- Rates: Core bonds thrive in sour risk environment
Asian risk sentiment suggests a repeat of last week’s risk aversion with COVID-19 cases rising in the US (20 states) and China (Beijing). Core bonds thrive. This week’s eco calendar centers around US retail sales, Fed Chair Powell’s Humphrey-Hawkins testimony before US Congress and the EU Summit. - Currencies: EUR/USD profit taking continues as sentiment turns further risk-off
The dollar already held up well even as equities tried to recover on Friday. Growing uncertainty on a revival off the corona virus is causing a return to save havens. The yen and the dollar outperform. EUR/USD is falling prey to further profit taking. EUR/GBP rebounds north of 0.90 as UK PM Johnson and EU leaders will discuss the status of the Brexit talks.
The Sunrise Headlines
- losses the day before. The DJI (+1.9%) outperformed. Asian stocks trade heavy as second wave concerns linger. South Korea underperforms.
- Beijing moved to shut down a large market and lock down residential compounds after the city confirmed 41 new cases over the weekend. Elsewhere, Tokyo also reported a jump of 47 infections yesterday, the most since May 5.
- French president Macron brushed off a report that he may call early presidential elections. Instead, he kicked off the 2022 campaign yesterday, pledging more growth and a greener economy with less inequality and more solidarity.
- The largest US public pension fund is venturing deeper into more profitable but lesser liquid private equity and debt via leverage that could be as high as 20% of the fund’s value as it seeks ways of achieving its long-term 7% return target.
- Chinese data fell below expectations but showed further bottoming from March’s slump. Industrial production, retail sales and investments all fell at a lesser pace compared to the month earlier (-2.8% YTD y/y, -13.5%, -6.3%).
- The Trump administration opposed extending the federal unemployment weekly payments of $600, part of the $2.2 tn March stimulus package, beyond July. WH advisor Kudlow said the cheques are “in effect a disincentive” to work.
- Today’s economic calendar contains the US Empire Manufacturing Index (June). Several Fed speeches are due. The EU holds a virtual Brexit summit with UK PM Johnson.
Currencies: EUR/USD Profit Taking Continues As Sentiment Turns Further Risk-Off
EUR/USD profit taking continues
USD trading initially showed no clear pattern last Friday but in the end the dollar got the benefit of the doubt. The dollar maintained Thursday’s gain quite easily even as sentiment on risk wasn’t that bad. EUR/USD tried to hold north of the 1.13 barrier, but EUR/USD longs finally threw in the towel. The pair closed the day at 1.1256 (from 1.1299 on Thursday). Interest rate differentials at longer maturities widened in favour of the dollar. Data including a better than expected U. Michigan consumer confidence again had little impact on USD trading. USD/JPY also was rather well bid and closed at 107.38 (from 106.87) This morning, sentiment on Asian markets is again turning risk-off. Investors are pondering the potential economic consequences of a new outbreaks of corona in China and a rise in cases in some parts of the US. China May production and retail sales data were marginally lower than expected but confirm the scenario of a cautious rebound. Even so, sentiment remains fragile. The yuan weakens modestly (USD/CNY 7.09 area). The Aussie dollar is holding up quite well (low 0.68 area). USD/JPY slipped to the low 107 area. EUR/USD hovers in the mid 1.1250 area.
Today’s eco data are second tier with the Empire manufacturing survey exception to the rule. However, global sentiment will be the main driver for global FX trading. (US) equity futures show steep losses as investors fear a flaring up of the corona pandemic. US social unrest is a factor of uncertainty too, but at least for now it doesn’t really hurt the dollar.
Last week, a solid, three week-long EUR/USD rally ran into resistance with finally some modest profit taking. The dollar again attracts some safe have flows and euro longs maybe turned a bit more cautious ahead of this week’s EU summit as European politicians still have to agree on the structure of a EU recovery fund. EUR/USD is testing first ST support at 1.1240/60. A return below 1.1157 (38% retr) would question the EUR/USD uptrend, but we don’t expect that to happen.
EUR/GBP developed an indecisive, erratic trading pattern in the upper 0.89 area on Friday. Today, UK PM Johnson and top EU officials will hold a call on the state of the Brexit talks. Real progress is unlikely but both parties will look for path to revive the talks. EUR/GBP regains the 0.90 barrier and rest of the 0.9055 ST top might be on the cards.
EUR/USD falling prey to profit taking as risk-off intensifies
