Currencies: Dollar shows no clear trend, but USD/JPY nears key support

Transcription

1 Rates: US 10-yr yield closing in on 2.3% support Today s eco calendar won t inspire trading, suggesting sentiment-driven action. If yesterday s risk aversion persists, the US 10-yr yield could eventually test key 2.3% support, the lower bound of the 2.3%/2.64% trading range. We don t anticipate a move lower given the Fed s intention to normalize policy (rate hikes and run-off Fed s balance sheet). Currencies: Dollar shows no clear trend, but USD/JPY nears key support The dollar stabilized against the euro yesterday, but the decline in US yields weighed on USD/JPY. The pair nears the key 110 support area. Will the US currency lose further interest rate support. Today s data probably won t be decisive yet. The recent short squeeze of sterling shows tentative signs for running into resistance. Calendar Headlines US equities eventually closed between flat (Dow) and -0.30% (Nasdaq) after reversing part of the initial losses. Overnight, Asian stock markets lose ground as well with Japan underperforming and China & India closed. Car sales unexpectedly slid in March, heightening concerns about bloated dealer stocks and pricing pressure in an industry that has been central to US economic growth. It delivers a sluggish start to the spring selling season. South Africa s credit rating was downgraded to junk status for the first time in almost two decades amid an accelerating drumbeat of calls for President Jacob Zuma to step down. USD/ZAR moved north of Australia kept interest rates unchanged at 1.5%, remaining in a form of policy paralysis as housing is too hot to allow an easing and the economy lacks the strength to absorb a tightening. Gold 2 yr US 10 yr US The Fed could begin shrinking its portfolio of bonds as soon as this year, Philly Fed Harker said, adding his voice to a growing number of colleagues warning they could promptly wind down a crisis-era policy. 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP The ECB estimates that Banca Popolare di Vicenza and Veneto Banca need about 6.4B to bolster their balance sheets, and considers the two struggling Italian lenders to be solvent, according to people familiar with the matter. Today s eco calendar only contains US trade balance and EMU retail sales. The Austrian debt agency sells bonds. ECB Draghi and Fed Tarullo are scheduled to speak, but the ECB chairman presents the new 50 euro note. S&P Eurostoxx 50 Nikkei Oil CRB P. 1

2 Rates Core bonds rally despite reasonably strong ISM Core bonds rally on multiple drivers German curve bull flattens Belly US curve outperforms Peripheral spread widening US yield -1d 2 1,19 0,00 5 1,93 0, ,44 0, ,07 0,00 DE yield -1d 2-0,79-0,02 5-0,56-0, ,18-0, ,92-0,03 EMU retail sales, US trade deficit and factory orders on the docket Little impact expected Global core bond rallied strongly yesterday. The German curve bull flattened. Given the sharp underperformance of the euro swap curve, we suspect that Bund s morning movements were largely due to technical (shortage?) reasons more than fundamental ones. To a small extent, the combination of low inflation readings in the euro area and signals out of the ECB that they don t want to contemplate changing policy now, might have still had some marginal impact. The EMU eco data were plain vanilla. The US ISM was spot on consensus with stronger prices paid and unemployment sub-indices. Around the time of publications, both US Treasuries and Bunds made another up-leg, even as bonds already gained some modest ground in the run-up to the ISM after the blast in the St-Petersburg subway. Risk off sentiment settled in with equities and oil going down. The former recouped most losses later on and the damage to oil was limited. US Treasuries nevertheless kept their gains and even finished strong. Was some repositioning at the start of the quarter at work too? In a daily perspective, the German yield curve bull flattened with yields down by -6.3 bps (2-yr) to 3.9 bps (30-yr). In the US, the belly of the curve outperformed with yields declining by 2.8 bps (2-yr) to 6.9 bps (5-yr). The swap curve registered changes of between -1.8 bps (2-yr) and -2.8 bps (30-yr). On intra- EMU bond markets, 10-yr yield spread versus Germany widened up to 6 bps (Italy). France slightly underperformed Belgium (+3 bps versus +2 bps). Dataflow won t affect markets much The eco calendar is less enticing today. In EMU, the volatile retail sales for February will be released. Markets expect a 0.5% M/M and 1% Y/Y increase. We don t forecast this volatile indicator. It is normally largely ignored. In the US, the February trade balance and the factory orders are up for release. The trade deficit is expected to have narrowed to $44.5B from $48.5B in January, which would be a reversal of the January surge to its highest deficit in 5 years. The surge was due to the early timing of Chinese New Year, which increased the shipments of goods towards the US ahead of the festivities. The advance goods trade data confirmed this. So, we don t expect a big reaction. Similarly the factory orders include the more volatile durable orders that have been published in an advance report last week. Regarding central bankers, ECB Draghi speaks on the occasion of the launching of the new 50 banknote at the ECB. Fed Tarullo speaks after closure. He has resigned and leaves the Fed soon. Therefore, his words won t carry much weight. Bund future (black) and EuroStoxx (orange): Strong Bund rally at start of the quarter. US 10-yr yield Testing time as 2.30% yield support looms P. 2

