Rates: Chinese President reaches out to US to unlock trade conflict
Risk sentiment improved overnight after Chinese President XI Jinping called in favour of a more open Chinese economy and lowering import tariffs on eg vehicles. We hold a negative intraday bias for core bonds with heavy European & US supply also playing in their disadvantage. The consensus bar for US PPI doesn’t seem that high (0.1% M/M).
Currencies: US holds mixed picture as trade tensions ease
FX trading was driven by global risk sentiment yesterday. This factor is still in play this morning after a constructive speech of Chinese President Xi Jinping. However, the impact on the dollar is modest and mixed. USD/JPY tries to regain the 107 barrier. EUR/USD is holding in the 1.23 area. Will US price data be strong enough to support more broad-based USD gains?
The Sunrise Headlines
- US stock markets failed to hang on to positive intraday momentum, but still closed up to 0.5% higher (Nasdaq). Asian stock markets recovered initial weakness after Chinese president Xi Jinping’s speech (>0.5%).
- Chinese President Xi Jinping promised to open the country’s economy further and lower import tariffs on products including cars, in a speech seen as conciliatory amid rising trade tensions between China and the US. (Reuters)
- “While risks to growth can be assessed as being broadly balanced, the international trade environment may have added to the downside. Financial conditions have recently tightened, but remain very supportive,” ECB Praet said.
- Dallas Fed Kaplan warned of potential damage to the US economy if the US/Chinese trade conflict won’t get resolved soon even if it’s too early to judge at this stage. He remains in favour of 2 more rate hikes this year.
- FBI agents searched the office, home and hotel room of President Trump’s longtime lawyer Cohen as part of a probe by the US attorney’s office which is coordinated with the office of special counsel Mueller. (WSJ)
- The CBO said that it expected the US budget deficit to swell to $804bn this year, some $242bn more than it projected last summer. The gap would expand to just over $1tn by 2020 (nearly 100% of GDP) (FT).
- Today’s eco calendar contains US NFIB small business optimism and PPI data. ECB Nouy, Nowotny, Visco and Fed Kaplan are scheduled to speak. Austria, the Netherlands, Germany and the US tap the bond market
Currencies: US Holds Mixed Picture As Trade Tensions Ease
US shows mixed picture as trade tensions ease
The (often diffuse) narrative on the US China-trade conflict continued driving FX yesterday. USD swings were modest initially. Later, (US) equities rebounded as markets anticipated a constructive speech of Chinese President Xi Jinping. The risk-on sentiment supported USD/JPY, EUR/JPY and EUR/USD. Cautiously positive comments from ECB members were also euro supportive. Risk sentiment deteriorated later on as the FBI started an investigation against president Trump’s personal lawyer, Michael Cohen. US equities returned most intraday gains and the issue weighed on the dollar. USD/JPY closed the session at 106.77. EUR/USD ended the day near the session top at 1.2321.
Chinese president Xi Jinping kept a positive, open tone on trade in a keynote speech at the Boao forum overnight. Asian equities and US equity futures rebounded and so did USD/JPY. The pair tries again to regain the 107 barrier. The gain of the dollar against the euro remains very limited. EUR/USD is holding north of 1.23.
Markets will today look out for the reaction of the US to the speech of Xi Jinping. US NFIB small business confidence and PPI price data will be published. Headline PPI is expected to rise 0.1% M/M and 2.9% Y/Y. Of late, the trade war overshadowed US data as driver for FX trading. Still, the data might resurface as a driver for trading. The bar of the consensus for the PPI (0.1% M/M) is not that high. We are keen to see the USD reaction in case of a positive surprise. Of late, we had the impression that USD/JPY became a bit more sensitive to good news (both data and risk-on). The picture for EUR/USD remains more diffuse. Last week, EUR/USD drifted gradually lower in the 1.2476/1.2155 ST consolidation pattern. A sustained break of this range bottom will probably remain difficult as long as Fed rate hike expectations are clouded uncertainty on trade.
Sterling trading was still driven by technical considerations yesterday. EUR/GBP held a tight range close to, but mostly slightly north of 0.87. BRC retail sales were OK overnight. Combined with a positive risk-sentiment, this might be slightly sterling positive in a daily perspective. Sterling sentiment wasn’t too bad of late. We maintain the working hypothesis though that really high profile news on Brexit or from the data is needed for EUR/GBP to break the 0.8650 support area.
USD (trade-weighted) holding within ST consolidation pattern. Will easing trade tensions support US currency?
