Rates: Risk-off at start of new trading week
Core bonds will profit from their safe haven status at the start of the new trading week with political event risk looming large. US President Trump doesn’t back down on his trade rhetoric/action while German Chancellor Merkel’s political life hangs in the balance. This week’s eco calendar is rather thin apart from Friday’s inflation readings.
Currencies: Euro rebound shows no convincing momentum
EUR/USD rebounded off the 1.1510 support area last week. However, for now, follow-through gains remain modest. A soft German IFO release might weigh on the single currency today. Rising trade tensions mostly are euro negative , too. So, last week’s rebound might be short-lived. USD/JPY is further easing below the 110 mark
The Sunrise Headlines
- US equity markets remain resilient, with only the NASDAQ going into the weekend with losses Asian stock markets lose ground this morning with also US equity futures recording losses of more than 0.5%.
- US President Trump threatened on Friday to impose 20% levies on the EU car industry. The EU has stated in an internal memo, ahead of June 28-29 summit, this trade war could lead to a 20-year step backward in global economics.
- The Chinese central bank has eased its deposit rules for its banks, to free up to $100bn to be deployed in the economy. While not explicitly stated, it is to help cushion a slowing economy and the effects of the trade war.
- Turkey’s president Recep Tayyip Erdogan has won the Turkish elections. With 52.5% of the votes and a majority in parliament, he now has another 5 years in office, with a presidential system that gives him more (and absolute) power.
- Yesterday, 16 of 28 EU leaders already met in Brussels, ahead of the migration top on Thursday. The ‘mini-top’ was meant for Merkel to find a solution, but Italy’s Conte disrupted with a new plan to “rip up the current system”.
- OPEC’s initial agreement, with a real output increase of 700k b/d, will be raised to close to 1 million b/d, Saudi Arabia said. The statement pushed the price for Brent crude oil temporary below the $74 a barrel mark.
- US May Chicago Fed Nat Activity Index and German IFO business sentiment for June are released today. Next to that, no other important events on our economic calendar.
Currencies: Euro Rebound Shows No Convincing Momentum
Risk-off to favour USD more than euro?
On Friday, EUR/USD profited temporarily from stronger than expected EMU PMI’s. However, there were no follow-through gains. EUR/USD basically hovered in the 1.16 big figure. Political noise in Germany and Italy caused ongoing investor caution on euro. Uncertainty on next steps in the US-China trade conflict also prevented investors to place directional bets in the USD or the euro. EUR/USD closed at 1.1651 (from 1.1604). USD/JPY finished the day little changed at 109.97.
Overnight, Asian markets mostly trade with a moderate risk-off bias. China outperforms slightly after the PBOC cut the reserve requirement ratio for some banks. The Yuan weakens further (USD/CNY 6.5320). At the same time, the trade conflict might move to a next phase. US officials and press reports indicate that the US will take action to prevent US technology transfers to China. Chinese companies might be blocked from buying US tech companies and the US might install controls on technology exports to China. USD/JPY is drifting further below the 110 mark (currently 109.50). EUR/USD stabilizes in the mid 1.16 area.
Today, German IFO sentiment will be published. A further decline might be a euro negative. Europe also still has to cope with several issues (migration) going into this week’s EU summit. Next steps in the US-China trade conflict will continue to affect global market sentiment. Of late, rising trade tensions were often a negative for the euro rather than for the dollar (except for USD/JPY). In this context (data, European politics and trade tensions) we don’t see much further upside fur EUR/USD. Last week, we advocated that any sustained EUR/USD comeback would be difficult for now, as investors still adapt positions to the ‘new’ policy divergence between the Fed and the ECB as it became clear after the Fed and ECB meetings. End last week, EUR/USD rebounded of the 1.1510 support. This gave some temporarily relief to the euro, but we don’t expect this move to go really far.
In technical trade sterling stayed in the defensive on Friday. EUR/GBP closed the session in the high 0.87 area. Thursday’s ‘hawkish BoE voting’ didn’t help sterling much. There are few really important UK eco data this week. Assuming a cautious risk-off context, we expect no sustained sterling gains. Brexit noise will also likely persist. On the other hand, several BoE members (mostly ‘hawks’) will speak this week. We assume more sideways trading in EUR/GBP near the 0.88 pivot.
EUR/USD: rebound off 1.1510 support lacks convincing momentum
