- Rates: Balance sheet growth key at first Fed policy meeting
Core bonds fell prey to some profit taking yesterday on the coronavirus-driven rally since early last week. We expect no policy rate changes at tonight’s first Fed policy meeting, with discussions probably centered around balance sheet growth. How long will the Fed keep its (term) repo facility and T-bill purchases in place? - Currencies: EUR/USD continues lackluster trading, with or without risk-off
Smaller, less liquid currency mostly reversed (a small) part of their recent losses yesterday. EUR/USD first dropped to test the 1.10 level and hardly profited from the subsequent risk rebound later. Today’s Fed meeting will mostly address technical topics. A change on the IOER or on the balance sheet extension in theory might be mildly USD supportive
The Sunrise Headlines
- WS rebounded with gains up to 1.43% (Nasdaq) as investors were consoled by solid US data, upbeat earnings and attempts to contain the coronavirus. Asian markets are upwardly oriented with HK underperforming in a catch-up move.
- US consumer confidence jumped to a 6-month high of 131.6 in January from an upwardly revised December print of 128.2. Consumers take on a brighter view of both present and future business conditions amid easing headwinds.
- Australian headline inflation ticked higher than expected in Q4/2019 to 0.7% (Q/Q) while the annual pace rose to 1.8%. Core inflation, measured by the RBA’s favorite trimmed mean gauge, stabilized at 1.6% Y/Y.
- ECB’s Jens Weidmann claimed the central bank’s stimulus package in September went a bit too far, in particular the additional bond purchases. Yet, interest rates won’t rise again for a while given subdued inflation, he says.
- Johnson’s government is introducing a bill today to end automatic rights for EU vessels to fish in UK waters. The proposal may have repercussions for the UK as the EU disclosed any trade deal must be underpinned by a fisheries pact.
- Minutes of the BoJ’s last meeting show a growing concern over the effectiveness and consequences of prolonged low rates and the BoJ’s ineffectiveness to meet its inflation target, with one member indicating the need for a policy review.
- All eyes are on the Fed today which is seen standing pat. Investors will attentively listen to Powell on hints on future balance sheet growth. In Europe, confidence indicators are due. Germany taps the bond market
Currencies: EUR/USD Continues Lackluster Trading, With Or Without Risk-Off
EUR/USD continues lacklustre trading
The risk-off first deepened yesterday as Hong Kong restricted travel due to corona, but sentiment improved in US trading. Several smaller currencies (AUD, SEK, NOK and to a lesser extent CZK, PLN) that were sold recently, rebounded. USD/JPY returned north of 109. The Swiss franc came off a near 3-year top against the euro (close 1.0725). The (trade-weighted) dollar also reversed its intraday gain. US data were mixed (poor durable orders, strong consumer confidence) but were largely ignored as driver for FX trading. The performance of EUR/USD was again lacklustre. The pair tested the 1.10 level, but the subsequent rebound was unconvincing. The pair closed little changed at 1.1022.
Overnight, Asian equities also show signs of bottoming after yesterday’s rebound on WS. Hong Kong reopens after the holidays (-2.5%). The offshore yuan (USD/CNH 6.96 area) rebounds after nearing the barrier of 7 earlier this week. Australia Q4 inflation rose slightly more than expected (1.8% Y/Y), supporting a guarded AUD comeback (AUD/USD 0.677 area). USD/JPY hovers in the lower part of the 109 figure. EUR/USD still struggles not to fall back to the 1.10 area.
Today, the focus for (FX) trading turns the Fed policy decision and on the developing story of the corona virus. The Fed is likely to keep its policy and assessment unchanged. It might address technical issues (IOER, balance sheet). Any tweaks might be mildly USD supportive, but we don’t expect a big impact. Yesterday’s risk-rebound supported the higher-yielding/high risk currencies but failed to inspire EUR/USD. Both eco data and the fall-out of the virus didn’t provide a clear guide for euro trading. EUR/USD was caught in a gradual, protracted downtrend. We look for technical signs of a bottoming. The EUR/USD technical picture deteriorated after its break below 1.1066/40. It paints a H&S pattern with targets near/below 1.09 and interim support at 1.0990/80. Regaining 1.1120 would be a first sign that downside bias is easing.
Sterling extended its ‘corrective’ decline against the euro yesterday. We consider the move as mainly technical in nature. The dispute on fishing rights between the EU and the UK might have been a tentative sterling negative too. Today, the UK eco calendar is thin. Markets will keep a wait-and-see approach ahead of tomorrow’s BoE policy meeting. For now, we seen no reason for further sterling losses.
EUR/USD: risk-rebound hardly helps euro.
