Rates: Risk sentiment remains very fragile
We expect strong US eco data and OPEC+ production cuts in 2019, but they’ll probably play second fiddle with investors watching stock markets. Overnight risk sentiment is negative even if we think the news flow is meagre. We don’t fight current trends, but think the downside could gradually be exhausted with key support lining up.
Currencies: Dollar doesn’t find clear directional trend as market doubts persist
Trading in the major USD cross rates remains an era of relative calm as global uncertainty persists. The combination of global uncertainty and at the same time declining interest rate support for the dollar is keeping EUR/USD in a directionless trading pattern. Sterling is still haunted by (conflicting) headlines on Brexit
The Sunrise Headlines
- US stock markets were closed yesterday in honour of former president Bush, while Asian equities opened with heavy losses this morning. China underperforms on news that Canada arrested Huawei CFO Wanzhou Meng.
- French president Macron has cancelled the increase in fuel taxes which was going to be implemented starting from 2019, in an attempt to calm the growing nationwide protest movement. Protesters still want Macron to resign.
- OPEC+, led by Russia and Saudi Arabia, are close to agree on a deal to cut oil production, though the size of the cut is not yet decided on. The move defies US President Trump, who urged to maintain current supply so prices are kept low.
- The Bank of Canada held its benchmark rate steady at 1.75%, a 10-yr high. However, latest disappointing economic data prompted the bank to take a more cautious tone, warning the economy could be heading for a slowdown in Q4.
- UK PM May’s cabinet urged to delay next week’s Parliament vote on the Brexit deal, as they fear the heavy defeat could topple the government. Opponents fear the ‘backstop’ will keep the UK in a EU customs union indefinitely.
- The Federal Reserve’s Beige Book confirms the US economy remains strong, though some districts are signalling a cooling growth. Labour markets is further tightening and trade uncertainty remains a big concern for US businesses.
- Today’s economic calendar contains the US ADP employment report, jobless claims and non-manufacturing ISM. The EMU’s eco calendar is empty. ECB’s de Guindos, Fed’s Bostic and Fed Quarles speak
Currencies: Dollar Doesn’t Find Clear Directional Trend As Market Doubts Persist
USD looking for direction as risk-off persists
Global volatility eased (temporarily) yesterday. US markets were closed in honor of former president Bush. Sentiment stayed risk-off but the pace of the sell-off slowed. EUR/USD bottomed after Tuesday’s intraday slide. The news flow from Europe was also mildly euro supportive. The EMU PMI’s were slightly better than expected. Headlines suggested that Italy and the EU are making progress to find a compromise on the Italian budget. In the Fed Beige book, most Fed districts see ongoing modest to moderate growth. Labour shortages and price pressures due to higher tariffs are a concern. The trade-weighted dollar finished marginally stronger near the 97 handle. EUR/USD was little changed (1.1344). The yen returned part of Tuesday’s risk-off gain. USD/JPY rebounded (113.19 from 112.77). Overnight, global sentiment turned again outright risk-off. The flattening of the US yield curve resumes. Canada arrested the CFO of Huawei and might extradite her to the US. The case suggests that there is little improvement in the US-China trade relationship despite Saturday’s meeting between Presidents Trump and XI Jinping. Asian equities are again deep in the red, with losses in China mounting close to 3%. EUR/USD still lacks any directional tendency holding in the mid 1.13 area. The yen strengthens below 113 (112.75 currently). The yuan weakens modestly. The Aussie dollar extends this week’s decline after disappointing trade data. Today, The ISM, the ADP labour report, jobless claims and trade balance data might move the dollar intraday. FX traders will also keep an eye at the OPEC meeting. However, global (FX) markets will stay focused on the US yield curve. The context of at the same time global uncertainty and declining US yields (and a flattening yield curve) is ambiguous for EUR/USD. In case of a new risk-off episode, some EUR/USD downside drift might be on the cards, despite a narrowing of the US-EMU interest rate differential (spill-over from EUR/JPY-USD/JPY selling). Still the 1.12/1.15 range looks solid.
Sterling gained temporarily ground yesterday despite a poor UK PMI. The Brexit debate in Parliament continued. Over the previous days chances on no Brexit looked to have grown slightly. However, the outcome of the process remains highly uncertain/binary in nature. EUR/GBP finished little changed near 0.89. Headlines from the Brexit debate in parliament will continue to drive EUR/GBP trading today. For now, we see no trigger for a sustained sterling comeback.
EUR/USD: Risk-off and flattening of the US yield continue to give ambiguous sign for EUR/USD trading
