- Rates: German Bunds prone for profit taking?
The ECB announces details of TLTRO III funding at today’s meeting. The central bank probably won’t be able to convince investors that they have much in the toolbox left to fight any potential near term economic downturn. That could trigger profit taking in German Bunds, even if TLTRO III conditions were to be very generous. - Currencies: Dollar decline slows, for now. Euro watches ECB policy meeting
EUR/USD again failed to close above the 1.1265 resistance yesterday as the dollar received some good news. Today, headlines on US trade policy remain a wildcard for global currency trading. Even so, the focus turns to the EMU/ECB side of the story. The lack of ECB tools to stimulate the economy further might cause some by-default euro gains
The Sunrise Headlines
- Wall Street shrugged off initial doubts after a major miss in the ADP job report yesterday. The S&P and DJI outperformed (+0.82%). Asian equity markets are trading mixed, with China underperforming peers.
- US Treasury Secretary Mnuchin wants to talk about including a currency clause in the bilateral US/Japanese trade deal that is still in the progress of being made, a Treasury official said.
- The Chinese central bank injected $72 bn to roll over medium-term lending to ease liquidity concerns after the government’s first bank seizure in two decades at the end of May drove up funding costs for smaller and medium sized lenders.
- Fitch downgraded Mexican debt from BBB+ to BBB, citing increased risks in public finances and a bleak economic outlook. Moody’s changed its outlook to negative from stable as it sees a deterioration in the policy framework.
- Frederiksen’s Social Democrats won Danish elections. The left-leaning party adopted tougher rules on foreign labor, a move that undermined the success of the Rasmussen led centre-right bloc and the Danish People’s Party in particular.
- Fed districts reported a modest growth pace with ‘relatively subdued’ wage pressures, the Beige Book showed. Some districts cited worker availability issues however, while others warn trade and tariff uncertainty delayed investment.
- Today’s economic calendar is all about the ECB policy meeting, followed by a press conference where the details about TLTRO III will be revealed. NY Fed president Williams is scheduled to speak. Spain and France tap the bond market
Currencies: Dollar Decline Slows, For Now. Euro Watches ECB Policy Meeting
Dollar avoids further losses. Euro watching ECB
Euro and USD traders faced conflicting drivers yesterday. In the end the dollar avoided further losses, at least for now. Intraday, EUR/USD touched the 1.13 area on a poor ADP labour report. Later, the US non-manufacturing ISM printed solid. Investor hope on a solution in the US-Mexico dispute on tariffs also supported US yields and the dollar. On the EMU side of the story, the EC laying the groundwork for disciplinary action against Italy for not complying with fiscal rules weighed on the euro. EUR/USD closed at 1.1221. So, a sustained break of the 1.1265 resistance again failed. USD/JPY also rebounded to close at 108.46.
This morning, sentiment in Asia is fragile compared to WS yesterday evening. US president Trump indicated that there is still work to do in the US-Mexico negotiations. US yields are drifting lower and the dollar is ceding modest ground (EUR/USD 1.1230 area; USD/JPY near 108.20). The PBOC offered ample liquidity to smooth tensions in the banking sector. UCD/CNY traders little changed in the 6.91 area.
Today, US jobless claims and the trade balance will probably only be of intraday significance for FX trading. The focus turns to the ECB meeting. We expect no big changes in the ECB forecasts from March. Markets will keep an eye on the ECB communication on the LTRO pricing. Less generous conditions might be slightly euro supportive. In a broader perspective, the question is how much ammunition the ECB has left to stimulate the economy further. If markets see no significant measures to be available soon, this might cause some by-default euro strength. Headlines on US trade politics remain a wildcard. Of late, EUR/USD extensively tested the 1.1110 support, but no break occurred. The USD topside test was rejected as markets anticipate Fed rate cuts as trade tensions might hurt US growth. EUR/USD still tries to break the 1.1265 level in a sustainable way. A break would improve the technical picture with 1.1324 the next target.
EUR/GBP entered some kind of consolidation modus. The pair found a ST equilibrium in the upper half of 0.88. There is little high profile news on Brexit or on the leadership race in the conservative party. At the same time, UK eco data have little impact on sterling trading either. Some more wait-and-see price action might be on the cards for sterling until there is some clarity on who will succeed PM May.
EUR/USD: battle on 1.1265 resistance as USD and euro are both facing issues, preventing a clear directional move
