The dollar could retain the benefit of the doubt today

KBC Market Research Desk KBC Bank

Markets

Markets finished the week with a cautious risk bias last Friday with Biden's $1900 billion stimulus plan lifting spirits only temporarily. Its announcement was the market's cue for some profit-taking while pondering the way forward. The narrowest Senate majority possible won't make it easy for the plan to be approved while investor attention also shifted to the potential need for higher taxes. Disappointing US data (retail sales, NY Empire Manufacturing index, U. of Michigan consumer confidence) and reports about the vaccine rollout risking to be delayed added to the risk-off. European stocks finished more than 1% in red. Wall Street ended up to 0.87% (Nasdaq) lower. UST's vastly outperformed Bunds with the US yield curve bull flattening. Yields were down 0.6 bps (2-yr) to 4.6 bps (10-yr). German yields rose marginally at the very long end (1.3 bps, 30-yr). The dollar continued its corrective rebound in a largely sentiment-driven move, strengthening from EUR/USD 1.2155 to 1.2082. DXY finished near 90.8 (up from 90.2). USD/JPY traded choppy sub 104. EUR/GBP traded subdued just shy of 0.89.

Overnight trading sentiment is mixed. Most Asian-Pacific indices trade in the red. China is the exception, profiting from solid Q4 growth figures (see details below). Core bonds trade muted. Japanese yields gapped higher on reports the BoJ is mulling a wider band for long term yields to fluctuate in (cf. infra). The dollar kicks off the week on slightly stronger footing. EUR/USD hovers slightly below Friday's close. The Aussie (and kiwi) dollar underperform G10 peers even as China's recovery stays on track.

China's GDP release was today's economic calendar headliner. There's a EMU finance minister meeting scheduled today, followed by a full gathering of EU ministers tomorrow to discuss the implementation of the recovery fund. It is worth following up but it won't be a market mover. Moreover, US financial markets are closed in observance of Martin Luther King Jr. holiday, rendering low-volume, technically inspired trading in the run-up to this week's key events: Biden's inauguration on Wednesday, the ECB policy decision on Thursday and EMU PMI's on Friday. Markets could err on the side of caution, protecting core bond's downside in a daily perspective. Given the high-profile events later this week, the dollar could retain the benefit of the doubt today. EUR/USD is close at intermediate support around 1.206 (Dec. correction low, 38.2% Nov-Jan Fibo retracement). In any case we hold our view that 1.2011 is key and won't break easily. In case of a prudent risk setting we see few reasons for sterling to excel. EUR/GBP tested but did not break important support at 0.8865 last Friday. The pair is again flirting with 0.89. We assume the upward trading bias to hold.

News Headlines

The BoJ is considering a proposal to allow wider band for the fluctuations in long term yields, Jiji mentioned without citing sources. The BoJ currently targets a 0% target for 10-y government bond yields with a deviation of 0.2% on either side. A widening of the range might result in the BOJ buying less bonds and allow a bigger role for the market mechanism. The Jiji report caused LT government bond yields to open up to 2-3 bp higher, but the move slowed afterwards. The BoJ meets on January 21.

Chinese Q4 growth expanded at a faster than expected 2.6% Q/Q and 6.5% Y/Y, resulting in positive growth for the year 2020 of 2.3%. December production and retail sales data showed a divergent picture. IP rose further from 7% Y/Y to 7.3%, but momentum in retail sales slowed from 5% Y/Y to 4.6% Y/Y, maybe as new restrictions in some part of the country slowed consumer spending. China today reported 109 new Covid Cases for January 17.

In Germany, Merkel's Christian Democratic Union voted for Armin Laschet to become the next party leader. The appointment of Laschet is seen as providing a continuation of Merkel's centric policy approach. Usually, the party leader also becomes the chancellor candidate for the CDU/CSU block, but this step isn't sure currently.

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KBC Market Research Desk

KBC Bank

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