Summary: EU sovereign yields got a big boost yesterday from a higher than expected EU inflation print, but also on a couple of known hawks arguing for a reduction of stimulus. But the fact that EU yields have moved at all, especially relative to the moribund activity in US yields, has helped bring the euro some fundamental support. Still, some further wood to chop to force the focus higher for EURUSD.
FX Trading focus: EU yields, outlook offer the euro more fundamental support
Yesterday saw some odd price action in UDS pairs with no readily identifiable catalyst that may have been down to end-of-month rebalancing flows, as the EURUSD rally was suddenly erased in late trading yesterday. Indeed, yesterday saw a couple of quite supportive developments for the euro in the form of a higher than expected inflation level out from the Euro Zone (the +0.4% MoM and +3.0% YoY for the headline vs. 0.2%/2.7% expected as well as +1.6% at the core vs. +1.5% expected). A couple of ECB members, Knot and Holzmann were out in separate interviews calling for a reduction in the stimulus. No surprise from these known hawks, but EU yields seemed to specifically react the most to this development. Bunds and especially Italian BTP yields rose strongly, with the latter up 10 basis points for the 10-year BTP even as the demand at an auction of Italian debt yesterday was strong. These moves despite the rather moribund action in US treasuries is a distinct positive support for the euro.
Also, as we look at the remainder of this year and into the wind-down of PEPP purchases in March (the one in which we will believe it when we see it) we have a built-in asset purchase taper in place for the ECB anyway, which had always signaled earlier this year that it was front-loading its purchases. We can even see the market getting cheeky over the last couple of weeks and pricing in higher odds of ECB rate hikes out into 2025. Adding to this, we saw a very strong Italian manufacturing PMI (60.9 and slightly higher than July) and a couple of upward revisions for the other European PMI’s. Going forward, there may even be a relative Covid-impact angle as Europe could be on a delayed path that is taking into its peak growth surge now, one that is already receding in the rear-view mirror in the US, in part due to a lower vaccine rate there and covid impacts on confidence, but increasingly due to the risk of a fiscal cliff on the hangover from radical stimulus that mostly ended with the March stimulus check. All in all, as long as risk sentiment is stable (or possibly, only comes under some pressure due to higher yields on a more positive forward outlook), the EURUSD rally could just extend here, with the first objective a full reversal back to 1.1900+.
Chart: EURJPY
EURUSD and EURJPY are often directionally correlated (r-square of over 0.5 for last forty trading days) and today we will focus on EURJPY, which is rallying harder and got a significant boost yesterday and overnight, most likely on the jump in EU sovereign yields discussed above. Note the break back above the important 130.00 level. If US yields follow suit and we have a rising yield theme underway, this pair may be set for a challenge of the cycle highs again, as the JPY is the most sensitive to rising yields of any G10 currency.
US home prices continued to explode in June: the June S&P CoreLogic home price data series (its 20-city index at least) registered a 19.1% gain year-on-year, a record in the history of the survey going back to 2001, and probably ever, as the gutting of interest rates is reaching maximum impact – also on inequality. Surveys show that US homebuyer sentiment is at rock-bottom and the Biden administration may announce a plan today to support the increase the supply of homes that will be rented at lower prices. Given than home sales activity has rolled over, the housing market could be the source of a net drag on the economy.
Weak US Consumer Confidence – this poll saw a more than 15-point drop – the largest in point terms, ex-pandemic outbreak – since 2011 in the month of a huge market correction. As discussed in this morning’s Saxo Market Call podcast, the University of Michigan survey may be a more leading survey and is more noteworthy recently in that the survey dropped in August to an even worse reading than during the worst months of the pandemic outbreak in the spring of last year.
Germany – SPD polling momentum extends. The momentum for the SPD is stunning in the recent polling, with the SPD now solidly overtaking the CDU/CSU in polling averages and one of the most recent, one even showing 27% in favour of the SPD vs. 19.5% to the CDU/CSU. A center-left government is likely the most EUR-positive outcome after September 26, although the ability to put together a ruling coalition remains a key outstanding question.
