Rates: Safe haven flows ahead of the long US weekend?
Core bonds profited from disappointing EMU inflation data and safe haven flows stemming from stress on EM FX markets and from US President Trump’s latest hawkish trade rhetoric. The latter two topics might continue to influence trading today. US Treasuries could receive additional support ahead of the long weekend.
Currencies: dollar hardly profits from rising global tensions
Yesterday, the dollar (ex USD/JPY) gained modest ground on EM stress and US president Trump stepping up its trade rhetoric against China and Europe. However, the USD rebound had no strong legs. The themes of EM stress and trade will continue to dominated FX trading today. Will the dollar ‘rectify’ current unconvincing performance?
The Sunrise Headlines
- US stock markets responded to President Trump’s new wave of threats, with all indices losing ground at closure. Most Asian markets prolong this sentiment and start the day in red as well with Hong Kong underperforming (-0.91%).
- US President Trump has repeated his threat to pull the US out of the World Trade Organization. His comments came as Nafta talks with Canada continue today and he considers expanding tariffs on $200bn of Chinese imports.
- Cecelia Malmstrom, EU trade commissioner, said the EU is willing to remove all tariffs on cars in a trade deal with the US, only if the US would do the same. Trump already reacted the offer is “not good enough”.
- The Argentine peso fell another 12% yesterday, despite its central bank effort to raise interest rates to 60%. A two-day sell-off was triggered by President Macri’s request to the IMF to speed up the release of its $50bn bailout package.
- China’s manufacturing PMI unexpectedly rose in August picking up from 54.0 to 54.2, despite new export orders decreasing at the fastest pace in six months. In Japan, industrial production decreased by 0.1% in July (+0.2% expected).
- ECB policy maker Ewald Nowotny has said the laggard economy of Italy should not slow down plans to tighten euro-area monetary policy and start raising interest rates. He added Italy’s problems cannot be solved by monetary policy.
- Today’s eco calendar is richly filled, with in the US the Chicago Purchasing Manager index for August. The EMU releases its inflation numbers for this month. ECB’s Guindos speaks in Asturias (Spain).
Currencies: Dollar Hardly Profits From Rising Global Tensions
Dollar hardly profits from rising tensions
Yesterday, the US dollar finally gained some ground, amongst others, supported by emerging market tensions (Argentina, Turkey). Later, trade tensions (Bloomberg report indicating that Trump might impose more tariffs on Chinese imports soon) caused selling of risky assets and a run to safe haven assets. However, overall USD gains were modest. The trade-weighted dollar closed at 94.72 (from 94.60). EUR/USD finished at 1.1671 (from 1.1710). The yen outperformed with USD/JPY closing at 110.98 (from 111.68). This morning, Asian equities mostly trade in the red, but losses remain modest. Several regional currencies including the Indonesian rupiah and Indian rupee are setting multi-year/record lows. Interesting, the yuan gains slightly and EUR/USD (1.1665) is holding up well. The yen remains well bid with USD/JPY hovering in the 111 area. Today, EMU CPI inflation and the Chicago PMI deserve attention. Soft EMU inflation is in theory euro negative, but the focus probably returns to global trade. Trade tensions mostly favoured the dollar (ex USD/JPY). However, the overnight market reaction to Trump’s latest trade-threats is modest. US equity futures are tentatively rebounding and the dollar doesn’t make any broad-based gains. Do markets think that Trump’s comments are mainly tactics? Or do they acknowledge his call for a weak USD as he criticized Europe and China on their FX policies? The jury is still out. Recently, the USD reversed the early August gain but the USD decline showed signs of levelling off this week. EUR/USD returned in the 1.15/1.1850 consolidation range. However USD gains were modest given EM uncertainty and negative headlines on Italy. Eco fundamentals and the trade narrative in theory look USD supportive. However, the USD performance remains mediocre. We keep the working hypothesis that the EUR/USD rebound might slow and that a EUR/USD break beyond 1.1791/1.1850 might be difficult. That said, we cannot but take notice of current unconvincing USD performance.
Yesterday, sterling kept the gains after Wednesday’s short squeeze even as eco data and brexit headlines were sterling negative. Today, markets look out for comments from EU’s Barnier and UK’s Raab as they meet in Brussels. We don’t expect high profile positive news yet. However, with the market apparently still positioned GBP-short, the time is maybe not yet ripe for a new GBP down-leg. We still assume a break of EUR/GBP below 0.8850 is difficult unless there is real progress on Brexit
USD (trade-weighted-DXY): dollar hardly profits from rising global (trade) tensions