Rates: Caution is warranted ahead of next week’s key US eco data
Core bonds might shrug off some more of the overbought conditions going into the weekend, but we expect a correction lower, if any, to be short-lived. Investors eye next week’s key US eco releases (retail sales, ISM’s, ADP, payrolls). A deterioration might amplify global growth doom and benefit core bonds again.
Currencies: dollar maintains benefit of the doubt, for now
The dollar extended gains supported by a rebound in US yields yesterday. Today, the US new homes sales and the Chicago PMI might be good pointers for the reaction of the dollar to next week’s key US eco data. We are not convinced that US eco data will be good enough to sustain further USD gains.
The Sunrise Headlines
- US equity markets posted modest gains with all major indices closing between 0.30%-0.40%. Asian markets are tracking WS with Chinese bourses outperforming (+3%) on positive signals emerging from US-Sino trade talks.
- UK PM May is said to put her Brexit deal for the 3rd time to a vote today but only the withdrawal part of the deal, so it meets the requirements for a delay, and not the part that pertains to the future EU/UK relationship.
- US Treasury Secretary Mnuchin said the trade talks with China are productive, with China pledging better access for foreign tech firms. He added that a resolution could still be months away as the quality of the deal has priority.
- US President Trump said oil prices are “getting too high”. He renewed his criticism on OPEC, asking to increase output. The reaction in oil prices remained limited. A barrel Brent crude oil currently trades just below $68 a barrel.
- St. Louis Fed chief Bullard said it is premature to expect a Fed rate cut as he expects the US economy to rebound in Q2, while New York Fed president Williams downplayed fears of recession risks.
- Japan’s jobless rate dropped to 2.3% in February, a nine-month low and down from 2.5% the month before. Core inflation remained steady at 0.7% in March, while retail sales grew 0.2% in February, below expectations (1.0%).
- Today’s US eco calendar contains the PCE Core(Jan),new home sales (Feb) and the MNI Chicago PMI (Mar). France and Italy print consumer inflation for March. ECB’s Coeuré and Fed’s Kaplan and Quarles speak. UK Parliament votes again.
Currencies: Dollar Maintains Benefit Of The Doubt, For Now
Dollar maintains benefit of the doubt, for now
The dollar maintained the benefit of the doubt on global FX markets yesterday. We didn’t see any specific trigger. The momentum of the previous days simply continued. USD-gains again mainly occurred at the start of the US session. Eco data in the US and Europe were mixed and had no lasting impact on trading. Risk sentiment wasn’t too bad. At the same time, core yields rose with interest rate differentials widening in favour of the dollar. This factor prevailed. EUR/USD drifted further south in the 1.12 big figure and closed at 1.1221 (from 1.1244). USD/JPY finished at 110.63 (from 110.51).
This morning, Asian equity indices mostly show decent gains with China outperforming. The rally was probably supported by positive comments of US officials on the US China trade talks. However, the talks might continue for a while. The (trade-weighted) dollar stabilizes in the 97.20 area. Despite the risk-on, USD/JPY (110.70 area) struggles to make further gains. EUR/USD meanders in the 1.1230 area.
Today, German retail sales and labour market data will be published. French consumer spending and CPI also provide interesting info on the EMU economy, but usually that are no movers of the FX market. US inflation and spending (Jan) data are a bit outdated. The Chicago PMI and new home sales have more market moving potential. The Chicago PMI is expected to ease from 64.9 to 61.0. We are keen the see the dollar reaction in case of a negative surprise. It could be a good pointer for market sentiment ahead of next week’s key US eco data including the ISM’s and the payrolls. We are not convinced that US data will remain strong enough to support further USD gains. EUR/USD is drifting further south in the 1.2/1.15 MT trading range. Euro sentiment is fragile, but US data are also turning mixed. For now, we maintain the view that there is no compelling reason for EUR/USD break below the 1.1187/1.12 support in a sustainable way even as we understand downside risks have increased.
Sterling momentum deteriorated yesterday as UK PM/ failed to agree on any alternative Brexit option and as the UK government indicated that it will hold a new vote only on the withdrawal agreement. However, for now it is unlikely that May’s tactic will yield a positive result. EUR/GBP hovers in the 0.8895 area. We remain cautious on sterling long exposure as long as there is no indication on how this process will turn out.
EUR/USD: drifting lower in the 1.12/1.15 range. However, global uncertainty on growth makes a real trend-move not evident.
