- Rates: Risk environment and data could weigh further on core bonds
Consensus expects a stabilization of EMU September PMI’s. Against the backdrop of yesterday’s positive risk sentiment that probably will continue today, we expect the Bund to remain under pressure and the German 10-yr yield to further test the 0.5% upper bound of the 0.3%-0.5% sideways range. - Currencies: EUR/USD, USD/JPY and EUR/JPY succeed a ‘classical’ risk rally
Yesterday, global FX markets traded in line with a global risk rally. The euro was squeezed higher and the yen declined against the dollar and the euro. Today, the eco calendar is thin. Risk sentiment will prevail as a driver for FX trading. EUR/USD is nearing next resistance (1.1850). Sterling rally eased as EU Summit shows no material progress on Brexit
The Sunrise Headlines
- US stocks (+0.8 – 1%) performed excellent in yesterday’s outright risk-on session, as the Dow Jones and S&P 500 hit new all-time highs. Asian exchanges currently also thrive, with China outperforming (+1.3%).
- The EU-summit in Salzburg ended with little to no brexitprogress as EU-leaders rejected Theresa May’s blueprint, stumbling on the future EU-UK relationship and the Irish border matter. May promised to bring up own proposals “shortly”.
- The Hong Kong dollar rallied more than 0.5% this morning as prospects of higher rates and upcoming holidays force speculators betting on the dismantling of the USD peg to frontload the covering of short positions.
- Rating agency S&P revised Australia’s rating, keeping it at AAA but upgrading the outlook from negative to stable as the agency expects a fiscal surplus again by early 2020.
- The NAFTA stalemate remains as the US and Canada made little progress in the latest round of talks on Thursday, threatening the (unofficial) deadline by the end of September.
- In its new economic programme, Turkey revised growth prospects to 3.8% this year and 2.3% in 2019, down from 5.5% in a (failed) attempt to convince markets from a break of the massive credit-fuelled growth over the last decade.
- Today’s eco calendar is thin yet interesting as EMU (and US) PMI’s are published this morning. Canada releases August inflation data.
Currencies: EUR/USD, USD/JPY And EUR/JPY Succeed A ‘Classical’ Risk Rally
EUR/USD jumps higher, testing first resistance
Yesterday, tentative FX trends from earlier this week continued and even accelerated. Risk sentiment improved as trade tensions moved to the background. The USD bid ebbed further even as US interest rates kept near the cycle peak. At the same time, the euro showed already resilient of late. A resumption of the equity rally finally triggered a euro short squeeze with the EUR/USD clearing the 1.1720/33 resistance. US data were OK but didn’t help the dollar. EUR/USD closed the session at 1.1777. USD/JPY initially hardly profited from the rise in core yields and the positive risk sentiment. However, both EUR/JPY and USD/JPY finally joined the risk-on trade. USD/JPY finished the session at 112.49. Overnight, risk rally continues with most Asian indices recording gains of 1% or more. The BOJ trimmed its (regular) purchases LT JGB’s. LT yields spiked higher this morning as markets ponder whether the BOJ also intends some kind of implicit tapering. However, the BOJ action didn’t support the yen. USD/JPY even extended gains in line with the global risk rally. USD/JPY trades in the 112.75 area. EUR/USD maintains yesterday’s gain. The Hong Kong dollar also succeded a remarkable rebound. Today, there are only second tier data in the US. In EMU, the composite PMI is expected little changed at 54.4. We don’t expect a substantial positive surprise. Trading in the major euro and USD cross rates will probably again be driven by global sentiment. Political event risk isn’t out of the way yet (trade, Italy, Brexit). However, markets apparently assume that a substantial part of the ‘bad news’ has passed, at least for now. So, there is no obvious reason to row against the risk trade and against the associated FX move. So, if no new event risk pops up, the combined EUR/USD, EUR/JPY and USD/JPY rally maybe has some further to go in a day-to-day perspective. EUR/USD 1.1791/1.1850 is the next EUR/USD technical resistance on the charts. Despite the current setback, we stay more positive on the USD in a LT perspective.
Yesterday, EUR/GBP initially declined. Sterling profited from strong UK retail sales and markets hoped that the EU summit would yield positive headlines on Brexit. However, the last hypothesis wasn’t really confirmed. The Brexit stalemate persists. EUR/GBP returned to the 0.8880 area. Today, the UK public finance data won’t change the global picture. We assume that the recent GBP rebound has run its course for now. More trading around EUR/GBP 0.89 might be expected.
EUR/USD jumps as sentiment on risk improves sharply
