Rates: US yields clear final technical hurdles ahead of cycle highs
The stoic market reaction to new tariffs in the US/Chinese trade conflict suggests that the moves were discounted and/or the worst could be over. Technical factors dominated trading with the US Treasury sell-off accelerating as the US 10-yr and 30-yr yields pierced through resistance levels, paving the way for a test of cycle highs at 3.12% and 3.26% respectively.
Currencies: Conflicting drivers are leaving USD in indecisive trading pattern
Yesterday, EUR/USD held a remarkably stable trading pattern even as the US/China trade conflict moved into a new phase. The dollar faced confliction drivers, but a rising US interest rates apparently prevail and are giving the US currency downside protection, at least for now. Sterling traders are keeping an eye at the UK CPI and at the EU summit in Salzburg.
The Sunrise Headlines
- US markets bounced back up yesterday as global risk sentiment improved. All three major indices closed with gains north of +0.5%. Asian equity markets opened in green as well, with Japan and China outperforming (+1.5%).
- The Bank of Japan kept its targets for the short-term interest rate and the 10-y bond yields unchanged at -0.1% and 0.0% resp. The bank maintained an optimistic view on the economy. Exports grew 6.6% in Augusts (vs. 3.9% in July).
- Kim Jong Un stated that he agreed to continue North Korea’s denuclearization at the presence of foreign inspectors. However, only on the condition that the US takes reciprocal actions to relief international sanctions.
- The US and Canada continue trade talks today, as Canadian PM Freeland travels to Washington. In the meantime, business groups from both countries are urging their political leaders to agree on a deal to renew Nafta.
- The US Senate has approved a short-term spending bill that keeps the government running through December 7, avoiding a government shutdown before the midterm elections over President Trump’s border wall fight.
- Ahead of the EU-summit in Salzburg today, UK PM May told that she urges the European Union to evolve its position, just as the UK did. In that way, she believes she is close to achieve a deal with the EU on an orderly Brexit.
- Today’s eco calendar contains second tier data in the US and inflation numbers in the UK. Bank of England’s Haldane speaks in Estonia while ECB president Draghi is speaking in Berlin
Currencies: Conflicting Drivers Are Leaving USD In Indecisive Trading Pattern
USD stalemate persists on conflicting drivers
On Tuesday, the dollar didn’t show a clear directional trend in the wake of the escalation in the US-China trade war. Contrary to what was often the case of late, the USD hardly profited for the trade tensions. EUR/USD tested the 1.1720 area twice, but the 1.1733 resistance stayed out of reach. Risk sentiment wasn’t too bad and improved during the day, even as China announced countermeasures. At the same time, US yields surpassed important technical levels. It gave the dollar downside protection, but USD gains remained modest. EUR/USD finished the day at 1.1667 (from 1.1683). USD/JPY closed at 112.36 (from 111.85). Overnight, Asian equities further ‘ignore’ the US-China trade conflict, showing broad-based gains. The BOJ as expected left its monetary policy unchanged. In a speech at WEF, Chinese PM Li reiterated that China won’t use currency devaluation as an instrument in the trade war and that it aims a stable currency. The Yuan gains slightly ground (USD/CNY 6.85 area). The comments from Li had also modest positive spill-over effects on the Aussie $. AUD/USD extended its rebound beyond 0.72. Overnight, US data showed that China reduced holdings of Treasuries in July. This might raise US yields, but it is doubtful that it will support the dollar. There are again few eco data today. US housing starts/ permits are not the focus of USD trading. A speech of ECB’s Draghi is a wildcard. Of late, there were plenty of conflicting factors for EUR/USD trading (trade war, EM stress, Draghi’s positive assessment, rising US interest rates), leaving the cross rate in an indecisive pattern. The USD performance is not really convincing, but for now, it looks that the big interest rate buffer is strong enough to prevent a building up of USD shorts. Short-term, we keep a neutral bias on EUR/USD until it becomes clear which narrative will prevail as a driver for USD/global FX trading. 1.1733/50/91 resistance is the first topside reference. A break won’t be evident, but we are becoming more alert for a move in that direction.
Yesterday, there were no UK data. Brexit headlines brought little hard news. EUR/GBP closed at 0.8875. Today, the UK CPI is expected slightly softer at 2.4% Y/Y from 2.5%. There will be plenty of Brexit comments on the sidelines of the EU Summit. EU politicians will probably maintain a positive tone. We don’t expect a break-through, but a constructive tone might be slightly sterling supportive in a daily perspective
USD holding near recent lows, despite rising US yields
