Rates: Engulfing patterns suggest more upward potential for German yields
A strong German Ifo business confidence and positive risk sentiment following the US/Mexican agreement to rewrite Nafta inflicted losses on core bonds. The trade euphoria might be short-lived though with Chinese talks still deadlocked. Technical pictures suggest more upward potential for German yields. US eco data, supply, or ECB Praet might be triggers today.
Currencies: Dollar eases on positive risk sentiment, but will this trade persist?
Yesterday, the dollar declined further as a positive risk sentiment directed FX flows away from the US currency. The euro profited from a good German IFO. Investor assessment on the impact of the US/Mexican trade deal will be key for global (FX) trading. We are not convinced that the risk-on trade will inspire further USD losses.
The Sunrise Headlines
- US stock markets were breaking records yesterday, with all indexes in green. S&P500 (+0.77%) and NASDAQ (+0.91%) reached record high. Asian markets continued this morning, with China underperforming the rest of Asia.
- Mexico and the US have reached a trade agreement yesterday, overhauling the original NAFTA deal. Canada is now under pressure to agree to new terms on auto trade and dispute settlement rules to remain part of the three-nation pact.
- Argentina will have difficulties meeting its $82bn financing needs for this and next years despite the $50bn credit line it received from the IMF and following through on mandated reforms to cut the fiscal deficit and tame inflation.
- French Prime Minister Edouard Philippe asked his ministers to prepare for a no-deal brexit. The country hopes the UK will reach a deal with its EU partners on leaving the EU, but “the bloc has to be ready if no agreement can be found”.
- Turkey’s Finance Minister Berat Albayrak said yesterday at a news conference with France’s Le Maire that he wants to take the relationship with the EU to a new phase, because trade with the EU “is now more important than ever”.
- Iran’s President Rouhani wants the EU to give guarantees on banking and oil sales, saying the country has acted upon its promises made in the 2015 nuclear agreement and expects the partners to come through on their parts of the deal.
- Today’s eco calendar contains several US eco data including the Conference Board Consumer Confidence for August. ECB’s chief economist Peter Praet speaks in Cologne (Germany)
Currencies: Dollar Eases On Positive Risk Sentiment, But Will This Trade Persist?
Risk-on weighs on USD, but for how long?
Yesterday, the post-Jackson Hole USD decline initially took a breather even as the PBOC took steps to prevent further Yuan losses. EUR/USD dropped temporarily below 1.16, but found a floor after a solid German IFO confidence. Later, risk sentiment improved, causing additional USD losses. Investors hoped that a trade-agreement between the US and Mexico could be a harbinger for less global trade tensions. US equities set new records. The dollar lost further ground. EUR/USD finished at 1.1678. The trade-weighted dollar slipped below the 95 handle. USD/JPY hardly profited from the risk-on (close 111.08). This morning, Asian investors ponder the potential consequences of the Nafta overhaul for global markets. Asian equities show modest gains. The USD decline slows. Trade-weighted USD trades at 94.85. EUR/USD hovers near 1.1675. Later today, the calendar in Europe is thin. In the US, the trade balance, Richmond Fed manufacturing index and consumer confidence will be published. Consumer confidence is expected to ease slightly from historically high levels (126.6 from 127.4). However, risk sentiment and investors’ assessment on global trade after the US-Mexico trade deal will probably remain the key driver for the dollar. We are not convinced that that the US-Mexico deal will ‘automatically’ be followed by progress in the trade negotiations between the US and China (or Europe). If so, the rise in US equities and the USD correction might gradually slow. In a broader perspective, the dollar reversed the early August gains against the euro and EUR/USD returned in the previous 1.15/1.18 consolidation pattern. The USD momentum has eroded further after Friday’s balanced comments from Fed’s Powell and due to a positive risk sentiment. The jury is still out, but the easiest part of this trade might be behind us. If so, the recent EUR/USD rebound might slow. We maintain the hypothesis that a EUR/USD break beyond the 1.1750/91 resistance will be difficult short-term.
Yesterday, UK markets were closed. EUR/GBP extended gains beyond the 0.9033/44 resistance driven by the EUR/USD rebound. There are no eco data in the UK today. So, brexit and global risk sentiment will set the tone for GBP trading. The EUR/GBP rally might take a breather after recent rally. Even so, sterling will probably remain in the defensive unless there comes really good news (brexit progress or strong eco data). We don’t expect that to come anytime soon. The technical picture of EUR/GBP also improves if the break beyond 0.9033/44 is confirmed
USD (trade-weighted-DXY): dollar declines on positive risk sentiment. Trade to slow?
