Currencies: EUR/USD balance restored after hawkish ECB rumours

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1 Rates: Fragile balance ahead of tomorrow s FOMC meeting Initial losses on core bond markets were undone by a sell-off on US stock markets. Fragile risk sentiment and the possibility of a hawkish shift at tomorrow s Fed meeting, keep bonds currently in balance. The US Note future keeps underperforming the German Bund. Currencies: EUR/USD balance restored after hawkish ECB rumours A downside test of EUR/USD was blocked yesterday by the EU/UK transition deal and by comments on the ECB ending APP this year. Today, markets might shift into wait-and-see modus ahead of tomorrow s Fed decision. However, there is plentiful potential event risk that might unsettle (currency) markets. Calendar Headlines US stock markets lost up to 1.85% yesterday (Nasdaq) on reports of a digital tax by the EU. Facebook also dragged the index lower after a data breach claim. Asian equities opened weak, but sentiment improves during dealings. They are mixed with China and Japan underperforming (-0.5%). The Washington Post reports that US President Trump prepares to hit China with $60bn in tariffs by Friday, doubling aides earlier proposal in an escalation of trade tensions. S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP ECB Mersch, one of the more hawkish officials, said everything is in place for the return of stable euro-area inflation, putting the central bank on course to halt its bond-buying program later this year. Saudi Arabia called the 2015 nuclear deal between Iran and world powers a "flawed agreement", on the eve of a meeting between the Saudi crown prince and US President Trump who have both been highly critical of Iran. A majority in Norway s parliament signaled it will try to oust the nation s justice minister after a controversial Facebook post, in a move that will probably force PM Solberg to put her whole cabinet up for a vote. Chinese President Xi Jinping warned self-ruled Taiwan that it will face the "punishment of history" for any attempt at separatism, offering his strongest warning yet to the island claimed by China as its sacred territory. Today s eco calendar contains UK inflation, German ZEW investor confidence and EMU consumer confidence. Germany holds a 2-yr Schatz auction. P. 1

2 Rates Tuesday, 20 March 2018 Stocks and monetary policy keep bonds in balance US yield -1d 2 2,31 0,02 5 2,66 0, ,86 0, ,09 0,01 DE yield -1d 2-0,59 0,00 5-0,04 0, ,57 0, ,22-0,01 Core bonds traded volatile in this week s opening session, but eventually closed nearly unchanged. Yesterday s rollercoaster ride started with a sell-off via the UK Gilt market following the agreement between the EU and the UK on a 21-month transition deal. ECB rumours on consensus about ending APP in 2018 failed to accelerate the sell-off. Core bond sentiment shifted during US trading as heavy losses on stock markets caused a safe haven bid. At the end of the day, changes on the German yield curve were limited between -0.6 bps (30- yr) and +0.1 bp (5-yr). The US yield curve bear flattened with yields 1.7 bps (2-yr) to 0.9 bps (30-yr) higher. 10-yr yield spread changes vs Germany were small with Spain outperforming (-3 bps). The US Note future trades flat overnight. Asian risk sentiment improved compared to yesterday s performance by WS and despite rumours that President Trump is preparing a $60bn tariff plan by Friday. We expect a neutral opening for the Bund. Today s eco calendar contains some EMU data, but we don t expect them to influence trading. Several items currently point into different directions and keep each other in balance ahead of tomorrow s FOMC meeting. First, general geopolitical sentiment translates into uncertainty on stock markets. Investors fear a hawkish shift on Iran policy at the Saudi/US Summit, the US government faces a government shutdown on Friday and Trump adds to his protectionist rhetoric. Second, central bank policy suggests a faster normalization. The ECB for once seems to be unhappy by the (too?) dovish reaction after this month s policy meeting. Several sources indicate consensus on ending APP this year while (hawkish) ECB members provided a clear shift in tone on the EMU inflation outlook. The Fed will hike its policy rate tomorrow, but we also expect changes to the dot plot. More specifically, we expect a higher estimation of the neutral rate (3% from 2.75%) and a potential shift already in 2018 (4 from 3) and/or 2019 dots. This hawkish scenario isn t discounted in prices. Finally, technical pictures of the Bund and US Note future point in different directions. The German 10-yr yield lost 0.62% support. The break suggests a return to 0.46%/0.48% support (gap open/62% retracement). The US 10-yr yield on the other hand bounced off 2.8% intermediate support. Overall, we expect the US Note future s underperformance vs the German Bund to last. Af US Note future (red) and S&P (blue) (intraday): sell-off on stock markets creates intraday safe haven flows US/German 10-yr yield spreads approaches cycle high P. 2

