Markets
Yesterday’s trading session was rather uneventful up until the release of the transcript from US President Trump’s call with Ukrainian President Zelensky. The phone call, in which US President Trump supposedly blackmailed Zelensky into starting an investigation related to Democratic Presidential Candidate Biden and his son, is the basis of the Democratic impeachment inquiry launched on Tuesday evening. The transcript doesn’t show an explicit quid pro quo where Trump eg threatens to withhold financial aid to Ukraine in return of Zelensky doing him a favour.
Therefore, it probably reduces odds – at this stage – that the document is the smoking gun for an impeachable offense. Throughout the evening, it turned out that the lion share of US Republican Senators, who will ultimately decide, continue backing the US President. US Treasuries sold off after the release of the transcript and hugely underperformed German Bunds. US yields added up to 9.2 bps (10-yr) while the German yield curve bear steepened with yields rising 0.1 bp (2-yr) to 2.9 bps (30-yr). The rise in US yield supported the greenback which ruled over FX markets. EUR/USD dropped to the lower half of the 1.0926/1.1112 trading range, but fell short of a real test of the 2019 low. The trade weighted dollar increased to 99, but the 2019 high (99.37) also stayed out of reach. USD/JPY rose from 107.07 to 107.77. US stock markets reversed part of Tuesday’s losses, ending 0.6% to 1.05% higher. Stocks found additional support in comments from US President Trump who said that a China deal could happen “sooner than you think”. These came around the release from the Zelensky transcript so might just as well have been a red herring. Sterling underperformed on the FX market with EUR/GBP closing above 0.8850 as UK Parliament returned. The fog over the Brexit path remains as thick as ever.
Asian stock markets are mixed this morning with especially China underperforming. Japanese indices are in the green following the signature of a limited trade agreement between the US and Japan, which doesn’t include car tariffs.
NZD/USD returns above 0.63 after governor Orr played down the need for unconventional monetary policy. Today’s eco calendar contains second tier US eco data including trade balance, weekly jobless claims and pending home sales. The Democrat impeachment inquiry will remain talk of town. Without additional evidence, US President Trump seems to be off the hook. Speeches by central bank governors are wildcards. Overall risk sentiment will thus be key for intraday moves. The proximity of key dollar resistance levels suggests that a test will be unavoidable.
Regarding EUR/USD, we still think that the ECB’s September easing package was a final act and therefore strengthened the floor in the pair. Further support kicks in at 1.0778/1.0821. Standing ranges in the German and US 10-yr yields are not under threat.
News Headlines
The NY Fed said that it would increase the size of overnight cash loans offers through the repo market to $100bn from $75bn, while doubling the size of the two-week offering from $30bn to $60bn. Banks’ bids to get their hands on dollar liquidity exceeded the NY Fed’s offering over the past days. The latter probably wanted to avoid new stress on US money markets over quarter-end.
ECB Executive Board member Sabine Lautenschläger decided to resign from her position on October 31, prior to the end of her term in office. The decision probably came over disagreement with the ECB’s latest monetary easing package and deepens the split within the central bank. French, Dutch and Austrian ECB-members also questioned the necessity to engage for example to fresh asset purchases. Mrs Lautenschläger isn’t the first German ECB member to resign over controversial ECB policies. In 2011, both Axel Weber and Jürgen Stark did the same.
