Rates: Risk improvement drives global trading
Yesterday’s improvement in risk sentiment is set to continue today and will probably set the tone for global trading. The division between US and EMU monetary policies and Q2 eco data (US outperforming EMU) could trigger a further underperformance of the US Note future against the German Bund.
Currencies: Dollar gets benefit of the doubt as trade tensions linger
Yesterday, sentiment turned risk-on, but it didn’t help the euro. The dollar remains in pole position. Investors apparently assume that the trade conflict won’t break the US growth momentum, at least not short term. At the same time, ongoing low interest rates weigh on the euro. Sterling doesn’t profit going into the BoE policy decision even as PM May survived a key Brexit vote
The Sunrise Headlines
- US equity markets recovered and closed in green for the first time this week, with NASDAQ outperforming. The Asian markets opened mostly with losses. Only the Japanese markets remain slightly positive.
- Therese May has defeated pro-European brexiteers on the ‘meaningful vote’ yesterday. She keeps all negotiation power at the table with Europe but had to assure parliament time for debate in the event exit talks break down.
- Chinese Vice Premier Liu He will meet with a senior EU delegation in Beijing next week, where the EU-China High-Level Economic Dialogue is held. Vice President of the European Commission Jykri Katainen is representing EU values.
- North-Korean leader Kim Jong Un and Chinese President Xi Jinping had a promising meeting this week. They agreed to boost strategic and tactical cooperation, among the understanding of North-Korea’s denuclearization.
- Bank of Japan board member Yukitoshi Funo said that the central bank will remain its current policy of strong monetary easing since prices remain very weak. He said the 2% inflation remains a distant goal.
- New Zealand’s recent data showed a slower pace of economic growth in Q1. The 0.5% GDP growth (QoQ) was expected, but down from 0.6%. Together with a strong USD, the New Zealand dollar slipped to its lowest point this year.
- The eco calendar contains US weekly jobless claims, Philly Fed Business Outlook and EMU consumer confidence. UK, Norwegian and Swiss central banks meet. ECB’s Nowotny, BdF Governor Villeroy and Bundesbank Weidmann speak
Currencies: Dollar Gets Benefit Of The Doubt As Trade Tensions Linger
Dollar gets benefit of the doubt
Yesterday, trade tensions moved to the background, but the better global risk sentiment didn’t help the euro much. The trade war isn’t over yet. ECB comments also confirmed the FED/ECB divergence, indicating that the euro won’t get interest rate support anytime soon. EUR/USD mostly hovered in the upper half of the 1.15 figure. The pair closed the day at 1.1572 (from 1.1590). The USD/JPY risk rebound was also far from impressive, but the pair finally got some support from a rebound in US yields. USD/JPY finished the day at 110.36 (from 110.06). This morning, markets show a diffuse picture, China and Korea underperforming. At the same time, US equity futures show again modest gains. The trade-weighted dollar tries to regain the 95 resistance area. USD/JPY is trending higher in the 110 big figure. EUR/USD still develops a lacklustre trading pattern (currently 1.1560). New-Zealand Q1 GDP slowed to 0.5% Q/Q, as expected. The ‘soft patch’ in the economy reinforces the view that the RBNZ shouldn’t be in a hurry to raise rates. NZD/USD dropped below the 0.6850 support area this morning.
Today, the US jobless claims and the Philly Fed business outlook will be published. Markets apparently grow more confident that the trade war won’t derail US growth soon. The impact on other regions, including Europe, is more uncertain. If markets continue to play this card, the dollar might get further interest rate support. The next step in the spiral of retaliation between the US and its trading partners might kick in at any time. It might slow the rise of USD/JPY. For the euro, we have the impression that any sustained rebound is difficult for now, whatever the next step in the trade conflict. Policy divergance between the Fed and the ECB hampers a euro rebound, even if risk sentiment improves. Of late, we advocated that a retest of the 1.1510 correction low is possible. We maintain that view. The dollar can stay strong for longer.
Yesterday, the UK government winning the vote on the ‘meaningful vote’ didn’t help sterling much. The visibility on the next steps in the Brexit process remains very foggy. Today, the focus turns to the BoE policy meeting. Markets will look for an indication on an August rate hike. However, we assume that recent UK data were not strong enough for BoE’s Carney to prepare markets already again for a rate hike in August, after he had to backtrack on its guidance for the May meeting. He probably will keep the timing open. We assume more sideways trading in EUR/GBP near the 0.88 pivot
Tradeweighted USD (DXY): USD to prepair a next step higher
