Note improved sentiment in Asian trades, but not convincing

Markets

The fallout from yesterday’s risky session was core bond yields and the euro. The former fell from 3 (30 years) to 7.8 (2 years) basis points in the United States. Bunds outperformed sharply, losing more than 14 basis points in the middle segment of the curve.

There was, however, a striking difference: the decline in the US was driven by inflation expectations while real yields were at work in Europe/Germany. This hammered the common currency against an almighty dollar.

EUR/USD fell nearly 2 big digits during the day. The close at 1.038 is awfully close to the 2017 low of 1.0341. DXY finally broke through the 104 barrier (104.85). It has thus already exceeded the highest parallel of 2017 to finish at highest level in nearly two decades.

The Japanese yen was the only one able to resist the supremacy of the dollar. USD/JPY retreated to 128.34. Against the Euro, well… EUR/JPY lost a big 3.5 digits in the biggest one-day decline since 2016. The pair closed at 133.22.

Even the British pound made gains against the euro. EUR/GBP rose above 0.86 after slightly weaker than expected UK Q1 GDP figures, but that move quickly reversed. The pair finished in the 0.85 low zone.

Elsewhere, European equities narrowed their losses to just 1% while the WS ended mixed. Oil prices recovered from initial weakness to end flat (Brent $107.45/bbl). Wheat likes soared 6% on a surge in US trades. Equities in the Asian region are healing their wounds after a few difficult days. Gains go up to 2% (Japan, Hong Kong) and more. Equity futures point to a 1% open in the green for Europe and the US. Core bonds are taking a break after a huge surge. US yields add 2.4 to 3.3 basis points. The Japanese Yen is the biggest loser this morning, followed by the USD. U consumer confidence. from michigan for April is expected in the United States today. A pullback from 65.2 to 64 is expected. Ongoing inflation concerns are keeping confidence near levels last seen in 2011. General sentiment, however, will remain the main driver of the markets.

We note the improvement in sentiment on Asian trades, but this is unconvincing. The rises in stocks lately are more of an opportunity to sell than the start of a rally. We also advise against reading too much of the <4 basis point rise in US yields this morning. This week has brought uncertainty over growth to the fore and it can prove to be a sticky business theme.

It is too early to undo the consolidation/correction in core bond yields. As it stands, the weekly US 10-year yield will end in a bearish engulfment. EUR/USD remains in dire straits. A weekly close below 1.04 creates problems and paves the way for a return to 1.0341. The technical stars for DXY are aligned for a return to 109.14 (76.4% recovery of the 2001-2008 decline) after breaking through 104 yesterday.

News headlines

As expected, the Bank of Mexico yesterday raised its key rate from 6.50% to 7.0%. The Bank maintained a hawkish tone, indicating more aggressive measures to achieve the inflation target. One of the five board members has already voted to raise the policy rate by 75 basis points. Core and headline inflation in Mexico in April reached 7.22% and 7.68% respectively, with headline inflation has reached its highest level since 2001. In its inflation forecast, the Bank has raised the path of core and headline inflation through 2022 and 2023, but still expects (core) inflation to return to target by 3.0% in 2024. The next meeting of the Bank of Mexico is scheduled for June 23. In an initial reaction, the peso’s gains were modest. This morning, the peso gained modestly to trade around 20.20 USD/MXN. Inflation in India in April accelerated faster than expected, rising from 6.95% to 7.79 Y/Y%. Price increases in April were widespread. Fuel and lighting costs increased by 3.11% M/M and 10.80% Y/Y. Food prices, which make up about half of the basket, jumped 1.56% M/M and 8.38% Y/Y. The Indian rupee trading at historic lows (against the dollar) is adding to inflationary pressures. The Reserve Bank of India raised its key rate by 4.0% to 4.40 at an unscheduled meeting on May 4. The RBI has also recently intervened in the currency market in an attempt to slow the decline of the rupee. The next RBI policy meeting is scheduled for June 8. The RBI’s upper tolerance band for inflation is 6.0%. Trading at 77.40 USD/INR, the Rupee is still holding at historic lows.

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