Markets
Sterling trading draws most attention in an otherwise relatively calm trading session. The US House session including a vote on Donald Trump’s impeachment draws most media attention. EUR/GBP since the start of the year slipped in line with EUR/USD, but the pair started to disconnect yesterday with sterling taking a more dominant position. The UK currency forgets about all domestic economic struggles (both brexit and Covid-related) and enjoyed some interest rate support at the front of the curve. Dire economic prospects aren’t compelling for BoE’s Bailey to pull the trigger on negative policy rates. On the contrary, he contributed to sterling’s advance by almost formally ending the debate yesterday. EUR/GBP dipped below 0.89, but a test of key support at 0.8864 didn’t occur (yet). GBP/USD tested the recovery high at 1.3704, but both majors kept each other in balance afterwards. That implies some dollar strength against the euro with EUR/USD returning from a brief stay above 1.22 to 1.2150. First intermediate support stands near 1.2130, but the dollar’s recovery potential probably reaches some further, to the low 1.20 area.
US Treasuries slightly underperform German Bunds today in the run-up to tonight’s 30-yr bond sale which ends the US Treasury’s mid-month refinancing operation. A repeat of yesterday’s blow-out 10y sale could temporary cap any upward potential of long term US bond yields. Daily changes of US yields vary between +0.2 bps (2-yr) and -1.7 bps (30-yr). The German yield curve bull flattens with yields falling by 1 bp (2-yr) to 4.6 bps (30-yr). 10-yr yield spread changes vs Germany widen by 2 bps with Greece (+5 bps) underperforming. Italian PM Conte is meeting with president Mattarella to talk about the government crisis induced by ex-PM Renzi. The latter threatens to recall small, but crucial support from his Italy Alive party over handling the Covid-crisis. Renzi’s ministers are expected to resign later today. ECB Lagarde called the central bank’s December growth forecast still very clearly plausible despite the new lockdowns. The ECB’s expected growth path shows a recovery of respectively 3.9% and 4.2% in 2021 & 2022 after a -7.3% decline in 2020. Lagarde generally stuck close to the ECB’s official communication line.
News Headlines
Czech inflation unexpectedly fell 0.2% m/m in December, leading to a yearly price growth of 2.3% vs. 2.6% expected and 2.7% a month earlier. The fall came on the back of lower food prices (-1.2% m/m), defying the usual seasonal uptick in the run-up to the end-of-year holidays. Cost of housing, accounting for a quarter in the CPI calculation, also slowed compared to last month. The Czech National Bank penciled in a much stronger inflation in its autumn forecasts (0.7 ppts higher). EUR/CZK trades muted in the low 26 area.
The Polish central bank kept its policy rate steady at 0.10%. While that aligned with the consensus view, the marginal strengthening of the zloty in the wake of the decision (EUR/PLN retreated towards 4.52) suggests a minority expected the NBP to ease policy today, thus acting upon its FX interventions from mid-December last year to keep the zloty weak. However, NBP governor Glapinski earlier indicated that further rate cuts would only come if the inflation outlook is revised downwards. The next inflation report is due in March.
Spain attracted the strongest investor demand for a government debt sale on record, racking up over 130 billion euros in orders for a new 10y syndicated sale. Italy held the previous record (€108 bn in 2020). The Spanish 10y yield falls 2 bpn to 0.08%. Neighboring country Portugal meanwhile sold €500 mln October 2030 bonds for the first time at a negative -0.012% with a whopping 3.02 bid-to-cover in another sign of strong demand.
