- Rates: EC report on revising debt rules important wildcard
Asian stock markets remain upwardly oriented, but risk sentiment becomes less bullish. More and more companies report distortions in supply chains due to the Chinese quarantine. The EC publishes a report on revising strict debt and deficit rules, which could free hands of governments and allow for some more spending. US eco data include ADP and Services ISM. - Currencies: Smaller currencies and USD profit from risk rebound
The dollar profited from higher US interest rates as risk sentiment improved. Smaller less liquid currency that suffered from the corona risk-off earlier also found their composure. EUR/USD was a ‘by default’ loser. EUR/USD might be locked in the 1.0980/1.11 range ahead of the payrolls. Sterling still proves sensitive to signs of a UK eco rebound.
The Sunrise Headlines
- Wall Street advanced for a second day in a row as concerns about the coronavirus ebb away. The Nasdaq outperformed (+2.1%). Asian markets also trade in the green with Japan (+1%) leading the pack as the yen slid.
- In his State of the Union, Trump touted the US economy but refrained from hinting at new policies and commenting on (global) trade or the impeachment procedure of which the Senate is set to acquit him of later today.
- European and US car companies warned they are close to shutting down plants as disruptions in supply chains caused by the outbreak of the coronavirus risks leading to a shortage in key components.
- The US is considering to withdraw from the WTO’s Government Procurement Agreement if it isn’t reformed. The pact aims to open the market of government contracts to foreign competition and make public purchases more transparent.
- RBA Governor Lowe sees a case for a rate cut should unemployment fall but thinks the probability of that is very low. He also sees risks from low rates and doesn’t want them to encourage another boom in borrowing.
- Partial results from the Iowa caucus show Pete Buttigieg (26.8%) leading with a narrow margin over Bernie Sanders (25.2%) of state delegate equivalents. Warren comes in 3rd while Joe Biden finishes 4th with over 70% of the results in.
- Today’s economic calendar contains the US ADP employment report and the non-manufacturing ISM. The EC releases a report on revising the bloc’s debt rules. Several ECB members including Lagarde and Lane are scheduled to speak
Currencies: Smaller Currencies And USD Profit From Risk Rebound
Small currencies and USD profit from risk-on.
FX markets showed the ‘new’ standard risk-on reaction yesterday. The equity rebound and the rise in US yields supported the dollar against other majors like the yen and the euro. USD/JPY returned to the mid 109 area (close 109.52). EUR/USD and EUR/JPY again parted ways with EUR/USD (close 1.1044 from 1.1060) suffering from broad USD strength and a widening of the US-German rate differential. Smaller less liquid currencies and most EM currencies also joined the risk rebound.
Overnight, Asian equities mostly show gains of up to 1.0%. The PBOC fixed the yuan at a rather weak level given the overall risk rebound. Both CNY and CNH weakened above 7 against the dollar. The Aussie dollar extends its rebound north of 0.67 as RBA’s Lowe suggested that the CB will be guarded in using its (limited) room to cut interest rates and suggested a bigger role for fiscal policy. The USD/JPY rebound stalls (109.45). EUR/USD hovers in the 1.1040 area. In his State of the Union President Trump mostly focused on the domestic economy with little impact on markets/FX.
The final EMU PMI’s, the US non-manufacturing ISM and the ADP labour report might help to guide EUR/USD trading today. We are not sure that the strong performance of the manufacturing ISM will automatically translate into a big beat in services (expected 55.1). With respect to the global risk rebound, the easiest part of the rebound might be over. If so, the congruent rise in US yields and the USD might slow.
Last week, the EUR/USD 1.0989/81 support survived, and EUR/USD was squeezed back higher, but the dollar again outperformed this week. First resistance near 1.1100/20 already looks a high hurdle. More sideways price action in the 1.0980/1.11 range might be on the cards ahead of the payrolls.
Yesterday, a beat in the less important UK construction PMI was already enough to change fortunes for the better for the UK currency. EUR/GBP dropped back below the 0.85 handle. Today, the final PMI’s shouldn’t bring a big (positive) surprise anymore. Even so, we keep the view that the downside in sterling is rather well protected (especially against the euro) if UK eco data confirm a rebound in activity as political uncertainty is easing, at least for now.
EUR/USD 1.0989/81 support survives, but USD stays well bid.