3 Currencies EUR/USD balance restored after ECB rumours R2 1,2598-1d R1 1,2555 EUR/USD 1,2335 0,0045 S1 1,2165 S2 1,2055 R2 0,9307-1d R1 0,9033 EUR/GBP 0,8796-0,0021 S1 0,8690 S2 0,8657 Two factors changed fortunes for the euro yesterday. First, the UK and the EU agreed on a transition deal giving UK firms access to the common market till end This propelled sterling and, to a lesser extent the euro (against the dollar). Second, the rhetoric on the ECB turned less dovish on a Reuters article that there is consensus within the ECB to end APP by the end of this year. EUR/USD traded near yesterday morning, gained almost one big figure and closed the session at The equity sell-off had only a limited impact on the dollar. USD/JPY closed the session little changed at Sentiment in Asia remains risk-off this morning, but the losses are modest compared to WS yesterday. USD/JPY stays relatively well bid. The pair is said to be supported by importer related buying. EUR/JPY buying after yesterday s ECB rumors might also be in play. EUR/USD maintains yesterday s gains, but stabilizes near yesterday s close. The RBA minutes gave a balanced view on the economy and inflation with little impact on the AUD/USD which holds in the low 0.77 area. German ZEW investor sentiment and the EC consumer confidence will be published. Some easing is expected for both indicators. They will probably only be of intraday significance, at best. Last week, the euro ceded modest ground on soft ECB talk, highlighting ongoing low inflation. However, the balance between the euro and dollar looks restored after yesterday s Reuters comments. This morning s constructive performance of USD/JPY despite a global risk-off context suggests some USD buying interest going into the FOMC meeting. However, this probably won t help EUR/USD bears. Yesterday s rejected test of the area propelled EUR/USD back in the established consolidation pattern. There is probably a really hawkish Fed-message needed for new downside test. The trade tariffs debate and equity sentiment remain (tentatively negative) wildcards for the dollar. Sterling jumped yesterday after the EU/UK transition deal. Headline UK inflation is expected to ease from 3.0% to 2.8% today. (Inflation) data might get some more weight for GBP-trading.as Brexit moves to the background. Especially an upside surprise might reinforce BoE rate hike expectations and push EUR/GBP further south in the / trading range. We don t anticipate a downside break yet. EUR/USD returns higher in established range as ECB is said to end APP this year EUR/GBP: drifting lower after UK/EU transition deal P. 3

4 Calendar Tuesday, 20 March Consensus Previous UK 10:30 CPIH YoY (Feb) 2.6% 2.7% 10:30 CPI MoM / YoY (Feb) 0.5%/2.8% -0.5%/3.0% 10:30 CPI Core YoY (Feb) 2.5% 2.7% 10:30 RPI MoM / YoY (Feb) 0.8%/3.7% -0.8%/4.0% 10:30 PPI Input NSA MoM / YoY (Feb) -0.9%/3.8% 0.7%/4.7% 10:30 PPI Output NSA MoM / YoY (Feb) 0.1%/2.7% 0.1%/2.8% 10:30 PPI Output Core NSA MoM / YoY (Feb) 0.2%/2.4% 0.3%/2.2% EMU 11:00 ZEW Survey Expectations (Mar) :00 Consumer Confidence (Mar A) Germany 08:00 PPI MoM / YoY (Feb) 0.1%/2.0% 0.5%/2.1% 11:00 ZEW Survey Current Situation (Mar) :00 ZEW Survey Expectations (Mar) Events 01:30 RBA March Meeting Minutes 11:30 Germany to Sell 4bn 0% 2020 Bonds 10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,86 0,01 US 2,31 0,02 DOW 24610,91-335,60 DE 0,57 0,00 DE -0,59 0,00 NASDAQ 7344, ,74 BE 0,86 0,01 BE -0,55-0,01 NIKKEI 21380,97-99,93 UK 1,45 0,02 UK 0,83 0,02 DAX 12217,02-172,56 JP 0,04 0,00 JP -0,15-0,01 DJ euro ,79-42,61 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,04 2,71 1,19 Eonia -0,3680-0,0020 5y 0,42 2,80 1,35 Euribor-1-0,3700 0,0000 Libor-1 1,8221 0, y 1,01 2,89 1,55 Euribor-3-0,3290-0,0010 Libor-3 2,2018 0,0000 Euribor-6-0,2720 0,0000 Libor-6 2,3636 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,2335 0,0045 EUR/JPY 130,88 0,60 CRB 192,90-1,56 USD/JPY 106,1 0,09 EUR/GBP 0,8796-0,0021 Gold 1317,80 5,50 GBP/USD 1,4024 0,0082 EUR/CHF 1,1731 0,0030 Brent 66,05-0,16 AUD/USD 0,7718 0,0005 EUR/SEK 10,0776 0,0078 USD/CAD 1,3078-0,0018 EUR/NOK 9,5265 0,0450 If you no longer wish to receive this mail, please contact us: kbcmarketresearch@kbc.be to unsubscribe P. 4

5 Contacts Tuesday, 20 March 2018 Brussels Research (KBC) Global Sales Force Mathias van der Jeugt Brussels Peter Wuyts Corporate Desk 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 VIA OUR KBC RESEARCH APP (iphone, ipad, Android) 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. 5