Currencies: EUR/JPY and EUR/USD rebound sharply as Brexit fears ease

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1 Rates: Consolidation ahead of key events? This week s eco calendar is back-loaded with Fed chairwoman Yellen s semi-annual testimony, the British EU-referendum and Spanish general election. We expect core bonds to consolidate below the recent highs especially if risk sentiment improves. Overnight, that s the case as the latest Brexit-polls swung in favour of the remain-camp. Currencies: EUR/JPY and EUR/USD rebound sharply as Brexit fears ease The return of the risk-on trade on global markets triggers a reversal of last week s currency moves as investors position for a lower Brexit probability. EUR/USD and EUR/JPY rebound sharply. The gains of USD/JPY are more modest. Sterling trades also sharply stronger. We assume some consolidation after these sharp moves as the Brexit battle isn t over yet. Calendar Headlines S&P Eurostoxx50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2 yr EMU 10 yr EMU EUR/USD USD/JPY EUR/GBP In an uneventful session without eco data, US Equities ended slightly lower. This morning, most Asian shares trade in positive territory. Japanese stocks outperform, gaining more than 2%, supported by a weaker yen. Campaigning for Britain s vote on EU membership resumed yesterday after a three-day pause with opinion polls showing the Remain camp is recovering some momentum, although the overall picture remains one of an evenly split electorate. Indian central bank governor Rajan abruptly decided to quit as he felt he lacked support from political leaders as Finance Minister Jaitley and Prime Minister Modi. Indian stocks fell sharply and the rupee dropped almost 1% against the US dollar. Japan s trade balance fell unexpectedly into a deficit in May as the drop in exports accelerated more than expected, partly due to a series of earthquakes. While overseas demand is showing signs of stabilisation, further yen gains might weigh on exports. Brent crude oil prices rose almost 5% on Friday, reversing some of its recent losses as polls showed the possibility that the UK will vote to remain in the EU increased. The Brent is currently trading around $49.50 barrel, the WTI hovers around $48.50/barrel. Today, the eco calendar is thin with only some national data in the euro area. ECB s Mersch and Fed s Kashkari are scheduled to speak. P. 1

2 US- Rates No profit taking yet on core bonds. Periphery rallies No generalized profit taking of core bonds German curve steepened quite pronounced at the very long end. Peripheral spreads narrowed on easing Brexit fears. US yield -1d 2 0,7289 0, ,1532 0, ,6541 0, ,468 0,0513 DE yield -1d 2-0,5990-0, ,4800 0, ,0437 0, ,6265 0,0889 On Friday, global core bonds held up well in an uneventful end-of-week trading session, even as a decent curve movement occurred in the German market.. The downmove occurred mainly in the overnight session (Asia) and at the start of the European trading and might have been triggered by a certain return of risk appetite, as chances of a Brexit were lowered. Further out, it was merely sideways trading. Near-overbought conditions didn t really trigger profit taking going into the weekend. Brent oil rallied throughout the whole session but European equities went sideways after a catching up move at the open. The European longer end nevertheless underperformed the front end, as a reaction to the huge flattening since the start of the month. In the US, short and long end rallied together in June, making the scope of Friday s steepening much less outspoken. In a daily perspective, US yield changes vary between -0.7 bps (2-yr) and +2.9 bps (10-yr). The German yield curve bear steepened with yield changes ranging between -0.5 (2-yr) and +7.7 bps (30-yr). On intra-emu bond markets, 10-yr peripheral yield spreads versus Germany narrowed by 7 to 15 bps with Greece (-23 bps) outperforming on receding Brexit chances. In this respect, the 11 bps narrowing of the Irish spread merits special mentioning. Senior officials from eurozone finance ministries agreed on the disbursement of fresh loans to Greece worth some 7.5B. IMF Lagarde sounded again hesitant on whether or not the IMF will participate in the Greek debt package. St-Louis Fed Bullard issued a paper in which he explains why the St. Louis Fed changed its characterization of the US macroeconomic and monetary policy outlook.(see Friday s Sunset report for more details). For markets, it is important to know that Bullard s dots are limited to one rate hike in 2016 (to 0.625%) and unchanged from then on in 2017 and So, the mystery about the low dot in 2017 and 2018 in the Fed s dot plot is resolved. Second tier releases today, but Fed Kashkari speaks The eco calendar is almost empty today with only second-tier data in the euro area. ECB s Mersch and Fed s Kashkari are scheduled to speak. However, the key event of the week is the Brexit referendum on Thursday. We suspect the markets will be very sensitive to the latest poll results. A Survation poll showed a advantage for the Remain camp, reversing positions since the previous poll, while a YouGov poll showed a lead for the Remain camp. One third of the interviews were done before the murder of MP Jo Cox. On Tuesday, the German Consitutional Court decides on the constitutionality of the OMT T-Note future (black) & S&P future (orange): Largely sideways trading for US Treasury, with modest losses for the S&P German2-to-30-year spread: Following some steep narrowing in past three weeks, on Friday a correction occurred as 30-yr yield shot up 7 basis points P. 2

