- Rates: Eco data vs risk sentiment
A WSJ article suggested that the US pondered dropping Chinese tariffs. Risk sentiment improved, even if the headlines were later denied by a US Treasury official. Downside risks to US eco data and caution going into the long weekend hang in the balance with stronger stock markets. We have an upward bias for core bonds with outperformance of US Treasuries. - Currencies: dollar shows mixed picture. EUR/USD to bottom out?
The dollar gained against the yen yesterday, but showed no clear trend against the euro as risk sentiment remained constructive. Easing tensions on global trade and a continuation of the risk rebound might be slightly euro supportive. Sterling extends its rebound as markets see a growing chance of Brexit to be delayed despite current political stalemate
The Sunrise Headlines
- US equity markets gained up to 0.75% yesterday as new trade optimism supported risk sentiment. Most Asian equities opened in green, with Chinese and Japanese indices outperforming.
- US Treasury Secretary Mnuchin is said striving for easing Chinese tariffs, while US Trade rep. Lighthizer is more reserved about the idea. The Treasury department later denied the news, but it moved financial markets anyway.
- US President Trump cancelled the US delegation’s trip to the World Economic Forum in Davos, as the partial government shutdown continues. He also blocked Democrat House Speaker Pelosi’s trip overseas in a sign of rising tensions.
- A top North Korean delegation travels to Washington today for talks with US Secretary of State Pompeo and possibly with US President Trump. The meeting aims at paving the way for a second US-North Korea nuclear summit.
- Norway’s Prime Minister Erna Solberg secured a centre-right majority government by adding the small CDP to her minority three-party coalition. It’s the first conservative-led government in Norway in over three decades.
- Japanese consumer inflation (Y/Y) dropped in December to 0.7%, a seven-month low and down from 0.9% a month before, as household spending is further cooling. The data comes ahead of next week’s Bank of Japan meeting.
- Today’s US economic calendar contains Industrial Production for December and the University of Michigan consumer confidence for January. Fed’s Williams and Harker speak. December UK retail sales feature on the agenda as well
Currencies: Dollar Shows Mixed Picture. EUR/USD To Bottom Out?
Dollar still looking for direction
Global markets initially show no clear trend yesterday. The equity rally slowed (temporarily) and so did the rebound of the dollar. Later in the session, US yields rose a few bps and equities resumed their uptrend. The move was supported by decent US eco data and by press headlines that the US was considering easing China trade tariffs. The impact on the dollar was mixed. USD/JPY gained some further ground and closed the session at 109.26. EUR/USD didn’t go anywhere and finished at 1.1389 (from 1.1392). This morning, Asian markets are joining the risk rally from the US yesterday evening. Investors continued to hope for easing trade tensions between the US and China even as the US Treasury officials denied yesterday’s reports on the US considering rolling back tariffs. USD/JPY (109.35 area) is gaining modestly further ground. EUR/USD is currently hovering just below 1.14. The yuan is losing a few ticks despite the constructive risk sentiment (USD/CNY 6.7775 area, PBOC liquidity). There are no important data in Europe later today. In the US December production data and consumer confidence from the University of Michigan will be published. A decline from 98.3 to 96.8 is expected. The risk probably is for negative surprise as the impact of the shutdown is filtering through. If so, it might be a tentative negative for the dollar. This morning, the global positive risk sentiment supports USD/JPY. Market speculation on easing trade tensions should be neutral or maybe even slightly positive for EUR/USD. This week, markets turning more uncertain on EMU growth compared the US, weighed on the euro and supported the dollar. This balance might tilt again (e.g. due to the shutdown) but for now the dollar gets the benefit of the doubt. We still see no big case for a sustained USD rally and look for a EUR/USD bottoming out process. Yesterday’s intraday price action suggests such pattern might be in the making. EUR/USD 1.1309 is first minor support.
Sterling continued its rebound yesterday. The poltical stalemate on Brexit persists. UK PM May is talking to MP’s from several parties but labour leader Corbyn still refuses to cooperate. Still, markets continue to see rising chances for a new referendum or for a delay of the March 29 Brexit deadline. For now this scenario is considered as sterling positive. EUR/GBP dropped below the 0.88 support. The 0.8656/21 range bottom is key. We consider the sterling rally as a bit premature, but the day-to-day momentum on sterling is cleary improving
EUR/USD: no high profile story to guide trading. Tentative signs of EUR/USD to bottom out?
