- Rates: Fed wants to end BS run-off later this year
FOMC Minutes revealed that most participants want to end the balance sheet run-off by the end of the year. We expect communication on the subject at the March 20 Fed meeting. Core bonds lose ground overnight on rumours of significant progress in US-Sino trade talks. We’d be cautious to join the risk rally. EMU PMI’s are expect to bottom out in February. - Currencies: Dollar stays in wait-and-see modus despite positive headlines on trade
The dollar showed no clear trend yesterday. The Fed minutes didn’t change the broader picture for the US currency. Today, the eco calendar is well filled. Will EMU PMI’s bottom and provide some downside protection for the euro? Or will US data again disappoint? For now the consequences of (US-Sino) trade talks for the USD or the euro are still unclear.
The Sunrise Headlines
- US equities posted modest gains yesterday. Asian equity markets are trading mixed as China/US progress lifted sentiment at first but China’s central bank signalling not being ready to cut rates weighed on sentiment afterwards.
- The US and China are working on multiple pacts, covering topics from agriculture to intellectual property, that would form the basis of a final trade deal and (temporarily) avert higher tariffs on Chinese imports on March 1.
- US President Trump threatened to impose tariffs on EU car import again, if the US can’t reach a trade deal with the EU. The threat follows a report by the Commerce Dept. that investigated the national-security risks of auto imports.
- The Australian dollar erased earlier gains on strong labour data (+39.1k jobs in January) following a report that one of China’s main ports had banned imports of Australian coal. AUD/USD dropped below 0.71.
- Japan’s Manufacturing PMI dropped from 50.3 to 48.5 in January, the lowest reading since June 2016. Both production output (from 49.4 to 47) and new orders fell, suggesting Japan’s underlying business conditions remain poor.
- Rating agency Fitch said it might cut the UK’s sovereign rating as it sees mounting risks of a no-deal Brexit. Meanwhile, PM May reports constructive talks on a solution for the Irish backstop with EU Commission leader Juncker.
- Today’s eco calendar contains EMU PMI’s, US weekly jobless claims, Philly Fed Business sentiment and durable goods orders. The ECB releases the January meeting minutes, while Praet speaks. France and Spain sell bonds
Currencies: Dollar Stays In Wait-And-See Modus Despite Positive Headlines On Trade
EUR/USD little changed despite progress on trade
The dollar showed no clear trend yesterday. EUR/USD (close 1.1338) and the trade-weighted USD (DXY close at 96.45) finished little changed. USD/JPY (close 110.85) gained modest ground, mainly on yen weakness after soft comments from BOJ’s Kuroda. The Fed Minutes showed Powell and Co will be patient as they try to find out whether further rate hikes are needed. The balance sheet roll-off will likely end this year. The USD lost ground before the release of the minutes, but rebounded afterward. Some investors maybe hoped for hints on possible rate cuts, but this sign didn’t come, preventing further USD losses. Overnight, Asian equities are (modestly) supported by headlines that the US and China are making good progress on a trade deal (MOU’s, a list of products that China will buy to reduce the trade deficit ….). The valuation of the yuan is rumoured to be part of a deal. The yuan strengthens further (USD/CNY 6.70 area). The yen reversed earlier strength as the Japan manufacturing PMI fell into contraction territory. EUR/USD is little changed. The Aussie dollar initially gained on strong labour market data. However, the Aussie dollar nosedived later on an analyst call for rate cuts. Finally, headlines on a Chinese port blocking Austrian coal imports pushed AUD/USD back to the 0.71 area. The calendar is well filled today. EMU February PMI’s are expected to stabilize near recent low levels. Are there finally signs that the worst may be over? US data include the Philly Fed business outlook, durable goods orders and existing home sales. USD traders might be alert for more signs of US eco softness after last week’s poor sales & production data. Headlines on the Sino-US trade talks are a tentative euro positive, but it is counterbalanced by uncertainty on US import tariffs on autos. EUR/USD rebounded off last week lows after some poor US data but sentiment on the euro remains fragile. Of late, we assumed progress on trade issues and better EMU data are needed for a more protracted EUR/USD comeback. There are hopeful signs on trade, but the jury is still out. EUR/USD 1.1216 marks the Nov low. EUR/USD 1.1287 is 61% retracement (2016 low/2018 top).
Sterling maintained most of Tuesday’s gains yesterday. EUR/GBP hovered near the 0.87 pivot. The pair is still trading in that area even as Fitch put the UK AA credit rating on negative watch due to the potential negative impact of Brexit. Some headlines suggest progress on the backstop has been made after yesterday’s meeting between PM May and EU’s Juncker was labelled ‘constructive’. Of late, markets tended to be positioned for a scenario that a no-deal Brexit could be avoided. EUR/GBP 0.8621/17 is key MT support
EUR/USD little changed as impact from trade talks is still unclear
