- Rates: Defensive approach ahead of the weekend
Horrible economic data and bad news on a possible drug against the coronavirus caused a gradual intraday risk reversal. Core bonds ended higher, flattening the curves. We take a defensive approach ahead of the weekend with the fragility of the Easter rally once again exposed. Merkel and Trump warn for social distancing measures to be longer applied. - Currencies: Direction south remains path of least resistance for EUR/USD
EUR/USD jumped up and down mostly just north of the 1.0770 support yesterday. Finally, a reversal in risk sentiment and unclear outcome of the EU summit is putting the support under pressure. A risk off context might favour still the dollar going into the weekend. EUR/GBP is also nearing the 0.87 support area
The Sunrise Headlines
- US equities erased an intraday gain of as much as 1.8% to end flat following reports an experimental coronavirus trial disappointed. Asian stock markets trade mostly in the red with South-Korea underperforming (-2%).
- The touted Gilead Covid-19 drug remdesivir yielded poor results in a Chinese trial, a document accidentally published by the WHO showed. Gilead downplayed the report, saying the trial had to be concluded early.
- Public companies considered critical to national security seeking a share of the $17 bn relief will have to offer the government an equity stake, USTS Mnuchin said. For private companies Mnuchin may accept senior debt instruments
- EU leaders will ask the EC for a recovery fund within the 7y-budget. Merkel said Germany is prepared to make a substantial contribution. Disagreement over the size and whether loans or grants should be distributed remains, however.
- The PBOC lowered the interest rate on its targeted medium-term lending facility (TMLF) by 20 bps to 2.95% amidst the partial roll-over of TMLF loans maturing. With it, the central bank injected some $8 bn into the economy.
- According to the Japanese minister of economy, the country’s stimulus will boost real GDP by about 4.4%. The relief package swelled to a record $1.1 tn. Rumours circulated yesterday that the BoJ will discuss unlimited bond buying.
- Today’s rather meagre economic calendar contains US capital goods orders and shipments. The April IFO indicator is due in Germany. Italy taps the bond market.
Currencies: Direction South Remains Path Of Least Resistance For EUR/USD
EUR/USD: drifting below the 1.0770 support
EUR/USD jumped up and down yesterday, close to but mostly north of the 1.0770 support. Awful EMU PMI’s pushed the pair below 1.08 and a real test occurred at the onset of US trading. EUR/USD got temporary support from a better risk sentiment. Headlines also suggested that EU leaders were making progress on a rescue package, but both factors ebbed later. US equities reversed earlier gains. EU leaders asked the EC to work out a ‘big’ rescue package via the EU budget. However, the divide on whether most of the aid should be provided by grants rather loans persisted. EUR/USD closed the session at 1.0777. USD/JPY spiked temporarily higher on rumours that the BOJ was considering unlimited bond buying, but the yen even closed the day slightly stronger at 107.60.
This morning, sentiment on Asian equity markets is modestly risk-off after the intraday setback on WS. The yuan reverses yesterday’s gain (USD/CNY 7.085). The Aussie dollar show (remarkable) resilience (AUD/USD 0.6350). EUR/USD still struggles not to fall below the 1.0770 area. USD/JPY (107.65) is holding the recent sideways trading pattern. Japanese deflationary pressures persist as the March CPI printed at 0.4% Y/Y, with probably more pressure to come. Today’s US March durable orders are expected to show a big decline, but from a market point of view it will only confirm the story received from more timely eco data. The German Ifo business climate will probably also copy the free-fall in the EMU PMI’s. This won’t be ‘news’ either but a big disappointment might still weigh on the euro, especially as sentiment looks fragile this morning and as investors might hold cautious/risk-off bias going into the weekend. The 1.0770 support is now under severe strain and any USD strength ahead of the weekend might push the domino. We don’t expect a sharp euro sell-off, but south is the way of least resistance. The March low (1.0636) is the next high profile reference on the technical charts.
EUR/GBP mostly followed the intraday price pattern of EUR/USD. In this respect sterling, contrary to the euro, ignored a similarly sharp drop in UK PMI’s. EUR/GBP closed at 0.8730. Selling pressure from EUR/USD might continue to weigh on the EUR/GBP pair. However as this is at least partly USD strength, the impact on EUR/GBP might be more modest. EUR/GBP 0.8680/0.8700 remains an important support.
EUR/USD: direction south remains the path of least resistance. 1.0770 supporting is breaking
