Well, it’s Monday. Welcome to Q2.
Things were relatively subdued in the overnight session, as the dollar (which, recent strength notwithstanding, had a terrible Q1) traded within tight ranges while the euro tried its best to snap the four-day decline that followed dovish comments from the ECB (remember last Wednesday’s stealth bailout of the dollar?)
“ECB Executive Board member Peter Praet told Expansion in an interview that policy makers are not yet ready to signal any change in monetary policy stance, joining a chorus of officials that have looked to taper market perceptions of an imminent exit of the central bank’s stimulus mix,” Bloomberg recounts, adding that “fellow board member Benoit Coeure noted that current rates are of no risk to the functioning of the bond market while they have also been very effective in terms of monetary policy, adding further concern for euro bulls.” One-month 25d risk reversals gapped lower and traded at 124bps in favor of EUR puts, compared to 113bps Friday – that’s the most bearish sentiment in the pair since December.
So it’s all about policy divergence again, a reversal of the two-week-ish shift towards policy convergence that dented dollar sentiment. Here’s some early morning color from SocGen:
After a week when Fed Governors talked rate expectations back up in response to the dovish interpretation of the March FOMC statement and press conference, New York President Bill Dudley applied a dovish veneer going into the weekend. He sees no rush to hike and two more moves this year seem reasonable to him. That leaves 10year Note yields at 2.4%, 10-year breakeven inflation a whisker below the Fed’s inflation target of 2%, and real yields at 41bp. Q1 saw real yields in a 30-60bp range, nominals in a 2.31-2.63% range and we need to revisit the top end of that for the dollar rally to get going again. The suspicion is that the Fed, as well as the US Administration, sees no need to engineer much higher longer-dated yields, let alone a stronger dollar. This is ambrosia for risk assets. G10FX is quiet and money is still seeking yield in more interesting markets.
ECB Council Members, by contrast, are sending dovish signals to counter the hawkish interpretation of the last Council Meeting Press Conference. Peter Praet’s on the wires this morning stressing that the ECBN isn’t ready to signal any change of policy stance. A week of that kind of comment has taken EUR/USD back from its 1.09 high a week ago close to the average level of 2017 so far at 1.0654. CFTC data show the net speculative EUR short on the UIMM is just 7900 contracts, the smallest short since May 2014.
The 10year yield differential between the US and Germany, at 208bp is at the year-to-date average too. Any EUIR/USD move requires bonds to lead, or French politics to interfere. Then relative winner in recent French polls is Jean-Luc Melenchon, but at 15% he’s not close enough to the front-runners. Macron and le Pen are on 25% and 24% respectively. If he’s a race horse, he’s a rank outsider working his way through the field, but still needs someone else to fall over to have a realistic chance of making the top two. Oddschecker.com impute his chances at just under 3%, compared to 64% for Macron and 24% for Le Pen.
Speaking of French politics…
- LE PEN 1ST-ROUND SUPPORT UP 1 POINT TO 25%: OPINIONWAY POLL
That hit just before 6 EST, and unless there’s something I’m missing, it looks to have hit EURUSD a bit. Whatever. Who knows.
Anyway, we also got econ data out of the eurozone. Here are the prints you should probably care about:
- Germany March Manufacturing PMI 58.3 vs Flash Reading 58.3
- Eurozone Feb. Unemployment Rate 9.5%; Est. 9.5% (believe it or not, that’s the lowest in something like eight years)
- Eurozone March Manufacturing PMI 56.2 vs Flash Reading 56.2
As noted above, the dollar looks steady as she goes to start the week, while 10Y yields seem inclined to fall, bad news for whatever’s left of the 10Y short, which isn’t much after a third straight week of aggressive short covering as detailed here on Saturday.
Asian stocks were higher on Monday despite Trump threatening to invade/nuke/bitch slap North Korea in a weekend interview with FT. European shares are mixed.
- Topix up 0.3% to 1,517.03
- Hang Seng Index up 0.6% to 24,261.48
- Shanghai Composite up 0.4% to 3,222.51
- Sensex up 0.9% to 29,873.24
- Australia S&P/ASX 200 up 0.1% to 5,872.68
- Kospi up 0.3% to 2,167.51
- FTSE 7322.54 -0.38 -0.01%
- DAX 12361.58 48.71 0.40%
- CAC 5120.64 -1.87 -0.04%
- IBEX 35 10428.60 -34.30 -0.33%
Oil’s back above $50 and gold’s trying to hang onto gains after three straight weeks in the… err… green.