USD profits as US yields resist riks-off trade

Global (equity) markets faced an outright risk-off session yesterday. Several (corporate) credit spread indicators also widened further. At the same time, US govt yields held up rather well as key support levels came in play. This resilience supported the USD. At the same time, EMU topics (Italian budget, Spain raising questions on Brexit deal) were potential euro negatives. The trade-weighted dollar rebounded from the low 96 area to close the day at 97.84, reversing a big part of the loss at the end of last week. EUR/USD lost almost one big figure and finished at 1.1370. The yen didn’t really profit from the risk-on sentiment. USD/JPY even closed the session with a modest gain at 112.77. Overnight, losses on Asian equities are moderate given the sell-off in the US. However, it’s too early to already see this as a sign of a genuine trend reversal on the risk-off trade. Headlines on US China talks ahead of the G20 remain negative. US president Trump again attacked the Fed rate hike policy. EUR/USD regains a few ticks (1.1385 area). USD/JPY is changing hands at around 112.80. USD/CNY is holding a tight range in the 6.94 area. Today, the US calendar contains durable goods orders, claims and existing home sales. The latter might be at least as important as the first one. In Europe, the focus will be on the EU assessment of the Italian budget and its reaction of Italian spreads. Global sentiment of course remains also an important driver. A risk rebound is often a euro rather than a USD positive. However, if US-German spreads would re-widen and given uncertainty on Italy, a sustained euro rebound might not be that evident. We had a neutral bias on EUR/USD of late. The USD lost momentum as investors doubt whether the US economy remains strong enough to support 3 additional Fed rate hikes next year. Even so, we assume it’s too early for a sustained market repositioning away from the USD. The news from Europe is mixed at best. We see yesterday’s price action as confirming our working hypothesis that EUR/USD 1.15/1.1621 resistance won’t give away anytime soon.

Sterling gained a few ticks against the euro yesterday but ceded ground against the dollar. The BoE hearing before the Treasury committee didn’t bring concrete news for GBP-traders. Today, PM May goes to Brussels to fine-tune the Brexit deal and address issues on the future relationship. After last week’s tensions, the Brexit debate temporarily calmed down. This might be slightly GBP-positive in a daily perspective. We stay cautious on sterling as long as uncertainty on final vote persists.

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