Markets:
Core bonds stay well bid as uncertainty on global trade kept investor interest for safe haven assets alive. Bunds again outperform Treasuries. Recent soft ECB comments cause EMU bond bears to reduce exposure. The German 10-y yield broke below the 0.62% floor, adding to positive sentiment. There were few important eco data in Europe. US data including the Empire Manufacturing survey, jobless claims, import prices and the Philly Fed business outlook were ok/mostly slightly above consensus (except for the Philly Fed). However, they didn’t change markets’ assessment ahead of next week’s Fed policy decision. At the time of writing, the US 2-y yield rises 1.2bps. Yields for other maturities decline less than 1bp. The German yield curve bull flattens with the 2-yr German yield declining 0.5 bps and the 30-yr easing 2.7 bps. Intra-EMU spread vs Germany are little changed expect for Greece (+9bps).
Over the previous days, some modest USD softness prevailed as investors pondered next developments in the US trade/tariffs saga. The dollar still isn’t in great shape, but today euro softness was the more dominant factor among the major FX cross rates. EUR/USD gradually drifted further south in the 1.23 big figure. Of late, interest rate differentials were often ignored as a driver for EUR/USD trading. However, some tentative policy divergence between the ECB en the Fed is again coming to the forefront. The ECB recently indicated that there is still a long way to go to reach its inflation target. In this context, an ECB rate hike might still be further away than the market recently discounted. The 2-yr US German interest rate differential widened to a new cycle peak (285 bps). Finally, it looks that this is providing some downside protection for the dollar against the single currency. EUR/USD trades in the 1.2330 area. From a technical point of view, the established ranges remain perfectly intact. The picture of the dollar against the yen looks far less buoyant. The pair still struggles not to fall below the 106 barrier. The 105.25 correction low is again coming with reach.
Technical considerations continued to dominate sterling trading. The Cable 1.40 area still proved a tough resistance. The political tensions between the UK and Russia for now have only modest impact on markets. Even so, they are no help for sterling. Sterling was under pressure early in the session but found a better bid later. The intraday slide of EUR/USD also reinforced the EUR/GBP decline back to recent lows. EUR/GBP tries to sustain below 0.8850. This move is at least as much due to euro softness rather than sterling strength. Cable hovers near 1.3975.
News Headlines:
Norway’s central bank signalled it will move faster in raising interest rates as a change in the inflation target and accelerating growth opens up for the first tightening in seven years. Governor Olsen said that a first rate hike can be expected after this Summer. EUR/NOK dropped (temporary?) below 9.5, breaking technical support.
The Swiss National Bank kept its monetary policy unchanged (deposit rate -0.75%). The SNB remains willing to intervene in the FX market if necessary. Swiss growth is finally accelerating and inflation is expected to hit the 2%-target by the end of the policy horizon (2020).
Euro zone banks may get a reprieve until 2021 to fully implement ECB guidelines on treating new soured loans, an ECB document showed, a retreat from an earlier proposal for a more aggressive treatment of bad debt.
Most US eco data beat expectations. The Empire Manufacturing rose in March from 13.1 to 22.5 (vs 15 expected). Weekly jobless claims continued to hover near historically low levels (226k). Import prices rose more than forecast in February (0.4% M/M) while the opposite was true for export prices (0.2% M/M). The Philly Fed business outlook faced a somewhat larger than forecast setback, declining from 25.8 to 22.3.
