Rates: Risk sentiment faces a snag
Asian stock markets face a significant setback this morning and that will likely be European indices’ faith as well, returning from the long weekend. Such market environment remains fertile for core bonds. April US eco data will this week show the full impact of lockdown measures, but quite some bad (short term) negative eco news is probably discounted.
Currencies: EUR/USD shows remarkable strength, but is it sustainable?
EUR/USD at the end of last week tested the 1.10 area. The move was probably mainly technical in nature and occurred as most EMU markets were closed. This morning, the risk-off sentiment again causes the ‘usual’ preference for the dollar. For now, there is no compelling reason for EUR/USD to start a protracted further rally.
The Sunrise Headlines
- US stocks ended the week on a down note on Friday amid gloomy earnings reports and reignited US-China tensions. The Nasdaq underperformed (-3.2%). Asian markets slip although Japan and China are closed for public holidays.
- The US FDA has granted emergency use authorization for Gilead’s remdesivir drug to treat Covid-19 as well as to Roche for its new test determining if someone has been exposed to the coronavirus.
- The formation of a new Irish government progressed as the opposition Greens decided to enter formal coalition talks with PM Leo Varadkar and the centre-right Fianna Fail and Fine Gael parties.
- US-China tensions reignited after president Trump & his administration sharpened their knifes, accusing China of being the cause of the spreading of the corona pandemic and even threatened with tariffs to punish the country.
- The US Manufacturing ISM fell to 41.5 from 49.1 (consensus at 36) in April on the back of a sharp drop in employment (27.5 from 43.8) and tumbling new orders (27.1 from 42.2) while supplier deliveries (76 from 65) soared.
- Incoming governor Tiff Macklem who will be taking the helm at the Bank of Canada one June 3, said the coronacrisis calls for unprecedented measures with negative rates possibly on the table.
- Today’s economic calendar contains second tier, outdated data only (final PMIs in Europe, final durable goods orders in the US) leaving trading mostly up to global sentiment.
Currencies: EUR/USD Shows Remarkable Strength, But Is It Sustainable?
EUR/USD rallies, but is it sustainable?
EUR/USD showed remarkable strength end last week. On Thursday The ECB meeting didn’t help the euro, but an (end-of-month?) repositioning finally propelled EUR/USD north of 1.09, with EUR/JPY also rising sharply. EUR/USD stayed well bid on Friday even as most European markets were closed and as US sentiment was outright risk-off. The pair tested the 1.10 area after a (mixed-toweak) US manufacturing ISM. Rising political nervousness between the US and China, maybe also to some extent supported the euro. USD/JPY showed a similar rise on Thursday, but closed the week in well-known territory (106. 91)
This morning, most Asian markets are trading in negative territory, but the picture is incomplete as Japan and mainland China markets are closed. The dollar again profits from the risk-off with the TW-dollar (DXY) at 99.35. The offshore yuan (USD/CNH 7.1385) is losing further ground on the US-China tensions. The Aussie dollar is also retreating after a strong performance of late (0.6390). The yen slightly outperforms (USD/JPY 106.75). EUR/USD is ceding part of last week’s gain (1.0935).
Today, the eco calendar is rather thin. The final EMU manufacturing PMI’s probably will confirm the steep contraction of the preliminary releases. US final factor order data usually have no big impact on FX trading. Later this week, markets will look for the US non-manufacturing ISM and the US labour market data. In Europe, the German Court ruling on the ECB’s APP might be a source of uncertainty. At the same time, global risk sentiment will remain an important driver from global FX trading even as the risk-on/risk-off reaction function of the dollar was sometimes less unequivocal of late.
EUR/USD regaining the 1.09 area slightly improved the ST picture, but we stay cautious as the move occurred when most EMU markets were closed. With global sentiment still fragile, we see no compelling reason for a sustained EUR/USD rally. We expected more consolidation in the 1.0727/1.1018 range with risk for some modest losses today.
A risk-off context and ‘remarkable’ euro strength kept EUR/GBP well bid on Friday. Business confidence dropped the most on record according to a quarterly survey of Deloitte. There are no important eco data today. Aside from the EU-UK Brexit talks, UK’s Raab said the country will start trade talks with the US this week. We keep the view that EUR/GBP 0.8675/0.87 remains a solid support after the recent sterling rally.
EUR/USD shows surprise rebound, but sideways pattern remains in place for now