3 US-Ge R2 166,63-1d R1 165,68 BUND 164,56 0,9400 S1 163,61 S2 162,12 Belgian OLO auction This week s scheduled EMU bond supply is thin with only Belgium and Germany tapping the market. Today, the Belgian debt agency taps the on the run 10-yr OLO 77 (1% Jun2026), 15-yr OLO 75 (1% Jun2031) and 20-yr OLO 76 (1.9% Jun2038) for a combined amount of B. The bonds cheapened marginally going into the auction in ASW spread terms, but trade normal on the Belgian yield curve. We expect a plain vanilla auction. On Wednesday, the German Finanzagentur taps the on the run 30-yr Bund ( 1B 2.5% Aug2046). This week s auctions will be supported by a 3.75B 30-yr Bund redemption. In the US, the Treasury starts its end-of-month refinancing operation with a $26B 2-yr Note auction. Currently, the WI trades around 0.74%. The auction will be followed by a $34B 5-yr Note auction tomorrow and a $28B 7-yr Note auction on Wednesday. Consolidation ahead of back-loaded event calendar Overnight, Asian stock markets gain ground with Japan outperforming (+2%) on the back of risk-on sentiment and a slightly weaker yen and China underperforming. UK Brexit-polls swung in favour of remain and support sentiment further. The US Note future trades weaker with Brent crude again creeping towards $50/barrel. We expect a somewhat softer opening for the Bund as well. Today s eco calendar is empty apart from speeches by ECB Mersch and Fed Kashkari. The Fed governor gives prepared remarks on too big to fail though and will likely refrain from commenting on monetary policy. An improvement in risk sentiment is negative for core bonds and can result in some more neutral positioning. However, we fear that trading could be soporific ahead of this week s key events (Yellen s testimony, Brexit, Spanish elections). Longer term, we expect the downside of core bonds to be limited ahead of the Brexit-vote. If the UK stays in the EU, a September Fed hike could become topic of debate, though Yellen and markets (15% probability September move) indicate that US rates are in no hurry to go somewhere. The ECB will probably reassess its policy stance in September. The market probability of a rate cut stands at 41% (35% for a 10 bps cut, 10% for a 20 bps cut). German Bund (Sept. contract!!): Room for consolidation if risk sentiment improves US Note future (September contract!!): profit taking on extended rally P. 3

4 Currencies EUR/USD and USD/JPY rebound as brexit fears eases On Friday, sideways trading R2 1,1616-1d R1 1,1416 EUR/USD 1, ,0105 S1 1,1058 S2 1,0822 Risk-on trading modus as chances for Brexit recede EUR/USD and EUR/JPY rebound sharply USD/JPY gains are tepid Today, the eco calendar is thin We expect EUR/USD rally to run into resistance as Brexit risk isn t completely over yet. On Friday; currency traders basically took a day off. The most important single driver for trading, Brexit, didn t provide guidance as the Brexit campaign was temporary suspended. With no eco data on the agenda, EUR/USD and USD/JPY held very tight sideways ranges. EUR/USD closed the session at (from ). USD/JPY finished the week at even slightly lower from Thursday s close at During the weekend, the campaign for the UK EU referendum resumed. A first poll after the murder of MP Cox showed again a lead for the remain camp over the leave camp, reversing the previous situation. It triggers a risk-on repositioning on global markets. Asian equity indices rebound with Japanese indices gaining more than 2%, but the rebound of USD/JPY remains tepid. The risk-on rally is also visible in commodities, but gold declines. AUD/USD returned well north of the 0.74 barrier (currently at ). Last week, the euro came under pressure due to the Brexit uncertainty. The decline of EUR/JPY reinforced that move. Both EUR/USD (1.1375) and EUR/JPY (119.10) rebound sharply. The eco calendar contains only some second-tier data in the euro area. ECB s Mersch and Fed s Kashkari are scheduled to speak. However, the focus of global markets will be on the latest Brexit developments in the run-up to Thursday s referendum. In Asia, investors adapted positions as chances titled again in favour of the remain camp. However, we are not yet convinced that markets will already fully play the card of no Brexit. So, the risk on repositioning might still be bumpy and influenced by all kinds of last minute headlines/event risk. So, the European markets will probably join the risk-on move this morning, but we expect the rebound of EUR/USD to run into resistance quite soon. In the same context, the modest rebound of USD/JPY also suggests that there is still some market caution to fully play the risk-on card. So, after the overnight strong rebound of EUR/USD, we start the week with a neutral, even cautiously negative bias for the pair. EUR/USD rebounds as Brexit-driven risk-off trade eases USD/JPY records only very modest gains despite risk-on rebound Tion P. 4

