Rates: Focus turning from coronavirus to eco data
Last week’s standstill on core bond markets was extended yesterday with US Treasuries slightly underperforming on the back of stronger US eco data. Today’s complex of EMU and US eco data suggests more of the same ahead of tomorrow’s EMU PMIs. ECB Minutes of the January meeting serve as a wildcard.
Currencies: USD/JPY taking the lead in new USD up-leg
Dollar strength prevailed as the main theme for global FX trading yesterday. The US currency profits from ongoing solid eco data. At the same time, the other majors (euro, but also the yen) have to cope with poor eco data and potentially a bigger fall-out from corona. This leaves the dollar the most obvious safe haven. For now there is no trigger to block this trend
The Sunrise Headlines
- WS scaled fresh peaks (gains up to 0.87%, Nasdaq) after Beijing reported a decline in new coronavirus cases and on expectations of Chinese stimulus. Asian markets are trading mixed with China outperforming.
- Chinese banks lowered borrowing rates after the PBOC cut a range of policy rates to blunt the economic impact of the coronavirus epidemic. The 1yr LPR was cut to 4.05% from 4.15% and the 5yr tenor was set at 4.75% from 4.80%.
- Minutes of the last FOMC meeting show the Fed remains upbeat about the US economy despite new risks and doesn’t seem anxious to raise rates anytime soon. Also, senior Fed staff raised the idea to end term-repos after April.
- The IMF expects the global economy to “moderately strengthen” by 3.3% this year but warns the corona outbreak could derail the “highly fragile” projected recovery as growth is disrupted in China and other countries also feel the pain
- S&P slashed China’s economic growth forecast for this year to 5% from 5.7% as the coronavirus epidemic is paralyzing the country. S&P expects the slowdown in the country’s growth rate to have “a material effect on global growth”.
- Washington enforces to suspend a key tax break for Boeing and other aerospace firms in a bid to head off possible EU levies on US goods and ease the transatlantic trade dispute over what the WTO marked unfair aircraft subsidies.
- Today’s eco calendar contains US Philly Fed Business Outlook, weekly claims, UK retail sales and EMU consumer confidence. ECB minutes will be published and EU leader will discuss the bloc’s budget. Spain and France tap the bond market
Currencies: USD/JPY Taking The Lead In New USD Up-Leg
USD/JPY taking the lead in new USD up-leg.
It wasn’t always clear whether euro weakness rather than dollar strength was the driver for global FX trading lately. Over the past 24 hours, the balance tilted to the latter. EUR/USD touched a minor new low, but pair closed marginally stronger at 1.0805. The USD/JPY rally was far more impressive. The dollar continued to profit from solid US data (yesterday housing data printed strong). The USD is also a more evident safe haven than the yen as Japan may feel growing headwinds from corona. Whatever, USD/JPY jumped sharply higher to close at 111.37. The trade-weighted dollar closed marginally above the 2019 top at 99.70.
This morning, mainland China equities outperform as the PBOC cut the 1-y and 5-y prime loan rates. Japanese equities slightly profit from the weaker yen. Other regional markets underperform. USD strength further weakened the yuan beyond USD/CNY 7.0 (7.02 area). USD/JPY (111.45 area) hovers within reach of the overnight top. EUR/USD is drifting back below 1.08. The Aussie dollar hit the lowest level since March 2009 after mixed labour data. Job growth was solid, but a higher unemployment rate (5.3%) suggests ongoing slack in the labour market.
The eco calendar remains thin with EC consumer confidence in EMU and the Philly Fed business outlook and jobless claims in the US. Of late, US data stayed solid and there is no reason to expect a sharp U-turn. From a market point of view, the question is how long the ‘by default’ USD rally will continue. For now, the other majors (euro and yen) have more issues to cope with than the USD. So, there is no reason to row against the tide as long as there is no ‘external’ event to break this vicious upward USD-cycle.
The EUR/USD technical picture deteriorated substantially after breaking subsequent supports, including the 1.0879 2019 low. 1.0778 is the next reference (2017 gap). The pair is moving into oversold territory, but this factor alone is unlikely to trigger a rebound. A rise above the 1.09 area would be a first tentative sign that pressure might be easing.
Sterling ceded ground against the euro yesterday. We see the move as mainly technical in nature (cable selling below 1.30). UK inflation was slightly higher than expected but with no lasting impact. Today, the UK retail sales and CBI order data are interesting. A solid rebound in sales might support sterling, but tomorrow’s PMI migh still be more decisive. The 0.8276 remains the key point of reference on the technical charts
USD (trade-weighted – DXY) piercing 2019 top, evidence of a broad USD bid.
