Markets
US Treasuries outperformed the German Bund for once yesterday. The coordinated inflation pushback by three Fed governors on Monday still lingered and was echoed by others, including vice-chair Clarida, as well. US housing data and Conference Board consumer confidence disappointed, acting as another drag on US bond yields but also on equities as Europe pared gains and Wall Street closed marginally in the red. The US yield curve bull flattened with yield changes varying from -1 bp (2y) to 5.2 bps (30y). German yields fell more than 2 bps at the medium and long part of the curve as well, weighed down by soft comments from ECB’s Villeroy. This helped peripheral yields go lower in tandem, sending spreads up to 4 bps down (Italy). We saw both a tad of dollar weakness and euro strengthon FX markets yesterday. EUR/USD took out resistance from the February high at 1.2243 to finish at 1.225. The trade-weighted USD handed over below parallel support situated at 89.68. Sterling remained in the defensive. EUR/GBP rebounded off support from the lower bound of the short-term upward trend channel (0.862) to end the day at 0.866.
The kiwi dollar is the star this morning. New Zealand’s central bank projected a rising cash rate from H2 2022 onwards in a first shift away from its easing bias (see headline below). China’s yuan continues to strengthen (and the dollar to weaken), pushing USD/CNY below 6.40 for the first time since mid-2018. By setting a strong daily reference rate, the PBOC effectively gave green light for the recent yuan strengthening. EUR/USD extends yesterday’s rise to 1.226 currently. The Japanese yen trades a bit weaker, especially against the euro, in a moderately constructive risk setting. Core bonds pare some of Tuesday’s gains.
The US auctions $61 bn of 5-yr notes after a successful 2y sale with strong bidding metrics yesterday but there are no events other than that today. Risk climate will thus dominate trading. We think the dollar will stay in the defensive after giving up technical support zones yesterday. For the break higher in EUR/USD to be confirmed however, the couple should extend gains in a decisive manner today. The constructive equity environment can help with that. Core bond yields look ready for a rise. The US 10y yield hit first support yesterday as did the German variant (hitting the lower bound of the upward trading range). UST underperformance could thwart a swift rise in EUR/USD needed for technical confirmation. Sterling is going nowhere and has little inspiration to find today for guidance. EUR/GBP is trapped in a narrow consolidation pattern between 0.86 and 0.87.
News Headlines
The Reserve Bank of New Zealand (RBNZ) maintained its current stimulatory monetary policy in order to meet its consumer price inflation and employment objectives. The Committee kept the Official Cash Rate (OCR) at 0.25%, and the Large Scale Asset Purchase and Funding for Lending programs unchanged. The economic recovery remains uneven, but confidence in the outlook is rising. Even as meeting the requirements on inflation and employment will necessitate considerable time and patience, the RBNZ in its forecasts penciled in a rate hike to 0.50% by September 2022 and put the end 2023 forecast at 1.5%. These forecasts are conditional on the economic outlook evolving as expected. The 2-y and the 10-y NZ government bond yield jumped 7 bp and 8 bp respectively (10-y at 1.87%). The kiwi dollar also gains 1% trying to regain the NZD/USD 0.73 big figure.
Gregory Meeks, the chairman of the House of Representatives Foreign Affairs Committee, introduced ‘Ensuring American Global Leadership and Engagement Act’(Eagle Act). The bill addresses a range of issues, including increased investment to promote U.S. manufacturing, trade, work with allies and partners, re-engagement in international organizations, and recognition of the treatment of China’s Uyghur Muslim minority as genocide. If approved in the committee, the measure might be combined with legislation from other House committees.