3 Austria taps Jul2023 and Jul2027 RAGB s R2 164,54-1d R1 163,19 BUND 164,58 0,41 S1 159,14 S2 158,67 The Austrian debt agency kicks off this week s scheduled EMU bond supply by tapping the on the run 7-yr RAGB (0% Jul2023) and off the run RAGB (6.25% Jul 2027) for a combined 1.32B. The bonds on offer didn t cheapen in ASW spread terms in the run-up to the auction. The Jul2023 RAGB trades cheap on the Austrian curve, while the Jul2027 bonds sits rather rich. We expect a plain vanilla auction. US 10-yr yield closing in on key 2.3% support Overnight, most Asian stock markets register some losses with Japan underperforming on the back of a stronger yen. Chinese and Indian markets are closed. The US Note future stabilizes around yesterday s closing levels/intraday highs. Brent crude lingers just above $53/barrel. Today s eco calendar won t inspire trading (see above), suggesting sentiment-driven action. If yesterday s risk aversion persists, the US 10-yr yield could eventually test key 2.3% support, the lower bound of the 2.3%/2.64% trading range. We don t anticipate a move lower given the Fed s intention to normalise policy (rate hikes and run-off BS) and given huge progress made towards the central banks dual mandate. Therefore, we hold our view that a return to 2.3% could be used to offload bonds or position for higher rates. The German 10-yr yield is declining in a similar sideways range (0.2%-0.5%). We take a same approach as for US Treasuries and don t anticipate a decline below 0.2%. German Bund: speculation on earlier than expected ECB exit reversed US Note future: risk aversion pushes Note future to minor new contract high P. 3

4 Currencies Decline in US yields weighs on the US dollar Decline of bond yields weighs on the dollar Decent ISM ignore Asian markets turn into risk-off modus USD/JPY drifts south in the 110 figure. R2 1,1145-1d R1 1,0851 EUR/USD 1,0487-0,0036 S1 1,0518 S2 1,0458 Eco data unlikely to be of significance USD/JPY nears key 110 area. On Monday, trading in the major dollar cross rates started the new quarter on a slow footing. EUR/USD retested last week s lows, but no break occurred. The US manufacturing ISM was OK, but didn t help the US currency. On the contrary, US bond yields declined during the US session, pressuring the dollar. Especially USD/JPY was hurt. A decline in equities and oil was also a USD negative. The pair closed the session at (from ). EUR/USD finished the session at ( on Friday). Overnight,several Asian markets are closed. The cautious risk-off start to the quarter in the US and the rise of the yen are causing 1%+ losses for Japanese equities. The yen extends yesterday s rebound. USD/JPY drops to the mid 110 area. EUR/USD shows no clear trend. Euro weakness and USD softness are keeping each other in balance. EUR/USD hovers in the /70 area. The Reserve bank of Australia kept its policy rate unchanged at 1.5%. It warns on growth in household borrowing. At the same time, the Bank indicates that wage growth and inflation remain low. It applauds the Aussie decline since A rise could complicate the economic adjustment. AUD/USD dropped from area to the Today, the volatile EMU retail sales are expected to rise 0.5% M/M and 1% Y/Y, but the report is most often ignored. In the US, the February trade balance and the factory orders are up for release. The trade deficit is expected to have declined to $44.5B from 48.5B. Technical factors might be in play. We don t expect a big reaction. The factory orders include the more volatile durable orders that have already been published. Regarding central bankers, speeches from Draghi and Tarullo won t be important. EUR/USD: correction slows as USD rebound is running out of steam USD/JPY struggles not the fall below the key 110 area. Last week, the US reflation trade regained traction and supported a comeback of the dollar. Fed speakers also confirmed that further policy normalization is to be expected throughout At the same time, the euro faced headwinds as rumours questioned the case for early ECB policy normalization. The move was reinforced by very soft EMU inflation data. However, the price action at the end of last week and yesterday suggests that the rise of the dollar as no strong legs. US yields also remain on a downward trajectory. P. 4