5 In a broader perspective, the dollar rebounded in May on more hawkish Fed comments. However, the May payrolls delayed a rate hike and triggered a repositioning lower of the dollar. We expect consolidation in EUR/USD, as markets assess the timing of the next Fed rate hike. Brexit is a wildcard for EUR/USD trading. Last week Brexit uncertainty was a negative for the euro. EUR/USD ws drifting lower in the established / trading band, but rebounded overnight. We expect no clear trend until Brexit is completely out of the way. USD/JPY failed to challenge the key resistance in the high 111 area. The pair tested the key correction low of late and was hammer sharply lower last week as the BOJ left its policy unchanged. With the Fed rate hike path highly uncertain and global sentiment weakening, any rebound of USD/JPY should be short-lived. The break below is a high profile warning for USD/JPY longs. We don t row against the USD/JPY negative trend. Sterling rebounds sharply R2 0,8117-1d R1 0,7947 EUR/GBP 0,7797-0,0095 S1 0,7753 S2 0,7526 On Friday, sterling traded with a slightly positive bias amid an empty eco calendar. There was still plenty of analysis on the consequences of Brexit. However, the heat of the debate has cooled after the campaign was suspended following the murder of a UK MP. EUR/GBP dropped temporary to the area on Friday morning. However, even as tensions eased, it was still too early for investors to substantially adapt sterling positions for a lower Brexit probability. EUR/GBP found a new short-term equilibrium in the high 0.78./low 0.79 area. The pair closed the session at (from ). Cable traded with a slightly positive bias and gained further ground later in the session. Cable closed the session at , from Overnight, the Rightmove House prices were OK at 0.8% M/M and 5.5% Y/Y. However, sterling trading was in the first palace driven by investors reacting to better polls for the remain camp. We find this morning s reaction quite forceful as the battle isn t over yet. So, we are cautious to already aggressively buy back sterling as the Brexit campaign is still in the last straight line. We assume that further sterling gains are only possible if polls show a clear lead for remain. After the recent rebound, we stay cautious/neutral on sterling going into Thursday s EU vote. EUR/GBP: sterling rebound continues GBP/USD: rebounds off recent lows as Brexit-fear eases, at least temporary P. 5

6 Calendar Monday, 20 June Consensus Previous Canada 14:30 Wholesale Trade Sales MoM (Apr) % Japan 01:50 Trade Balance (May) A b 823.5b 01:50 Trade Balance Adjusted (May) A 269.8b 426.6b 07:30 Nationwide Dept Sales YoY (May) A -5.1% -3.8% 07:30 Tokyo Dept Store Sales YoY (May) A -4.5% -1.5% 09:00 Convenience Store Sales YoY (May) % UK 01:01 Rightmove House Prices MoM YoY (Jun) A 0.8%/5.5% 0.4% / 7.8% EMU 11:00 Construction Output MoM YoY (Apr) %/ -0.5% Germany 08:00 PPI MoM YoY (May) A0.4%/-2.7% 0.1% / -3.1% Spain 10:00 Trade Balance (Apr) m Events 15:00 ECB's Mersch Speaks at Conference in Brussels 18:15 Fed's Kashkari Gives Prepared Remarks on TBTF 18:30 ECB s Lautenschlaeger Speaks at ECB Cultural Days Belgium OLO Auction (1% Jun2026, 1% Jun2031, 1.9% Jun2038) P. 6

7 Contacts 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,65 0,05 US 0,73 0,03 DOW ,16 DE 0,04 0,04 DE -0,60 0,00 NASDAQ for Exch - NQI #VALUE! BE 0,48 0,02 BE -0,48-0,03 NIKKEI ,30 UK 1,14 0,00 UK 0,37 0,02 DAX 9631, ,36 JP -0,14 0,00 JP -0,26 0,01 DJ euro ,17 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,341-0,006 3y -0,169 0,938 0,768 Euribor-1-0,36 0,00 Libor-1 USD 0,51 0,51 5y -0,039 1,128 0,875 Euribor-3-0,26 0,00 Libor-3 USD 0,58 0,58 10y 0,480 1,515 1,229 Euribor-6-0,16 0,00 Libor-6 USD 0,71 0,71 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1,1357 0,0107 EUR/JPY 118,81 1,44 192, ,4 49,58 USD/JPY 104,64 0,30 EUR/GBP 0,7793-0,0096-1d 3,48 1,24 1,76 GBP/USD 1,4567 0,0312 EUR/CHF 1,089 0,0043 AUD/USD 0,7442 0,0059 EUR/SEK 9,3609-0,01 USD/CAD 1,2835-0,0099 EUR/NOK 9,4185 0,01 Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Joke Mertens Institutional Desk Mathias van der Jeugt France Dublin Research London Austin Hughes Singapore Shawn Britton Prague Research (CSOB) Jan Cermak Prague Jan Bures Petr Baca Bratislava Research (CSOB) Marek Gabris Bratislava Budapest Research David Nemeth Budapest ALL OUR REPORTS ARE AVAILABLE ON This non-exhaustive non exhaustive information information is based on short-term is based forecasts on for expected short developments term forecasts on the financial for expected markets. KBC Bank developments cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice. P. 7