- Rates: German 10-yr yield tests first resistance at -0.41%
Hopes on a Brexit deal lifted risk sentiment. Core bonds sold off, following UK Gilts south. The German 10-yr yield tested the neckline of a double bottom formation at -0.41%. Risk sentiment soured again this morning as US-Sino relations turn in the opposite, less positive, direction. US retail sales, Q3 earnings and central bank speakers are wildcards. - Currencies: Brexit deal to propel both sterling and the euro?
Yesterday, initial USD strength was reversed as sentiment turned risk on and as headlines indicated that the UK and the EU were nearing a Brexit deal. The euro and sterling outperformed. Today, the US retail sales have potential to move the dollar but the focus remains on Brexit. A deal should remove a (heavy) weight for the euro and sterling, at least short term.
The Sunrise Headlines
- WS ended in the green (+1%) as positive earnings releases and optimism over Brexit boosted risk appetite. Asian markets are trading mixed as US-China (non-trade) tensions. Japan outperforms (+1.33%)
- Sentiment sours as China threatens to retaliate if US enacts a bill supporting pro-democracy Hong Kong protestors. The threat dented risk appetite as markets are worried US-China trade tensions will heat up.
- The EU and the UK edged closer to a draft Brexit deal with optimism that there will be a breakthrough before the end of Wednesday. Northern Ireland’s DUP threw a dash of cold water on hopes however by expressing some concerns.
- The IMF made a fifth-straight cut to its 2019 growth outlook to its slowest pace (3.00%) since the financial crisis, citing a broad deceleration across the world’s largest economies and trade tensions that continue to drag on global growth.
- Germany’s finance minister communicated that Germany aims to stick to its ‘Schwarze Null’ policy for now and boost spending without incurring new debt, adding that the government would use all fiscal options in an economic crisis.
- South Korea’s central bank cut its policy interest rate for the second time in three months on Wednesday to prop up its sputtering economy hit by cooling demand and trade tensions, and address mounting deflationary pressures.
- In today’s economic calendar the focus will shift to the US consumer with the publication of September’s retail sales and the release of the Fed’s Beige Book. Several central bank (Fed, BoE, ECB) speeches are due.
Currencies: Brexit Deal To Propel Both Sterling And The Euro?
Brexit deal to propel euro and sterling?
EUR/USD trading showed two faces yesterday. USD strength initially prevailed. Uncertainty on the status of the US-China trade negotiations initially supported bonds and the dollar. EUR/USD drifted back lower to the 1.10 previous resistance area. From there, a new risk-rebound kicked in. First US corporate earnings were assessed positive and headlines said the EU and the UK came ever closer to striking a Brexit deal. EUR/USD, USD/JPY and EUR/JPY all jumped higher as did core yields. USD/JPY closed at 108.86 (from 108.40). EUR/USD reversed the intraday decline to finish the day little changed at 1.1033.
Overnight, Asian equities initially joined the risk rally on WS. However, sentiment, especially on Chinese markets, deteriorated as China said it would retaliate political action in the US Congress to support the Hong Kong protests. The yuan weakens (USD/CNY 7.10 area). USD/JPY is also losing momentum (108.65). EUR/USD is little changed (1.1030 area). The Korean won weakens after the BoK cut its policy rate by 25 bp.
Regarding the eco data, US retail sales take centre stage today. The consensus expects ‘control group sales’ to rise for a seventh consecutive month. We see an asymmetric risk for the dollar being more sensitive to a negative than to a positive surprise. China-US (trade) relations and, even more, Brexit remain a wildcard. A Brexit deal would be euro supportive even as there remains uncertainty whether Boris Johnson will be able to get the deal approved in Parliament.
Last week, EUR/USD regained 1.10, but there were no follow-through gains. Easing trade tensions are positive for the export-reliant EMU economy, but the deal remains uncertain. A Brexit agreement would remove a high-profile source of E(M)U uncertainty. Such a deal at least should help EUR/USD to rebound further off the 1.10 support. The pair regaining the 1.1110 area would further improve the technical picture.
Over the previous days, sterling traders already positioned for a growing chance of a last-minute Brexit deal. Constructive headlines especially from EU sources yesterday gave sterling another shot in the arm. EUR/GBP dropped to the 0.8630 area. Today, the key question apparently is whether the DUP party will approve the deal. An approval might cause sterling to look for a new equilibrium at a higher level. The 2019 correction low of EUR/GBP comes in at 0.8472. As always in Brexit, last minute twists are never excluded
EUR/USD: Brexit deal to support further euro gains
