The US dollar held steady during Asian dealings but resumed strengthening the second European markets opened in a move similar to Wednesday’s repositioning. EUR/USD tanked another big figure from 1.20 to just north of 1.19, thus breaking no less than three support zones (1.1985, 1.196 area, and 1.1919). The trade-weighted dollar went for a test of the 92 barrier but eventually closed at 91.89 (up from 91.13). The only G10 dollar cross that didn’t profit, was USD/JPY (close at 110.21). The Japanese yen had a remarkably strong run yesterday, both against the USD and the euro (from 132.79 to 131.22). We blame a mixed risk sentiment, disappointing EU yield gains (the curve ended more or less flat after rising 2 to 3 bps earlier on the day), and outright nosediving (long) US yields. In numbers: the US10-y shed more than 7bps, the 20y: -10bps and the 30y: -11.4bps in a combo of both real yields and inflation expectations. Following the Fed and markets bringing forward normalization expectations, an unwinding of steepener trades/short covering is the best we can come up with. It is consistent with the short segment of the curve more or less keeping Wednesday’s yield gains (eg. 3y: +1.9bps) and the dollar remaining strong. Another interesting number: 756 billion dollars. That is the amount parked yesterday at the Fed’s overnight reverse repo facility after it bumped the interest it pays to 5 bp, luring a lot of excess liquidity. It’s another record and a near 50% (!) increase compared to the day before. In EUR/GBP, sterling profited from spill-over tightening bets. The currency pair edged further south of 0.86 support and tested the next reference at 0.8541.

Japan is in focus with CPI readings and the BoJ meeting this morning (see headline below). The Japanese yen remains well bid, eking out more gains against both the euro and the dollar. The greenback holds the upper hand against other peers though with EUR/USD now testing the 1.19 handle. AUD and NZD lag even. US Treasuries reverse an early dip, the German bund grinds higher.

The economic calendar is razor thin. Just-released UK retail sales disappointed (-1.4% m/m vs. +1.5% expected). Sterling is under minor selling pressure. EUR/GBP remains south of 0.86 though. Sentiment will remain the overall driver for the remainder of the day. Looking at the charts, yesterday’s yield moves could continue going into the weekend. The 10y yield has more downside potential within the downward trend channel. The US30y is at important support near 2.08% (23.6% March 2020-2021 rise). A break lower could trigger stop-outs/further short covering. If steepener unwinding is in effect the reason for the long end US curve outperformance. The dollar could stay well supported. That changes of course when declining yields are markets having doubts on growth. The jury’s still out.

News headlines

Japanese consumer price inflation in May remains very far away from the 2% BoJ target. Even so, the May data were marginally higher than expected. Headline inflation rose from -0.4% Y/Y to -0.1% Y/Y. Core inflation excluding fresh food even turned positive for the first time since March 2020 (+0.1% Y/Y from -0.1% Y/Y). At its policy meeting, the BoJ as expected left it short term policy rate unchanged at -0.1%. The target for the 10-y government yields stays at 0.1%. The BoJ extended the September deadline for asset-buying and loan programmes introduced last year to address the impact of the pandemic by six months. The Bank also will launch a new scheme to encourage financial institutions to boost lending and investment for fighting climate change. "Supporting private-sector efforts from a central bank's standpoint will contribute to stabilizing the economy in the long run”, the BoJ said.

In an interview with German Newspaper Handelsblatt, German central bank head Weidman said it hopes to ECB can reduce emergency stimulus soon. Also opposed the idea of transferring some of the flexibility of the current crisis measures into the mores standard tools such as the APP. "When the emergency for which the PEPP was created is over, it must be ended,", Weidmann was quoted.

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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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