move would follow a similar decision by the Agriculture Department in 2018.
- ECB’s Villeroy said the chances of a recession occurring in the US and Europe this year are so low it can almost be ruled out, adding that the euro area economy is “certainly giving good signs of stabilization”
- The NY Fed extended the repo operations through at least February 13. It will keep the maximum size of overnight repo’s at $120 billion but longer-term operations are downscaled to $30 billion (from $35 billion) starting Feb 1.
- Today’s calendar contains the Fed’s Beige Book and December US Empire Manufacturing survey. UK CPI figures are due. A flurry of Fed/ECB speeches are scheduled. Germany (tap), Belgium and Italy (syndications) issue bonds.
Currencies: EUR/USD Captured In Erratic Trading Pattern. USD To Lose Yield Support?
EUR/USD is holding ‘erratic’ trading pattern
EUR/USD trading remained some kind of erratic in nature yesterday. We didn’t see a close link with data or other eco-related narrative. After a rebound Monday, EUR/USD soon drifted back lower during European session. EUR/USD and EUR/JPY maybe suffered from a less positive risk sentiment. Initially, the EUR/USD decline continued after a (slightly) softer than expected US CPI. However, the 1.11 big survived and EUR/USD rebounded. The move occurred as US yields declined and the US-German interest differential narrowed. EUR/USD closed at 1.1128 (from 1.1134). A topping out of global/US equities also blocked further USD/JPY gains. The pair failed to hold north of 110 (close at 109.99). Overnight, investors are looking forward to the signing of the US-China trade deal. Markets are turning more cautious on the positive impact of the deal as US Treasury Secretary Mnuchin said there won’t be a tariff relief for China before a phase two accord, which probably won’t occur before the US elections. The PBOC provided additional liquidity to the market but kept the MLF interest rate unchanged. The yuan eases after the recent rebound (USD/CNY 6.89 area). USD/JPY is losing a few ticks (109.90/95 area) as most Asian equity indices are falling prey to modest profit taking. EUR/USD gains marginal ground on overall USD softness.
Later today, the US PPI is interesting, but a big surprise is probably needed to affect trading as the CPI was already published yesterday. The Empire Manufacturing is expected little changed at 3.6. Global FX trading will probably sentiment driven as markets will tried to find out some more details on the US-China trade deal. A cautious risk-off and lower core/US yields might be a tentative negative for the dollar.
Last week, EUR/USD dropped temporarily below 1.11, but 1.1066 support survived on soft payrolls. EUR/USD 1.1066 remains our first downside reference. A rebound above 1.1180 would call off the downside alert. Still, a ST break beyond 1.1250 looks far from easy.
Sterling initially felt further selling pressure yesterday as recent soft BOE comments fuelled investor rate cut anticipation. EUR/GBP tested the 0.86 big figure but reversed the gain later. A sustained break of the post-election didn’t occur. Today, the UK December price data might have more market impact than is usually the case as the BoE rate debate intensifies. Core CPI is expected at 1.7% Y/Y. A downward surprise might have some more impact on sterling than a positive one.
EUR/USD: shows no clear trend. Dollar to lose further interest rate suppor?
