Rates: US stock market swoon triggers test of 2.8% support in US 10-yr yield
A heavy sell-off in US tech shares pulled general stock markets lowers and lifted core bonds via safe have flows. US Treasuries outperformed German Bunds with the US 10-yr yield heavily testing 2.8% support. Risk sentiment remains today’s key driver ahead of inflation readings tomorrow and on Friday.
Currencies: USD shows ‘resilience’ even as sentiment turns risk-off again
The dollar is holding off recent lows against the euro end the yen. The risk-on/risk off balance recently provided no clear guidance for USD trading, and at least for now, risk-off doesn’t hurt the dollar. FX traders will keep a closer eye at the US trade balance data as foreign trade takes center stage in President Trump’s political agenda.
The Sunrise Headlines
- US stocks put in another dismal performance with Nasdaq underperforming (-3%) on fears over heightened regulation after Facebook’s Zuckerberg was said to be willing to testify before US Congress. Main Asian indices lose around 1.5% overnight.
- North Korean leader Kim Jong Un traveled to China to meet with Chinese president Xi Jingping in a mission to strengthen ties with Beijing ahead of a planned summit with US President Trump.
- The US and South Korea agreed to revise their six-year-old trade pact with a side deal to deter competitive currency devaluation by Seoul and with concessions for US autos and pharmaceutical companies, officials said.
- Atlanta Fed Bostic, voting FOMC member, said he supports plans to gradually raise rates, but uncertainty over how the economy would respond next year to tax cuts and increased government spending could complicate policy.
- Sources told The Times that Irish officials have been promised concrete details on what alternative plans the UK government has to avoid a post-Brexit hard border, beyond the so-called backstop plan.
- Saudi Arabia and Russia are working on a historic long-term pact that could extend controls over world crude supplies by major exporters for many years.
- Today’s eco calendar contains US advance trade balance and pending home sales. The US and Italy tap the bond market
Currencies: USD Shows ‘Resilience’ Even As Sentiment Turns Risk-Off Again
Dollar ‘resilient’ as sentiment turns again risk-off
A correction lower in EUR/USD enfolded after a failed test of 1.2475 resistance. EC confidence was softer than expected. It wasn’t the trigger for the correction, but provided a good excuse for additional selling. Several ECB members kept a soft tone. The intraday EUR/USD correction was not only due to euro softness. Dollar sentiment also improved slightly (both DXY and USD/JPY were upwardly oriented). A new sell-off hit US tech stocks. The reaction in FX was again modest compared to the swings in bonds and equities. EUR/USD closed the session at 1.2403. USD/JPY finished the day little changed at 105.34.
The US tech sell-off also affects Asian markets this morning with regional indices losing up to 1.5% with China and Japan underperforming. Even so, the major dollar/FX cross rates are again holding remarkably calm. The yen doesn’t profit from the risk-off sentiment. USD/JPY (105.60) even gains a few ticks. EUR/USD hovers in the low 1.24 area.
There are only second tier data in Europe today. US advance goods trade balance, inventory data, final Q4 GDP and pending homes sales will be published. Today’s US data probably won’t contain a game-changer for USD trading, but FX markets might become more sensitive to US foreign trade data, given recent campaign from the US administration to reduce the trade deficit. The reaction of the dollar might be asymmetrical, if any. The dollar might lose on a negative surprise, with little upside in case of a smaller deficit. FX traders also keep an eye at the global market context even if the risk-on/risk-off balance provided little guidance for USD trading of late. In a daily perspective, there a tentative signs of more dollar resilience, but the jury is still out. Any sustained USD gains probably need outright US data (especially price data). More technical trading in the EUR/USD 1.2155/1.2555 trading range might be on the cards.
Sterling initially came under pressure yesterday, but reversed most losses later. Anticipation on a big corporate flow might have been in play. CBI retail data will be published today. UK retail data were mediocre of late. (Unconfirmed) rumours on progress on the issue of the Irish border might be slightly sterling supportive. For now we assume the 0.8652 range bottom to hold
USD/JPY holds off recent low even as equity sentiment turns again risk-off
