Markets:
Rising oil prices and the de-escalation of the CDU/CSU rift dropped from the equation which kept core bonds in balance yesterday, leaving the new tit-for-tat threats in the US/Chinese trade row as the only factor influencing trading. Core bonds profited from global risk aversion. The main move occurred overnight (US Note future) or in the European opening (Bund). Both entered a more sideways pattern afterward. The ECB Sintra conference featured plenty ECB governors, including chairman Draghi. They all kept last week’s dovish line on policy rates. Draghi explicitly mentioned that current market expectations about a first rate hike, which is towards the end of Q4 2019, broadly reflect the ECB’s principles. Today’s eco calendar only contained second tier data with mixed US housing figures. The German yield curve bull flattens with yields 0.8 bps (2-yr) to 4.9 bps (30-yr) lower. Changes on the US yield curve vary between -1.7 bps (2-yr) and -2.6 bps (10-yr). 10-yr yield spread changes vs Germany widen up to 2 bps with Italy (+7 bps) underperforming.
EUR/USD. Global trade tensions were the main driver for global FX. Over the previous days, the impact of the enfolding trade war was mostly limited to a risk-off sentiment on equity markets. However, this time global FX was also affected. Global yen buying triggered a ‘classic’ risk off repositioning. USD/JPY selling in Asia was followed by a substantial decline in EUR/JPY and EUR/USD during the European trading session. EUR/JPY dropped (temporary?) below the 127 mark and EUR/USD fell to the 1.1530/35 area. Euro selling was reinforced by soft ECB speak from the ECB conference in Sintra. ECB’s Draghi said the Bank will be patient in the timing of the first rate hike. Other governors even indicated that the first rate hike could be later than September 2019. So, the euro indeed won’t receive interest rate support anytime soon. Risk sentiment eased slightly after US equity market opening. EUR/USD is trading off the intraday lows (1.1560 area) and so is USD/JPY (110 area). Even so, the trade-weighted dollar set a new 2018 top north of 95 today. The risk-off modus also infected the likes of the CAD and the Aussie dollar. Smaller currencies on boundaries of euro zone (SEK, PLN, CZK, to a lesser extent NOK) all lost ground, not only against the dollar, but also against the single currency. Lower liquidity often weighs on those currencies in a risk-off context. Maybe markets also delay rate hike expectations for most of those central banks in the wake of recent ECB guidance.
GBP. Sterling trading was still driven both by global uncertainty on trade factors and by the ongoing debate on the ‘Meaningful vote amendment’ that will be return to the House of Commons for a new vote tomorrow. The rift between the UK government and the pro-Bexit members of the Conservative Party persists. Both factors were a tentative sterling negative. Sterling struggled not to lose further ground against the euro even as EUR/USD was also under pressure. Cable dropped below the 1.32 level, reaching the lowest level since November last year. The low 1.30 support area is coming within reach.
News Headlines:
Hungary’s central bank kept its policy rate unchanged at 0.90%, but dropped a reference to maintaining the base rate and loose monetary conditions “for an extended period” as the current easy conditions were not sustainable through its policy horizon. “In the Monetary Council’s view, the current loose monetary conditions can no longer prevail up to the end of the 5 to 8-quarter horizon of monetary policy. In the Council’s assessment, the international environment is changing. We are nearing the end of a period of ample liquidity and persistently low interest rates, seen in previous years.”. The forint strengthened away from historically low levels with EUR/HUF dropping from 325 to 321.50.
