- Rates: Reality check from US eco data
Today’s US eco calendar is very interesting. Hard data (retail sales, industrial production) will give a first indication on how bad the US Q2 GDP hit will be while soft data for May might say something on the longitude of the hit. It’s hard to assess how much bad news is already discounted. Longer term, we think a firm bottom is in place for core bonds. - Currencies: Dollar holding strong but no swift break higher for now
The dollar initially profited from a risk-off sentiment but key resistance/support for the trade-weighted dollar and EUR/USD stayed out of reach. Today, US eco data probably won’t provide a trigger for a big USD correction, whatever the outcome. EUR/GBP continues challenging the 0.8860 resistance.
The Sunrise Headlines
- Wall Street advanced up to 1.62% (DJI) in a move led by financials. Barring a few exceptions (India), Asian stock markets also trade in green with Australia (+1.4%) outperforming peers.
- White House Press Secretary McEnany told Fox News that president Trump is open to more coronavirus relief measures, adding however that he is opposed to the $3 tn stimulus bill by the Democrats.
- Under its new corporate bond-buying facility which kicked off on Tuesday, the Fed bought no more than $305 million in the $212 bn rise of asset purchases in the week that ended May 13. The Fed did step up the pace of MBS purchases.
- Chinese April figures came in mixed. Industrial production rebounded to 3.9% y/y after a -1.1% decline. Retail sales continued to decline at a -7.5% y/y pace, suggesting consumer spending remains muted even as the lockdown eased.
- Saudi Arabia will cut its June oil exports to Asia up to 30% and even more for customers in the US and Europe, where cuts can go as high as 70%, people familiar said. Brent oil rose back above $30/b.
- Mexico’s central bank slashed rates to 5.5%, the lowest level in more than three years as it braces the country for the coronavirus impact and plunging oil prices. It hinted at more cuts while warning the shock will be worse this quarter.
- Today’s economic calendar contains US April retail sales and May U. of Michigan consumer sentiment and NY Empire Manufacturing. German Q1 GDP growth and a second EMU reading is due. Brexit negotiators brief the press
Currencies: Dollar Holding Strong But No Swift Break Higher For Now
USD holding strong, but no swift break higher
The trade-weighted dollar (DXY) hovered in the mid 100 area, near the top of the range that is guiding trading since end March. Markets initially stayed in a risk-off mode pondering the downbeat view of Fed’s Powell on the economy on Wednesday. Still the safe haven bid didn’t push the dollar out of the established ranges. EUR/USD slipped below 1.08, but key supports were left intact. Interestingly, US President Trump in an interview hailed the advantages of a strong dollar in times of crisis. A rebound in US equities finally eased the USD bid. EUR/USD close at 1.0805. USD/JPY showed a different intra-day trading pattern and rallied in line with equities to close the day at 107.25.
This morning, Asian equities mostly trade with gains of about 0.5% tot 1.0% after a positive close on WS. Chinese data painted a mixed picture indicating a revival in production but with consumer demand lagging. The yuan is trading rather soft near USD/CNY 7.10 as investors look forward to the annual parliamentary meeting next week. USD/JPY initially tried to extend yesterday’s late session rebound, but the move soon stalled. EUR/USD is going nowhere near 1.08.
Later today, the eco calendar is well filled with Q1 GDP from Germany and the EMU. In the US, retail sales, the Empire manufacturing survey, production and Michigan consumer confidence will be published. We assume that he market focus will be on the consumer/demand. Poor data might weight on global risk sentiment and that is usually USD positive rather than negative. At the same time, should we expect the dollar to decline sharply in case of positive news from the US consumer?
The rejected EUR/USD ‘topside’ test on Wednesday confirmed that the room for sustained EUR/USD gains stays limited. We expect more sideways trading in the 1.0727/1.09 range.
Over the previous days, EUR/GBP extensively tested to topside of a sideways consolidation pattern in the 0.8860/75 area, but a clear break didn’t occur (yet?). BoE governor Bailey said that the Bank currently isn’t contemplating negative rates, but he also didn’t formally exclude it. It helped to prevent further sterling losses. EUR/GBP closed at 0.8835. There are no UK data today. Global sentiment and headlines on Brexit should guide sterling trading. With respect to the latter recent headlines only suggest that the deadlock is becoming ever tougher. We still look for EUR/GBP to break beyond the 0.8860 area.
USD trade-weighted (DXY) nearing the top of sideways consolidation pattern. No break for now.
