- Rates: Supply-related steepening
This week’s eco calendar is backloaded. Focus initially turns to the heavy mid-month US supply operation which could cause some additional steepening. Asian stock markets copy WS gains this morning with China and South Korea lagging on a fresh increase of virus cases. Rating agency Moody’s kept the Italian rating unchanged at Baa3 (stable outlook). - Currencies: dollar gains slightly as US yields bottom
On Friday, US yields and the dollar gained modest ground even as the US economy lost 20.5 mln jobs. EUR/USD is holding north of the 1.08. Ongoing institutional uncertainty in the wake of the German court ruling probably makes a sustained rebound difficult. For now sterling, hardly profits from first steps in the UK to ease the lockdown measures.
The Sunrise Headlines
- Wall Street inched higher on Friday despite a horrible April payrolls report. The DJI (+1.91%) outperformed. Asian stocks rise in lockstep with Australia and Hong Kong taking the lead (up to 2%).
- The US job numbers will get even worse, White House advisor Kudlow said in the wake of the April job report. He thinks the contraction hasn’t fully run its course and there will be positive numbers only in the second half of the year.
- The UK will start to ease lockdown measures from Wednesday on, allowing outdoor time for sports and trips to parks and beaches. Some (primary) schools and shops will reopen in June.
- SNB President Jordan said the central bank has been engaging in the FX market ‘substantially’ and could still cut interest rather into deeper negative territory as the coronavirus pandemic exerts ‘enormous’ upward pressure on the franc.
- Rating agency Moody’s left Italy’s Baa3 rating (one notch above junk) and outlook (stable) unchanged last Friday. DBRS Morningstar didn’t alter Italy’s investment grade (BBB) rating but downgraded its outlook to negative.
- South Korea reported 34 new cases on Sunday after days of no infections. The new cluster was linked to a popular nightlife district, prompting its mayor to immediately shut bars and nightclubs and reinstate social distancing.
- Today’s economic calendar is extremely thin with key data backloaded. A new week of Brexit talks starts today. Several ECB and Fed speeches are due. The US taps the bond market
Currencies: Dollar Gains Slightly As US Yields Bottom
USD gains a few ticks on (slightly) higher US yields
Global sentiment stayed positive on Friday, resulting in smooth price action in the major FX cross rates. The disconnect between (equity) markets and the data continued. Mounting evidence of an unprecedented steep economic decline as illustrated by a loss of 20.5 mln jobs in the US in April, hardly affected markets. On the contrary; US yields regained a few bp after the report, slightly supporting USD/JPY (close 106.65). Still, price moves in the major USD crosses were confined to well-known ranges. EUR/USD hovered in the 1.08 figure closing little changed at 1.0839. Moody’s left the Italian Baa3 rating unchanged.
This morning, Asian equities join WS’s rally on Friday. Mainland China indices underperform even as the PBOC indicated to keep a supportive monetary policy in place in its quarterly report. The yuan loses a few ticks (USD/CNY 7.0825). USD/JPY is trading higher after a tentative bottoming last week, testing the 107 area. The Aussie is holding on the recent gains, but the 0.6550/70 area proves to be a tough resistance.
Today’s calendar thin. Later this week, US bond supply might be a topic for the bond markets with some potential spill-over effects to FX. Will the dollar profit (albeit modestly) from a (limited) rise in US yields? In Europe, Moody’s review of the Italian credit rate is out of the way, but the issue of German court ruling on the ECB QE stays in the headlines. During the weekend, the ECB and the European Commission pushed back on the ruling and indicated that rulings on ECB policy should be done at a European level. Even so, the debate illustrates to complexity of the EU institutional framework which is no help in a time of crisis. Last week, EUR/USD dropped below 1.08 after the German court ruling, but the 1.0727 correction low was left intact. Institutional issues probably will continue cap any sustained euro rebound. We expect EUR/USD to hold in the lower part of the 1.0727/1.1018 trading range for now.
EUR/GBP hovered sideways in the mid 0.87 area on Friday. During the weekend, UK PM Johnson announced ‘first careful steps’ to easing the lockdown rules. Details will be given later today. At least for now, sterling isn’t impressed. The UK isn’t a frontrunner on the path to a restart of the economy. Brexit also lingers with EU-UK talks still in a stalemate. We expect the EUR/GBP 0.8680/0.87 support to hold.
EUR/USD going nowhere as institutional uncertainty persists
