Rates: US Treasuries underperform after good non-manufacturing ISM
Core bonds faced more selling pressure yesterday with US Treasuries underperforming as a good non-manufacturing ISM ended the batch of key October eco data. The US 10-yr yield is nearing the upper bound of the 1.42%-1.94% trading range. The German 10-yr yield rises further away from -0.41% support, hitting the highest level since July.
Currencies: EUR/USD drops to intermediate support as USD enjoys yield support
A further widening in the US-German interest rate pushed EUR/USD further off the recent correction top. The pair is now testing the 1.1075 intermediate support. A slowdown in the risk rebound might turn out to be rather neutral for the euro. EUR/GBP nears the 0.8575 support even as the UK election campaign brings no concrete guidance yet
The Sunrise Headlines
- WS struggled for direction and closed mixed as investors weighed signs of improvement in US eco data against conflicting news flows on trade talks. Asian markets also trade directionless. China underperforms (-0.58%).
- Minutes of the BoJ’s September meeting showed that the board members debated the feasibility of ramping up stimulus while warning that the demerits of prolonged ultra-low interest rates require more attention.
- New Zealand unemployment increased more than expected in Q3, from 3.9% to 4.2% and employment growth slowed. This is adding to the signs of a sluggish economy that could prompt RBNZ to cut rates further next week.
- Germany’s finance minister Olaf Scholz provided a spark of hope of a breakthrough in plans to establish a euro zone banking union by ending Germany’s opposition against euro zone-wide bank deposit insurance scheme.
- Japan’s Jibun Bank services PMI fell to 49.7 in October from 52.8 in September. Japan’s services sector contracted for the first time in over 3 years amid subdued global growth, a rise in consumption tax and a damaging typhoon.
- US job openings slumped in September to 7.02 million (from 7.3 million), the lowest level in a year and a half on broad declines across industries. The US labour market remains strong yet shows signs of moderating growth.
- In today’s economic calendar final European PMI figures and September retail sales are due. UK’s election campaign officially starts today, infusing a month of uncertainty into the market. Several Fed-speeches are scheduled.
Currencies: EUR/USD Drops To Intermediate Support As USD Enjoys Yield Support
EUR/USD eases as USD enjoys yield support
The risk rally slowed yesterday but most equity indices held close to recent top levels. As was the case on Monday, a constructive sentiment didn’t help the euro to any further gains. There was no concrete news a US-China trade deal. Interest rate differentials widened further in favour of the dollar. The move accelerated after a solid US non-manufacturing ISM. EUR/USD trended lower and closed at the 1.1075, the neckline of a ST double top formation. The USD/JPY also accelerated after the ISM. The pair closed at 109.16.
The risk rally is running into resistance in Asia this morning. The rise in global core yields is also visible in Japanese yields. It doesn’t help the yen as the global reflation trade weighs on the Japanese currency (USD/JPY 109.05). USD/CNY is drifting further below the 7.0 mark, even as the dollar is trading strong overall (goodwill of the PBOC?). Mixed New-Zealand labour data are weighing in the kiwi dollar (NZD/USD 0.6370) as markets ponder the chances of a RBNZ rate cut next week. EUR/USD stabilizes in the 1.1075/80 area.
Today, the eco calendar is thin with the final EMU (services) PMI’s and the US productivity/labour cost data. This week, the risk rally supported the dollar more than the euro as US yields rose sharply. However, the risk rally shows signs of slowing and US yields are nearing important technical levels. In this context, the risk rally might turn out more neutral for the euro. Also keep an eye at the US 10-y auction. Recent auctions went reasonably well and even a rise in US yields due to a more difficult sale is not per se positive for the dollar. This week, EUR/USD ran into resistance ahead of the 1.1180 resistance area on global USD strength. Euro investors want more clarity on the US-China trade negotiations. The EUR/USD technical picture stays (moderately) constructive. The resistance at 1.1179 was robust. A break above 1.1250 improves the ST picture. The pair is testing the 1.1073 ST neckline. A return below would question the ST upward bias.
Sterling showed a mixed picture yesterday with the UK currency ceding ground against the dollar but gaining against the euro. The Lib Dems refusing cooperation with Labour might turn out to be slightly positive for Boris Johnson but the campaign of the Conservative party also meets stumbling blocks. EUR/GBP is nearing the 0.8575 support area. The day-to-day momentum for sterling (against the euro) isn’t that bad, but we keep the view that already quite some good news is discounted
EUR/USD: tests 1.1075 support after rejected topside test
