Bond markets moving EUR lower on deflation, QE hopes

• German bund yields hit record low, Portugal yielding just 3%

• Swiss National Bank eyeing EURCHF carefully as vol increases

• German CPI at 13.00 to hint at lower Eurozone figure tomorrow

• 2nd reading of US GDP due at 13.30, expected at 3.9%

The main story in the currency markets is once again what is going on in the world of bonds. As currency movements are indications of future interest rate changes, the bond market has a say in these things. At the moment it's the only song that's being sung.

Bond yields of both developed and peripheral European countries came lower yesterday. There is nothing new in that, all have fallen since Mario Draghi's 2012 "whatever it takes" speech. Such was the confidence boost that the then relatively new European Central Bank Chair gave markets, that they instantaneously started loading up on European debt in the belief that the risk of a default was now diminished and that should the worst come to the worst, the ECB would launch a bond buying program and the debt could be shifted to them.

Since then, the risk of default has fallen; nobody talks about sovereign risk anymore. This is a good thing of course. Unfortunately this is not why these yields continue to fall. Fears over outright deflation in the Eurozone and the increased prospects of an ECB-led bond buying program have pushed some yields into record territory. 10yr German debt now only pays 0.9%. I’m not sure what is worse; that or the fact that lending money to Portugal for the same time period will only get you 3% on your money.

With the new found weakness in the Eurozone and hints that the European Central Bank may finally be getting closer to engaging in further extraordinary monetary policy following its deposit rate cut into minus territory, EURCHF has finally broken lower. Movements of 0.6% on the month in other currency pairs are cause for complaint but this is the pair’s most volatile month since January – a month that saw heavy CHF buying on a desire for a haven from the Ukraine crisis. EURCHF is within 75 pips of the Swiss National Bank’s 1.20 floor which will come under pressure by any further ECB plan to weaken the single currency – something that Mario Draghi’s latest comments suggest he is all too happy to have occur. Whether this will come via another shift in the floor – to 1.2250 or 1.2500 for example – or by following the ECB into negative deposit rate territory remains to be seen.

We still have a constructive view on GBPCHF – it is essentially GBPEUR with a free bet on intervention.

Euro news remains the market guide this morning with German inflation and unemployment data coming before the latest US GDP reading. German inflation runs the very real risk of slipping back into negative territory on monthly scale for the first time since May. Prices have fallen in as many months this year as they have risen, while an overall yearly increase of 0.8% represents a cyclical low and the worst reading since February 2010. This month’s preliminary figure is due at 13.00 GMT.

Today’s German unemployment release should also show a continuation of recent job losses as the slowing industrial landscape hurts job prospects. We look for a decline of 7,000 people.

Spanish CPI released this morning has shown a 0.5% fall on the year, the largest since 2009.

US GDP at 13.30 will give us the second reading of just how well the economy has rebounded. Growth is expected to be revised to 3.9% from 4% with estimates varying from 3.5% to 4.3% for the overall number, with personal consumption expected to be revised lower to 2.4% from 2.5%. As we pointed out yesterday, in a landscape of rising consumer confidence and stagnant retail sales, personal consumption figures are all too important for the overall economy.

Have a great day.