Rates: China’s disinterest brings risk-off back on the table
The risk relief on financial markets yesterday proves short-lived as Chinese media signaled a lack of interest for China to continue trade talks with the US. Core bonds resume the upward trend this morning and are set to profit further from a deteriorating sentiment. The University of Michigan consumer confidence is today’s sole eye catcher on the eco calendar.
Currencies: dollar received interest rate support, but for how long?
The dollar succeeded broad-based gains, supported by higher US yields. The move was supported by good US data and a rebound of equities. This morning, the odds for the dollar to get additional interest rate support look rather small as uncertainty on the trade war persists. USD/JPY is most vulnerable. The picture for EUR/USD is more mixed.
The Sunrise Headlines
- US stock markets rebounded around 1% yesterday. Risk sentiment sours again overnight with Chinese stocks down 2% and gains for US Treasuries and the Japanese yen as China threatens to walk away for US talks.
- Chinese media signal little willingness from the government to continue trade talks with the US under the current tariff threat. They also report that the administration will step up stimulus to defend the local economy.
- Swedish deputy central bank governor Floden said he was unhappy with the slide of the Swedish krone against other major FX rates. It’s something the central bank will take into consideration for setting its policy.
- Washington Fed-based governor Brainard said that the Federal Reserve should be prepared to allow for an inflation overshoot (without raising interest rates) to more credible demonstrate its commitment to the 2%-goal.
- The US has cut tariffs on Turkish steel from 50% to 25%. The US President lifted this import levy last year over a row about the detention of a US pastor. There’s no reaction in EUR/TRY this morning.
- UK PM May said she would set out the timetable of her resignation after UK Parliament holds its 4th vote on Brexit legislation, whether it passes or not. The vote is expected in early June.
- Today’s economic calendar contains University of Michigan consumer confidence. Fed Clarida and Williams are scheduled to speak. EU Finance Ministers meet in Brussels.
Currencies: Dollar Received Interest Rate Support, But For How Long?
USD gains on rate support, but for how long?
EUR/USD initially hovered in a tight range in the 1.12 area yesterday as markets pondered the consequences of recent developments in the trade war saga. Risk sentiment improved in the run-up to the US session. US eco data were better than expected. US yields rose. A wider US-German yield spread finally tilted the balance in favour of the dollar. EUR/USD dropped below 1.12 to close the session at 1.11.74. USD/JPY also profited from the equity rally and closed at 109.85.
This morning, Asian markets are mixed with China underperforming. Yesterday’s relative trade optimism is again questioned this morning as a China government related source questioned whether it is appropriate for China to continue trade talks under current threats from the US. At the same time, the comment suggested that China might step efforts to support growth. The yuan is ceding further ground. USD/CNY jumped above the 6.90 barrier this morning. USD/JPY touched the 110 area this morning, but reversed initial gains (currently at 109.65). EUR/USD hovers in the 1.1175 area. AUD/USD slipped below the 0.69 level as the country is headed for elections this weekend.
Later today, the EMU final April CPI (expected at 1.7% headline and 1.2% core) is published. In the US, the Michigan consumer confidence is expected to stabilize at a decent level. At the same time, this morning’s price action suggest that it won’t be easy for the risk rally to continue.
Over the previous days the dollar (temporary)?) outperformed the yen and the euro. Yesterday, the dollar was supported by a rebound in US yields both due to good US eco data and a better risk sentiment. Especially, the risk context suggests that further USD interest rate support won’t be that evident. If so, it is in the first place a negative for USD/JPY. The picture for EUR/USD is more mixed. Selling pressure from EUR/JPY might make a EUR/USD rebound more difficult. Even so, we maintain the working hypothesis that the EUR/USD 1.1110 level won’t be easy to break without real negative EMU news.
Sterling lost further ground yesterday as the debate on the departure/ succession of UK PM May as leader of the conservative party continues. The outcome of the process and its consequences for Brexit are highly uncertain and this continues to weigh on sterling. EUR/GBP settled above the 0.8723 previous ST range top. May will try a last attempt to get her deal approved early June, but markets are not convinced it will succeed. Sterling will probably stay in the defensive.
EUR/USD: dollar rally to slow as rise in US yields might be temporary