5 Of late, we advocated that the dollar needs very strong data to gain more ST term. This assessment remains valid and especially applies to USD/JPY. The pair struggles not to fall to/below the recent lows in the 110 area. The red alert is again on! We keep a close eye on US yields nearing key support levels. For EUR/USD, the repositioning away from early ECB normalization s has been worked out. We maintain a cautious EUR/USD negative bias, but the decline might slow. We don t see a case for big EUR/USD gains if sentiment on risk would stay risk-off. From a technical point of view, USD/JPY temporary regained the /60 previous range bottom, but it couldn t be sustained. A decline below 110 would signal more trouble ahead. EUR/USD extensively tested the topside of the MT range, but the test was rejected last week. The / area now looks a solid resistance. EUR/USD might return lower in the previous /1.05 trading range. Sterling short squeeze is slowing R2 0,8828-1d R1 0,8689 EUR/GBP 0,8510-0,0015 S1 0,846 S2 0,8333 Yesterday, sterling drifted of off Friday s correction top against the euro and the dollar after a solid performance last week. The UK manufacturing PMI declined from 54.5 to The report didn t change the UK eco picture, but helped to block the recent short-covering rally of sterling. EUR/GBP rebounded to the mid 0.85 area and closed the session at Cable drifted back to the 1.25 area even as the dollar wasn t in really good shape. The pair closed the session at Yesterday s price action is a first indication that the sterling short-squeeze ran its course. Today, the eco calendar only contains the UK construction PMI. A stabilisation at 52.5 is expected. This morning, the sterling remains in the defensive. Both cable and GBP/EUR are ceding ground. Is uncertainty on Brexit again becoming a factor of importance for GBP trading? Mid-March, sterling found a better bid. Substantially higher than expected UK inflation and a more hawkish tone from the BoE supported sterling. We changed our short-term bias on EUR/GBP from positive to neutral. Last week s decline of the euro reinforced the EUR/GBP downside momentum. Further consolidation in the MT sideways range might be on the cards. The decline below the previous break-up suggests that a full retracement to the range bottom is possible. However, the pair shows tentative signs of a ST bottoming out process. Longer term, Brexitcomplications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after recent higher inflation data. EUR/GBP: sterling short-squeeze shows tentative signs of easing GBP/USD: sterling rally slows even as USD is also losing momentum P. 5

6 Calendar Tuesday, 4 April Consensus Previous US 14:30 Trade Balance (Feb) -$44.6b -$48.5b 16:00 Factory Orders (Feb) 1% 1.2% 16:00 Durable Goods Orders (Feb F) 1.7% 1.7% Japan 01:50 Monetary Base YoY (Mar) A 20.3% 21.4% Australia 06:30 RBA Cash Rate Target A 1.50% 1.50% UK 10:30 Markit/CIPS UK Construction PMI (Mar) EMU 11:00 Retail Sales MoM / YoY (Feb) 0.5%/1.0% -0.1%/1.2% Spain 09:00 Unemployment MoM Net ('000s) (Mar) Events 11:15 Austria to Sell Bonds (0% 2023 & 6.25% 2027) 11:30 Germany to Sell 1B 0.1% I/L 2026 Bonds 09:00 ECB Draghi speaks in Frankfurt on launch $50B euro note 22:30 Fed's Tarullo speaks at Princeton University 10-year td -1d 2-year td -1d Stocks td -1d US 2,44 0,00 US 1,19 0,00 DOW 19762,6 0,00 DE 0,18-0,03 DE -0,79-0,02 NASDAQ 5383,117 0,00 BE 0,51-0,04 BE -0,69-0,02 NIKKEI 19114,37 0,00 UK 1,24 0,00 UK 0,08 0,00 DAX 11575,57 94,51 JP 0,05 0,00 JP -0,18 0,00 DJ euro ,48 11,96 IRS EUR USD GBP EUR -1d -2d USD td -1d 3y -0,11 1,69 0,69 Eonia -0,3290 0,0000 5y 0,06 2,00 0,86 Euribor-1-0,3680 0,0000 Libor-1 0,7717 0, y 0,64 2,34 1,23 Euribor-3-0,3190 0,0000 Libor-3 0,9979 0,0000 Euribors-6-0,2210 0,0000 Libor-6 1,3177 0,0000 Currencies td -1d Currencies td -1d Commodities td -1d EUR/USD 1,0487-0,0036 EUR/JPY 123,15 0,11 CRB 192,51 0,00 USD/JPY 117,43 0,52 EUR/GBP 0,8510-0,0015 Gold 1151,70 0,00 GBP/USD 1,2326-0,0018 EUR/CHF 1,0714-0,0008 Brent 56,82 0,00 AUD/USD 0,717-0,0040 EUR/SEK 9,5408-0,0323 USD/CAD 1,3417-0,0024 EUR/NOK 9,0556-0,0236 P. 6

7 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Mathias van der Jeugt Institutional Desk Dublin Research France Austin Hughes London Shawn Britton Singapore 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 information is based on short term forecasts for expected developments This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank 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