- Rates: Risk sentiment shows vulnerability
Risk sentiment is showing some cracks as the 2nd wave of US infections interferes with reopening US States and causing some to return on their tracks. Transatlantic trade worries and ECB Chief economist Lane’s comments on the definitive character of PEPP played as well. Core bond yield curves bull flattened. Similar trading dynamics could be at work today. - Currencies: Dollar outperforms despite new wave of US corona outbreaks
The dollar still proved being first safe haven reference even as a new wave of corona infections in the US was the main driver of the risk-off repositioning. EUR/USD dropped to the mid 1.12 area. USD/JPY returned north of 107. US durable orders and jobless claims have market moving potential, but global sentiment remains the main guide for FX trading
The Sunrise Headlines
- Wall Street tumbled up to 2.7% (DJI) as coronavirus cases mount and pushes states and companies to at least pause the reopening. Asian mood is similarly grim. Australia and SK underperform (-2%). Chinese and HK markets are closed.
- The US reported the biggest rise in coronavirus cases since late April, raising the threat of restrictions being reimposed. Fed’s Evans said his economic outlook now takes into account these renewed lockdowns.
- Rating agency Fitch downgraded Canada from AAA to AA+ with stable outlook. It reflects the deterioration of public finances as a result of the pandemic. The deficit is expected to widen to 16.1% and growth to contract 7.1% this year.
- The World Trade Organization has delayed its decision on whether the EU is allowed to impose tariffs against the US over subsidies to the American aircraft industry. The decision is postponed from June to at least September.
- France revealed plans to scale down from October their (costly) furlough scheme set up during the pandemic to prevent mass permanent layoffs. Some 7.8 million workers were put on furlough or reduced schedules as of end May.
- EU negotiator Barnier said the October summit will be the “moment of truth” for a deal between the UK and EU. Barnier didn’t outright reject a UK suggestion to leave the level playing field in return for accepting tariffs and quotas.
- Today’s economic calendar contains US weekly jobless claims and durable goods orders (May). Several Fed and ECB speeches are due as well as the minutes of the ECB’s June policy meeting. The US taps the bond market
Currencies: Dollar Outperforms Despite New Wave Of US Corona Outbreaks
Dollar outperforms despite US virus outbreaks
The risk rally met a roadblock yesterday as investors pondered the impact of rising infections, mainly in the US and South America. Tensions between the US and Europe and the IMF cutting its global 2020 outlook (contraction of 4.9 %) were a source of concern, too. The risk-off mainly hit equities and currencies. The USD fully played its safe haven role even as the US is one of the hotspots of the new corona outbreak. The TW dollar (DXY) closed north of 97. EUR/USD dropped from 1.1325 to close at 1.1251. A better than expected German IFO this time didn’t help the euro. USD/JPY joined the broad dollar bid finishing the day at 107.04.
This morning, Asian equity indices follow the correction on WS. Chinese markets are closed. USD/JPY gains a few more ticks. The Japanese currency clearly isn’t able to capitalize on its safe haven status. The Aussie dollar is trading off recent top levels, but is holding quite resilient (AUD/USD 0.6872). The loonie yesterday evening underperformed after Fitch deprived the country of its AAA rating. USD/CAD is changing hands in the 1.3635 area. After a tentative further loss early this morning EUR/USD returned to the mid 1.12 area.
There are few data in Europe, but market look out whether the ECB will provide documents to the Bundesbank that might address the remarks of the German constitutional court on the ECB’s APP program. The perspective of this issue being solved in theory is a euro supportive. US durable orders are expected to rebound 10.5% M/M, but the series is notoriously volatile, even in ‘normal’ times. Initial jobless claims are expected lower (1.32 mln) but continuing claims might stay near 20 mln. A surprise might cause some intraday volatility but global sentiment will probably be the main guide for EUR/USD trading. EUR/USD this week started a second (ST?) corrective after touching 1.1422 early June. The first correction left the key 1.1160 area intact. We still expect this key reference to provide solid support.
Sterling initially resisted the global risk-off quite well yesterday, maybe supported by headlines that the UK and the EU are looking for a more pragmatic approach to reach a (minimal) trade deal this autumn. EUR/GBP eased to the 0.9020 area, but sterling finally had to give up intraday gains against the euro. Today CBI retail data will be published. We stay cautious on sterling. We assume a quick/sustained turn below 0.90/0.8950 unlikely ST. USD trade-weighted (DXY): USD rebounds on global risk-off correction
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