- Rates: US ready to walk the trade talk
Mixed reactions across Asia/Europe/US suggest doubt on whether or not this tariff threat is more than a negotiating tactic. The US walking the talk is the last thing the fragile global economy can use right now. We hold our positive bias towards core bonds. The EC’s Spring forecasts are a wildcard today with possible repercussions for Italian BTP’s. - Currencies: Dollar still doesn’t profit from risk-off due to trade uncertainty EUR/USD showed remarkable resilience yesterday even as uncertainty on trade weighed on global markets. Trade tensions probably will remain the key driver global FX trading today. For now the dollar doesn’t profit. Markets apparently assume that (global) uncertainty might raise the chance of a Fed rate cut further out, potentially reducing USD interest support
The Sunrise Headlines
- US equity markets lost up to 0.50% after recovering of steeper intraday losses. Asian shares are trading mixed with China trying to recover from yesterday’s steep decline. Japan underperforms after being closed for over a week.
- USTR Lighthizer confirmed the threat to move ahead with higher tariffs on Chinese goods by Friday. He accused China of “reneging on prior commitments”. Chinese VP Liu He is still expected in Washington this Thursday to continue talks
- Turkey’s election board cancelled the result of Istanbul’s mayoral election and ordered new municipal elections. Turkish President Erdogan had requested a rerun as his candidate lost narrowly. The Turkish lire lost over 2%.
- Ukraine’s new president, Volodymyr Zelensky, opened the dialogue with the EU in an attempt to bolster his credibility by pledging to push through on anti-corruption and judicial reforms. He said EU support would be crucial.
- The US Federal Reserve raised concerns about high levels of lending by US business who are already highly indebted. However, the Fed didn’t indicate any course of action to restrain the very high appetite for risk in US corporations
- The Reserve Bank of Australia held its cash rate at 1.5%, the record low since August 2016, despite expectations of a possible rate cut. The RBA states that the weaker Q1 consumer inflation wasn’t enough to already cut interest rates.
- Today’s economic calendar only contains secondary data in the US. German factory orders disappointed. The EU Commission releases its Economic Forecasts. The US taps the market with a 3-yr Note auction.
Currencies: Dollar Still Doesn’t Profit From Risk-Off Due To Trade Uncertainty
USD doesn’t attract major safe haven flows
EUR/USD trading was an era of relative calm yesterday. Asian/European equities were heavily sold after president Trump threatened to raise additional tariffs on Chinese imports. There were substantial losses in several smaller EM/less liquid currencies, but EUR/USD held a tight range close to, mostly slightly below 1.12. So, the dollar hardly profited from the risk-off. The US currency also lost interest rate support the euro and the yen. The risk-off eased in US trading, but that didn’t help the dollar much. EUR/USD finished the day at 1.1199, almost unchanged from Friday. USD/JPY closed at 110.75 (from 111.10).
This morning, Asian equities recover a small part of yesterday’s sell-off. Japan reopens with a substantial loss after the Golden week holidays. The yuan loses further ground as uncertainty on the trade talks/increase of tariffs persists. The RBA left its policy rate unchanged. Markets were balanced between a rate cut or an unchanged decision. Activity slowed, declining house prices are weighing on consumption and inflation eased, but a solid labour market prevented RBA to lower rates already. AUD/USD jumped back above the 0.70 handle (currently 0.7040 area).
Today, the eco calendar is thin. Markets will keep a look at the German factory orders and the European Commission Spring forecasts. Less negative EC forecasts might be a marginal euro positive. However, the US-China-trade turbulence will dominate global trading.
Yesterday and on Friday, the dollar failed to profit from solid US eco data and/or a context (risk-off) that is usually USD supportive. FX (and other) investors probably still see a decent chance of Fed rate cuts if the economic context deteriorates and/or if inflation were to stay low. This perception weighs on the dollar or at least demands perfect US data to support any further USD gains. We maintain the view that the EUR/USD 1.1110 support area won’t be that easy to break.
UK markets were closed yesterday, but sterling reversed part of Friday’s gain as press comments from both Conservative and labour officials suggested that some high hurdles still have to be conquered to reach a Brexit deal. EUR/GBP returned to the mid 0.85 area. Today, a new round of talks between both parties is scheduled for release. However, the result remains highly uncertain as are the chances for approval of a deal in Parliament. For now, we don’t expect sterling to get additional support from investors anticipating a political agreement on Brexit.
EUR/USD: uncertainty on global trade doesn’t help the dollar
