Markets
Core bonds enjoyed a modest safe haven bid today as trade hostilities between the US and China flared-up overnight/today. The BoJ announcing a ¥400 bn offer this morning to contain the Japanese yield rise (10-y touched 0.14%) probably supported core bonds too. The current risk-off sentiment pushed US rates lower by 1.2bps (2-y) to 1.4bps (30-y) with the belly of the yield curve outperforming (US 10-y back below the 3%-mark, -2bps). After opening higher, the German Bund extended its rally as Spanish and French auction results were rather mixed. The German yield curve bull flattens with yields declining 1.7bps (2-y) to 2 bps (10-y). Intra EMU-spreads increased from 2 bps (France, Spain) to 4 bps (Portugal). Italy’s BTP underperforms (+13bps) ahead of a key budget meeting between the country’s leaders and Finance Minister Giovanni Tria.
Today, the dollar trended higher. The rise had little to do with yesterday’s Fed policy statement. The US currency mainly profited from an overall risk-off sentiment as investors were puzzled by the a new exchange of mutual threats in the US-China trade war rhetoric. Tensions between the US and Turkey and further selling of Turkish assets probably added to the safe haven bid for the dollar. In EMU, peripheral spreads with Germany also widened, a potential negative for the euro. The eco data were second tier end had no impact on USD trading. The risk off sentiment eased slightly early in US dealings. This capped the rise of the dollar. EUR/USD dropped to the low 1.16 area, but trades currently again in the 1.1625 area. In line with the risk-off sentiment, USD/JPY traded with a tentative downward bias, but the rise of the yen remained modest. USD/JPY trades currently at around 111.40.
Today, the focus for sterling traders was on the BOE policy decision. EUR/GBP lost a few ticks in the run-up to the announcement. However, this was probably mainly due to EUR/USD softening at that time. The BoE as expected raised its policy rate by 0.25bp. However, it vote was 9-0 (unanimous) and this was a bit of a surprise. Sterling gained temporarily ground on this unanimity. EUR/GBP spiked to the 0.8855/60 area. However, the sterling gain could not be sustained. The BoE assumes that no more than one rate hike each year over the 2019/21 horizon might be enough to bring inflation back to target. This rate hike path remains very modest. ‘The BOE will walk not run’. Evidently, Brexit still also contains a high degree of uncertainty with potential impact on monetary policy. In the end, the gain of sterling was temporary and short-lived. EUR/GBP trades again close to the 0.89 mark. Cable is changing hands in the 1.3050 area, mainly on USD strength.
News Headlines
The Czech National Bank has raised its policy rate with 25bp to 1.25%. One of the main reason is the growing of inflationary pressures. Strong wage growth and a tight labour market pushed inflation to 2.6%, while the bank aims 2%. The bank also aims to strengthen the Czech crown after depreciations in May/July.
The Bank of England has raised its policy rate with 25bp to 0.75%, after an (unexpected) unanimous vote. The raise was widely expected, after the bank unexpectedly did not raised the policy rate in May, due to slowing Q1 growth. Governor Carney signaled there is no rush for a next hike, to achieve its inflation target of 2%.
The trial of an American pastor accused of backing the coup in Turkey, is causing political tension between the two countries, with the US sanctioning two top officials, part of President Erdogan’s cabinet. The tensions have caused the Turkish lira to reach an all-time low against the dollar, with USD/TRY surpassing the 5.00-level.
