KBC Market Research Desk
KBC Bank
Global sentiment improved yesterday as US policy makers said that progress is being made in the US-China trade talks. Stocks rebounded further and core (US & EMU) yields rose. The impact on the dollar was again modest given the price moves in interest rates and equities. A risk-on sentiment often favours the euro (and other ‘risk currencies') more than the dollar. However, the impact of the global risk rally on EUR/USD was mitigated by poor EMU/German data. The widening of US/German interest rate differentials also prevented further EUR/USD gains. At the same time, USD/JPY gained only modestly despite higher US yields and a risk-on sentiment. For now, FX markets (especially the USD) stay in some kind of wait-and-see modus. EUR/USD finished at 1.1441 (from 1.1474). USD/JPY closed the day at 108.75 (from 108.72).
The risk rally continues overnight as the US and China are extending trade talks. President Trump taking no new steps on the financing of the wall with Mexico in its television address yesterday also eased investors' concerns. Chinese equities outperform a broader regional rally, supporting the yuan (USD/CNY near 6.8390). Commodity currencies are profiting from a rebound in the oil price with the Canadian dollar extending its rally. The dollar is losing a few ticks. EUR/USD is trading near 1.1450. USD/JPY hovers in the high 108 area. There are few eco data in EMU and in the US today. Markets will keep an eye at Fed speakers and at the minutes of the December Fed meeting. Markets will look for more indications on Fed policy flexibility. Also keep an eye at the auction of 10-y US Treasuries. Yesterday's sale of 3-y bonds received only mediocre investor interest. A difficult sale of LT US bonds might raise LT US interest rates, but probably won't help the dollar. Yesterday, we advocated a cautious stance on the dollar and saw the downside in EUR/USD rather well protected as markets anticipate a softer, flexible Fed. We hold that view. For now, the established ranges remain in place, but if the risk rebound continues, a retest of the 1.15 area remains possible. The 1.1621 mid-Oct top is next reference.
Recent ‘sterling strength' proved short-lived yesterday as the political debate on Brexit returned to the forefront. UK PM May lost a vote in Parliament limiting her (financial) room of manoeuvre in case of a no-deal Brexit. Uncertainty on the next steps in the brexit process probably will cause investors to stay cautious on sterling long exposure going into next week's brexit vote (scheduled for Jan 15).
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.
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