Markets
Global core bonds gained ground today. The German bund opened lower but started its morning upward trend soon in lockstep with US Treasuries as investors digested the Fed’s dovish turn yesterday. Yields showed signs of bottoming (bonds topping) during early US trading hours. Despite rather poor underlying details, a better than expected headline Philly Fed business outlook (13.7 vs. 4.8 expected) supported US yields in particular. The US yield curve is little changed after yesterday’s blow with the 10y yield heavily testing technical support around the 2.5% area. The German curve bull flattens with yield declines ranging from 1 bp (2y) to 3 bps (5y) over 4bps (10y). Peripheral spreads with Germany’s 10y yield narrow with Italy outperforming (-3 bps).
(FX) markets tried to cope with the new context in the wake of yesterday’s soft Fed communication. Yesterday, the dollar was hammered and EUR/USD gained more than a full big figure after the Fed guidance that it expects its policy rate to stay unchanged this year and its announcement to stop the balance sheet roll-off sooner than expected. EUR/USD still traded north of 1.14 in Asia this morning, but the dollar gradually regained its composure. The growth outlook of the EMU also remains fragile. At the same time, yesterday’s Fed action left investors in risky assets with second thoughts. This kind of global uncertainty is tentatively more supportive for the dollar than for the euro. The US Philly Fed outlook was mixed at best, but had no additional (negative) impact on the dollar. EUR/USD has drifted back below the 1.14 handle (currently 1.1380 area). The pair has returned to the middle of the 1.12/1.16 trading band, awaiting more guidance on the relative balance between the Fed and the ECB. However, this might take time for investors to find out. USD/JPY is holding a rather tight range in the mid 110 area.
The Bank of England as expected left its policy unchanged. In line with its assessment in the February inflation report, the Bank sees room for a very gradual and limited tightening in case of an orderly Brexit. Understandably, the relatively positive assessment of the BoE didn’t help sterling much as the condition of an orderly Brexit is put ever more in doubt. At an EU summit in Brussels, UK PM May will probably receive the message that an approval of Brexit in the UK parliament is needed for the UK to get a (limited) delay to organize its exit from the EU. The high degree of uncertainty on how this process will develop heading toward the March 29 deadline is weighing on sterling. EUR/GBP is trading in the 0.8860 area. Cable is moving up and down in the mid 1.31 area. The risk for sterling trading is becoming ever more binary in nature.
News Headlines
Norges Bank increased interest rates from 0.75% to 1.0% today, citing solid economic growth, above target inflation and a consistently weaker than expected Norwegian krona. The currency jumped to EUR/NOK 9.61. The Swiss National Bank kept rates steady at -0.75%, cut its inflation forecast (again) and kept its currency intervention pledge, saying the Swiss franc is still “highly valued”. Nevertheless, EUR/CHF slipped to 1.13 amid a risk-off environment.
Rating agency Fitch issued a warning to Canada today after releasing the latest budget. The “modest fiscal loosening and sustained deficits will increase the economy’s exposure to a downturn”, Fitch said, adding that the Canadian government debt “remains close to a level that is incompatible with AAA status”. The loonie slipped to USD/CAD 1.336.
