Rates: EM stress lifts core bonds
Dollar strength weighted on EM assets, triggering risk aversion on a larger scale. Core bonds profited with US Treasuries outperforming German Bunds. German inflation data lost market relevance after the ECB’s recent signal, suggesting focus remains on the likes of BRL, ZAR, IDR,CNY,…
Currencies: Vicious circle of EM risk-off and USD strength to persist?
Yesterday, the dollar extended gains. The move was supported by ongoing stress/capital outflows from emerging markets. Today, eco data will probably be of second tier importance. The EU summit is a wildcard. Key question remains whether EM stress will persist. If so, the dollar will remain in the driver’s seat. EUR/USD might go for a test of the 1.1510 support.
The Sunrise Headlines
- US equity markets opened positive yesterday but eventually closed with losses. Nasdaq (-1,54%) underperforms the bunch. Asian stock markets opened mixed this morning. Japanese markets lose marginally but China recovers.
- With the EU summit starting today, Greece’s prime minister Tsipras has backed German Chancellor Angela Merkel in her migration proposal. This sudden support is needed as other EU countries, like Italy, already opposed to the plan.
- Japanese retail sales have fallen at the fastest pace since 2016, with a month-on-month decline of 1.7% while a decline of 0.8% was expected. The retail sales of April were also downwardly revised from 1.4% to 1.3%.
- The EU is preparing for a no-deal Brexit, by elaborating a contingency plan in case no deal is found with UK’s departure of the bloc. “The parachute”, as it is named, will prepare for issues in transport, financial services and customs.
- The Reserve Bank of New Zealand kept the official cash rate at 1.75%, as expected. Governor Adrian Orr said the RBNZ is prepared to cut them if needed, since economic growth slows and inflation remains below target.
- Domestic opposition against US President Trump’s tariffs on US import is growing, with the American Institute for International Steel taking action in the US Court of International Trade to forfeit the tariffs on steel.
- On today’s eco calendar the US publishes Initial Jobless Claims. In the EU, the Economic Confidence of the EMU for June is released, as is German CPI EU Harmonized MoM/YoY. BoE chief economist Haldane and FED’s Bullard speak
Currencies: Vicious Circle Of EM Risk-Off And USD Strength To Persist?
Vicious circle of EM risk-off and USD strength
On Wednesday, dollar strength prevailed. This reinforced a risk-off trade on most markets (except for Europe). The sell-off in several EM currencies, including the yuan, was an important factor for USD outperformance and for weakening risk sentiment. The EUR/USD rebound at the end of last week and early this week had stalled. EUR/USD again took the way south, mostly on dollar strength rather than on euro weakness. The US administration taking a less aggressive stance on foreign investment in the US was not enough to reverse the US risk-off sentiment. So were decent US eco data. USD strength prevailed and EUR/USD dropped to the mid 1.15 area. Understandably, the gain in USD/JPY was more modest due to the risk-off and declining core yields. The pair closed the session modestly higher 110.26. Overnight, Asian markets still show a mixed, unconvincing picture. Most regional equity markets are again trading in negative territory. China outperforms, but the gain is very small given recent losses. The decline of the yuan slows (USD/CNY 6.6170), but there is no trend reversal yet. The USD rally is taking a breather. EUR/USD trades in the 1.1560 area. USD/JPY hovers near 110.30. The trade-weighted dollar is holding near recent peak (95.30).
Today, the EC confidence data and German CPI will be published. Confidence is expected to ease slightly. German inflation is expected at 0.2% M/M and 2.1% Y/Y (from 2.2%). The impact of inflation data for (FX) markets has probably diminished after the ECB meeting. US data (final GDP claims) are probably not that important. Key question is whether the vicious circle of a strong dollar and EM (and US) risk-off persists. For now, we see no trigger to halt this trend. If so, a retest of the 1.1510 support, or even a break is possible. Next supports come in at 1.1448 & 1.1187 (50% and 62% retracement). There will be plenty of headlines from the EU summit. They might be a slight additional negative for the euro, but it will probably be of second tier importance. The rise in USD/JPY might be less outspoken due global uncertainty.
Yesterday, sterling remained in the defensive. EUR/GBP held near recent highs mostly at 0.88+ levels. Cable dropped to a new correction low just north of 1.31. Today, there are no UK eco data, but BoE’s Haldane speaks. The EU summit most likely won’t bring any progress in the Brexit progress. A risk-off context is also no help for sterling. At test of the 0.8843 range top might be on the cards
DXY (USD trade-weighted): dollar allies on EM risk-off
