Rates: Downward bias core bonds
Yesterday’s risk aversion proves to be short-lived with Asian stock markets and US equity futures extending their recent rebound higher. US CPI inflation is forecast to rise further above the Fed’s 2% inflation goal. The tentative topping-off pattern on core bond markets could be strengthened in such context with US Treasuries underperforming Bunds.
Currencies: dollar momentum improves going into US CPI release
Yesterday, the dollar profited from several factors including uncertainty on global trade, stronger than expected US PPI and a decline in commodity prices. Today, the risk sentiment is easing. A strong US CPI might inspire some further USD gains short-term. Even so, the EUR/USD 1.15 support looks solid for now. USD/JPY cleared the 111.40 ST range top.
The Sunrise Headlines
- US equity markets suffered yesterday from rising trade tensions, closing the day in red (-0.5% – 0.9%). Asian exchanges traded pessimism for optimism this morning, with China outperforming (+2%).
- US President Trump yesterday ordered trade representative Lighthizer to prepare tariffs of 10% on an additional $200bn of Chinese imports. Last week, the US already targeted $34bn worth of Chinese goods.
- Amidst China’s threats to respond to the US, its Vice Minister of Commerce Shouwen overnight called on his American counterparts to resume talks. The last round of negotiations ended up with little progress on the matter.
- The Bank of Canada raised its interest rate to 1.5% yesterday as inflation is nearing its 4 yr high. To keep inflation in check and despite increasing trade tensions, the Bank reiterates rates will need to rise further, albeit gradually.
- Oil slumped more than 6% yesterday, as Trump’s latest move in the trade dispute fuelled investor’s fears it will weaken the growth outlook. Other commodities such as copper (-3%), also suffered.
- UK PM May will publish the white paper, detailing the UK vision for its future economic relationship with the EU. The proposal contains a free-trade area for goods while keeping freedom for arrangements in the services sector.
- Today’s eco calendar contains US weekly initial jobless claims, US inflation data (CPI) and EMU industrial production. Fed’s Kashkari and Harker speak. Italy taps the bond market
Currencies: Dollar Momentum Improves Going Into US CPI Release
USD shows resilience going into US CPI release
Yesterday, the USD price pattern was a bit diffuse. The US preparing an additional $200 bln of tariffs on Chinese imports weighed on global sentiment. Initially, the impact on the dollar was limited. The euro even rebounded temporary on a Reuters article indicating ongoing internal debate on the timing of a first ECB rate hike. Even a July 2019 hike was said not being excluded yet. Later, USD strength returned. Several factors might have been at play, including a sharp decline in oil prices and higher than expected US PPI. EUR/USD closed at 1.1674 (from 1.1744). The rise in USD/JPY was also remarkable. The pair closed the day at 112.01, breaking above the 111.40 ST range top. This morning, most Asian equity indices are rebounding. The fall-out from the US import tariffs is already receding. Even so, the dollar is holding strong. USD/CNY came again with reach of the 6.70 level. USD/JPY extends gains north of 112. EUR/USD trades below 1.17. Broad US gains and softness in oil and other commodities pushed AUD/USD back below 0.74. Today, there are only second tier data in Europe. In the US, the June CPI will be published. Headline inflation is seen rising to 2.9% Y/Y. Core to 2.3%. Of late the reaction of the dollar to US data was often modest as markets questioned whether the Fed could keep the current pace of rate hikes given global political and economic uncertainty. Yesterday’s price action suggests that the dollar might still be sensitive to higher than expected inflation. So, it will be interesting to see the market react in case of headline inflation rising to 3%. At the same time, other factors (oil, risk sentiment) also remain wildcards for USD trading. The day-to-day momentum of the USD improved yesterday. Even so, we suppose that the EUR/USD 1.15 range bottom to be solid. USD/JPY breaking beyond 111.40 suggests that further gains in this cross rate are possible.
The new Brexit plan of the UK government reached on Friday didn’t break the stalemate for sterling trading. EUR/GBP remains locked in a very narrow range in the mid 0.88 area. Political uncertainty in the UK remains as elevated as it was before. The plan also contains several factors that will be difficult to accept for the EU. Today, the entire ‘White Paper’ will be published. We don’t expect this to change fortunes for sterling. For now, we expect sterling (EUR/GBP) to hold near recent levels unless there are signs of real progress in the negotiations with the EU.
EUR/USD: dollar rebounds even as debate on ECB rate hike persists. US CPI to support further USD gains?
