Rates: Trade conflict to reappear on market radar?
US payrolls, and more specifically wage growth, inflicted significant losses on US Treasuries on Friday. The US 2-yr yield hit a new cycle high. Hawkish trade rhetoric by US President Trump is weighing on Asian stock markets overnight, but other risk barometers are more neutral. Trade could retake its role as market driver in absence of other data/events today.
Currencies: EUR/USD nears intermediate support.
On Friday, the dollar succeeded modest gains after solid US wage growth. This week, trade tensions might dominate USD trading at the start of the week. US eco data might become more important later. For now, the dollar might regain the benefit of the doubt. EUR/USD breaking below 1.1540/30 might inspire some further USD gains short-term.
The Sunrise Headlines
- US equity markets lost ground on Friday, ending last week’s trading week with limited losses. Asian markets open the new week with (bigger) losses, with China underperforming. Only Japan remains marginally in the green.
- US President Trump has said that he is ready to impose tariffs on an additional $267bn on Chinese import on short notice, additional to the previously proposed $200bn that the US government is putting the final touches on.
- After Sweden’s elections, the country is in a political gridlock. Nor left-centred Social Democrats nor the right-centred Alliance bloc is able to form majority governments. The populist Sweden Democrats are Sweden’s 3rd biggest party.
- After an informal summit in Salzburg this month (20th of September) between the EU’s 27 leaders, the EU wants to give its Brexit negotiator Michel Barnier additional guidance and a mandate to close a brexit deal.
- Canada’s foreign minister Freeland left Washington on Friday for a two week break in Nafta-negotiations. No signs of a new Nafta-deal were detected, while US President Trump threatens to impose 25% tariffs on Canadian cars.
- US Congressional leaders are expected to secure a deal today on a package of three spending bills for the upcoming fiscal year. This deal would avoid the partial government shutdown, threatened by US President Trump.
- Today’s US eco calendar is empty, with only Fed’s Bostic to speak. UK industrial production figures and monthly GDP data will be released. The EU and the US resume talks over July Trump-Juncker agreement in Brussels.
Currencies: EUR/USD Nears Intermediate Support
USD retains benefit of the doubt post payrolls
On Friday, global trading developed in a typically quiet manner going into the publication of the US payrolls. Net job growth was solid (201k vs 190k expected), but June/July figures were downwardly revised. The unemployment rate stabilized at 3.9% but average hourly earnings unexpectedly accelerated 0.4% M/M and 2.9% Y/Y. US yields and the dollar turned north as markets saw a rising probability of two additional Fed hikes this year. Initially, the USD reacted cautiously but USD gains were extended later. EUR/USD closed the day at 1.1553 (from 1.1623). USD/JPY reversed an earlier dip, but closed the session in well-known territory near the 111 level. This morning, post-payrolls USD strength is keeping (some) EM currencies in the defensive, but overal the losses are rather benign. Japan Q2 growth was upwardly revised to a 3.0% Q/Qa. As usual, the yen hardly reacts to Japanese data. USD/JPY is holding near 111. EUR/USD is changing hands near 1.1550. Later today, there are few eco data in the US and in Europe. Trade issues will probably continue to take centre stage. The US and the EU resume talks. President Trump might still announce additional tariffs on Chinese imports, especially as the China-US trade surplus reached a record in August. Trade talks with Canada also didn’t yield a result yet. The eco calendar is back loaded with the US CPI and ECB policy meeting on Thursday and the US retail sales on Friday. Last week, the dollar gained a few ticks against the euro but didn’t break any key resistance. The combination of global uncertainty on trade, lingering EM stress and ongoing solid US eco data, should be a USD-constructive context. We continue to give the dollar the benefit of the doubt short-term, especially against the euro. That said, last week’s price action indicated that a similar context was no guarantee for spectacular USD gains. The EUR/USD 1.1530/40 is a minor EUR/USD support within the established range. A break below might inspire some further USD gains short-term.
Last week, markets saw some tentative signs that the EU and the UK might come closer to a brexit deal, pushing EUR/GBP back below the 0.90 handle. Today, the UK July production data will be pubublished. Still, brexit headlines will probably dominate GBP trading. Last week’s price action suggests the market was still positioned GBP-short, temporarily supporting sterling. However, fundamentally, we see no reason for a sustained GBP comeback without ‘real’ brexit progress.
EUR/USD nears intermediate support in 1.1530/40 area.