US President Biden calls official end to US nation-building. Biden announced this in a speech intended to put a positive spin on the end of the mission to evacuate US citizens and local allies in Kabul, Afghanistan. This makes explicit a trend that was already clearly in place with Obama’s exit from Iraq and Trump’s isolationism. The neo-cons are down for the count and the geopolitical heat potential has risen considerably as “bad actors” may feel emboldened while US allies may ponder the strength of the US backstop of their interests. This could eventually have profound consequences for capital flows and policies towards multinationals – as US platform companies, for example, are already a hot topic. Stay tuned.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
FX Trading focus: EU yields, outlook offer the euro more fundamental support
Yesterday saw some odd price action in UDS pairs with no readily identifiable catalyst that may have been down to end-of-month rebalancing flows, as the EURUSD rally was suddenly erased in late trading yesterday. Indeed, yesterday saw a couple of quite supportive developments for the euro in the form of a higher than expected inflation level out from the Euro Zone (the +0.4% MoM and +3.0% YoY for the headline vs. 0.2%/2.7% expected as well as +1.6% at the core vs. +1.5% expected). A couple of ECB members, Knot and Holzmann were out in separate interviews calling for a reduction in the stimulus. No surprise from these known hawks, but EU yields seemed to specifically react the most to this development. Bunds and especially Italian BTP yields rose strongly, with the latter up 10 basis points for the 10-year BTP even as the demand at an auction of Italian debt yesterday was strong. These moves despite the rather moribund action in US treasuries is a distinct positive support for the euro.
Also, as we look at the remainder of this year and into the wind-down of PEPP purchases in March (the one in which we will believe it when we see it) we have a built-in asset purchase taper in place for the ECB anyway, which had always signaled earlier this year that it was front-loading its purchases. We can even see the market getting cheeky over the last couple of weeks and pricing in higher odds of ECB rate hikes out into 2025. Adding to this, we saw a very strong Italian manufacturing PMI (60.9 and slightly higher than July) and a couple of upward revisions for the other European PMI’s. Going forward, there may even be a relative Covid-impact angle as Europe could be on a delayed path that is taking into its peak growth surge now, one that is already receding in the rear-view mirror in the US, in part due to a lower vaccine rate there and covid impacts on confidence, but increasingly due to the risk of a fiscal cliff on the hangover from radical stimulus that mostly ended with the March stimulus check. All in all, as long as risk sentiment is stable (or possibly, only comes under some pressure due to higher yields on a more positive forward outlook), the EURUSD rally could just extend here, with the first objective a full reversal back to 1.1900+.
Chart: EURJPY
EURUSD and EURJPY are often directionally correlated (r-square of over 0.5 for last forty trading days) and today we will focus on EURJPY, which is rallying harder and got a significant boost yesterday and overnight, most likely on the jump in EU sovereign yields discussed above. Note the break back above the important 130.00 level. If US yields follow suit and we have a rising yield theme underway, this pair may be set for a challenge of the cycle highs again, as the JPY is the most sensitive to rising yields of any G10 currency.
US home prices continued to explode in June: the June S&P CoreLogic home price data series (its 20-city index at least) registered a 19.1% gain year-on-year, a record in the history of the survey going back to 2001, and probably ever, as the gutting of interest rates is reaching maximum impact – also on inequality. Surveys show that US homebuyer sentiment is at rock-bottom and the Biden administration may announce a plan today to support the increase the supply of homes that will be rented at lower prices. Given than home sales activity has rolled over, the housing market could be the source of a net drag on the economy.
Weak US Consumer Confidence – this poll saw a more than 15-point drop – the largest in point terms, ex-pandemic outbreak – since 2011 in the month of a huge market correction. As discussed in this morning’s Saxo Market Call podcast, the University of Michigan survey may be a more leading survey and is more noteworthy recently in that the survey dropped in August to an even worse reading than during the worst months of the pandemic outbreak in the spring of last year.
Germany – SPD polling momentum extends. The momentum for the SPD is stunning in the recent polling, with the SPD now solidly overtaking the CDU/CSU in polling averages and one of the most recent, one even showing 27% in favour of the SPD vs. 19.5% to the CDU/CSU. A center-left government is likely the most EUR-positive outcome after September 26, although the ability to put together a ruling coalition remains a key outstanding question.
US President Biden calls official end to US nation-building. Biden announced this in a speech intended to put a positive spin on the end of the mission to evacuate US citizens and local allies in Kabul, Afghanistan. This makes explicit a trend that was already clearly in place with Obama’s exit from Iraq and Trump’s isolationism. The neo-cons are down for the count and the geopolitical heat potential has risen considerably as “bad actors” may feel emboldened while US allies may ponder the strength of the US backstop of their interests. This could eventually have profound consequences for capital flows and policies towards multinationals – as US platform companies, for example, are already a hot topic. Stay tuned.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.