Rates: Higher US risk premium and bearish engulfing Bund
Friday’s bear steepening of the US yield curve seemed to be at odds with events. Or are investors starting to discount a higher US risk premium? The German Bund and US Note future remain within July trading ranges, but technical pictures become heavier (bearish engulfing Bund). This week’s eco calendar contains EMU PMI’s, the ECB meeting and US Q2 GDP.
Currencies: dollar trading off recent highs after Trump comments
On Friday, the dollar continued to suffer after president Trump’s comments on trade, on Fed policy and on FX. During the weekend, Fin Min Mnuchin downplayed the risks of an FX war, but it is far from sure whether this will change fortunes for the dollar. EUR/GBP is holding below the 0.8968 resistance even as the global picture on Brexit remains foggy
The Sunrise Headlines
- US sUS stock markets ended slightly lower on Friday, posting losses from -0.03% (DJI) to -0.09% (S&P 500). Asian markets are trading mixed, with Japan underperforming (-1.3%).
- China’s central bank (PBOC) injected roughly $74bn of cash in the market via one-year loans to commercial banks. It is seen as the latest move to easier monetary policy, after the PBOC cut the bank’s reserve ratio twice.
- Japan’s 10-y yield spiked and the yen strengthened after media reports that the country’s central bank (BoJ) might discuss changes to its loose monetary policy at next week’s meeting.
- At the G20 summit over the weekend trade dominated discussions. The group warned, amongst others, for ‘heightened trade and geopolitical tensions” to threaten (the still robust) global growth.
- In New Zealand, the government introduced a bill to Parliament to extend the central bank’s (RBNZ) objectives. If approved, the RBNZ would also target employment alongside inflation.
- EU’s chief Brexit negotiator Barnier dismissed PM’s May’s ‘enhanced equivalence’ proposal for the financial services sector, saying it would deprive the EU from its ‘decision-making autonomy”.
- Today’s eco calendar is rather meagre with only US housing data, the Chicago Fed National Activity Index and EC’s consumer confidence scheduled for release. Alphabet publishes its Q2 results (aft-mkt).o calendar is rather meagre with only US housing data, the Chicago Fed National Activity Index and EC’s consumer confidence scheduled for release. Alphabet publishes its Q2 results (aft-mkt).
Currencies: Dollar Trading Off Recent Highs After Trump Comments
FX war worries continue weighing on the USD.
On Friday, the dollar continued Thursday’s correction when president Trump said that he was unhappy with the Fed raising rates and as he saw the strong dollar being disadvantage for the US. On Friday, Trump stepped up its trade rhetoric as he reiterated he was ready to impose tariffs on all Chinese imports. He also accused China and the EU of manipulating their currency. The new Trump comments put additional pressure on the dollar. EUR/USD jumped north of 1.17. USD/JPY tumbled below 112 and closed at 111.41. (From 112.47, with a week top at 113.17) Overnight, Asian equities mostly show moderate losses. China outperforms. Japan underperforms. The PBOC eased monetary conditions. In Japan, yields and the yen jumped on market speculation of a potential policy adjustment at next week’s BOJ meeting. The process remains unclear as the BOJ offered to buy 10-y bonds at fixed yields above current market yields. Even so, the decline of USD/JPY slows. The pair trades again near 111. EUR/USD holds at end last week’s levels. At a meeting of the G20 finance Ministers, US Fin Min Mnuchin downplayed the risk of a FX war and indicated that the president didn’t want to challenge the independence of the Fed. Today, the eco calendar is thin. Global FX trading will mostly look at the developments regarding the trade/FX war. Corporate earnings are a wild card. Of late, the trade tensions and a cautious risk-off sentiment didn’t really hurt the dollar. On the contrary. However, after last week’s comments from President Trump on FX, the dollar looks less solid. For now we see no reason for EUR/USD to leave the 1.1510/1.1850 range, but the downside looks better protected. The yen decline apparently has also run its course both due to a softer USD as due to yen-specific issues.
On Friday, EUR/GBP held near recent highs in the mid-0.89 area, but the UK currency regained some ground going into the weekend. Brexit comments during the weekend were mixed. British government officials said the UK should step up preparations for a no deal scenario. The impact on sterling is limited. For now, the EUR/GBP 0.8968 resistance looks solid. A break probably won’t be easy ST unless there comes additional negative news from the Brexit or unless the scenario of an August BoE rate hike is really questioned
EUR/USD: Trump comments take shine off the dollar
