Rates: More outperformance of German Bunds vs US Treasuries?
The US, Mexico and Canada reached a last-minute agreement to revamp NAFTA. US equity futures gain ground, while the US Note future is a tad weaker. Today’s eco calendar contains US eco data and Fed speakers, but we think sentiment will be the key trading theme. We expect more outperformance from Bunds, as the Italian situation remains precarious.
Currencies: US-Canada trade deal to support further USD gains against other majors?
In Friday, euro weakness prevailed as European assets suffered from the Italian budget deal. This morning, investors try to assess the meaning of the US-Canada trade deal for global (FX) trading. For now, it looks that the deal might be supportive for the dollar against other majors. Sterling traders keep a close eye at the Tory conference in Birmingham.
The Sunrise Headlines
- US equity markets closed Friday’s trading session almost unchanged. Chinese markets are closed for the week. Other Asian stock markets open the week mixed. US equity futures profit from the new NAFTA deal.
- Only hours before the deadline for the US and Mexico to send their trade agreement to Congress, Canada has joined the deal. The ‘United States Mexico Canada Agreement’ ends months of uncertainty over trade in North America.
- UK PM May has insisted that her ‘Chequers’ blueprint for Brexit is not dead, but that she does not rule out making further concessions to the EU. Her comments came after Boris Johnson launched a fresh attack on the PM and her plan.
- US President Trump and the King of Saudi Arabia discussed the global oil supply after a slowdown in American drilling. Combined with the uncertainty from Iran, the oil price rose to its highest level since 2014, with $83.15 p/b.
- Japanese business confidence (manufacturing) unexpectedly dropped from 21 in Q2 to 19 in Q3 while an increase to 22 was expected. Future forecasts fall as well for manufacturing, but increase for non-manufacturing from 21 to 22.
- Italy’s Finance Minister Tria has insisted his country will be able to reduce public debt despite the new budget agreement to raise the deficit to 2.4% next year. He said growth in GDP will help to keep public finances under control.
- Today’s eco calendar contains the ISM manufacturing numbers in the US and the Markit PMI Manufacturing index in the UK. Federal Reserve governors Bostic, Kashkari and Rosengren speak as well as ECB Villeroy.
Currencies: US-Canada Trade Deal To Support Further USD Gains Against Other Majors?
US-Canada deal to support further USD gains?
On Friday, the Italian budget agreement allowing the 2019 deficit to rise to 2.4% revived investor worries on the county’s debt sustainability. Italian and European equities nosedived, Italian spreads widened and the euro was sold. EUR/USD touched an intraday low around 1.1570. Sentiment on risk turned less negative as US investors got involved. US data were slightly softer than expected but with no meaningful impact the dollar. EUR/USD finished the day at 1.1604 (from 1.1641). USD/JPY didn’t suffer from the Italian driven risk-off and extended its established uptrend closing the day at 113.70 (from 113.38). Overnight, Chinese markets are closed. The BOJ quarterly Tankan report was mostly on the soft side of expectations but still suggests a decent level of economic activity. However, global trading is dominated by headlines that the US and Canada reached a new trade deal, replacing Nafta. The news propels the Canadian dollar (USD/CAD 1.2840 area) and to a lesser extent the Mexican peso. US equity futures are jumping higher. USD/JPY is nearing the 114 mark. For now, this risk-on sentiment doesn’t help the euro. EUR/USD (1.16 area) is losing a few ticks. Today, the US manufacturing ISM is expected to ease slightly from 61.3 to 60. A softening after last month’s sharp rise won’t change markets’ (and the Fed’s) positive assessment on the economy. The US-Canada trade agreement removes a regional factor of uncertainty. It might be slightly USD supportive. Especially, USD/JPY stays in remarkably good shape. For EUR/USD, question is whether/how fast uncertainty on Italy will recede. In a day-to-day perspective, the dollar apparently still has better cards compared to the euro. Next intermediate EUR/USD support comes in at 1.1526. (September low). The technical picture of USD/JPY is constructive, but we are reluctant on yen shorts as LT Japanese yields remain under upward pressure.
Yesterday, sterling again tentatively followed the intraday price moves of the euro and the dollar, but there was some underlying GPB-softness, too. EUR/GBP closed the session little changed at 0.8904. Today, the UK August lending data and the manufacturing PMI will be published. However, markets will keep a close eye at the Tory conference in Birmingham. For now, there is no indication that the internal rift in the UK government will end soon. In this context, we don’t expect any protracted GBP gains anytime soon.
EUR/USD: topside test rejected. 1.1526 first intermediate support.
