Bund Yields Provide EUR Support

  • Picking EUR tops a painful exercise
  • German bund yields on the cusp of pushing higher
  • Sterling walks alone, not fussed by fundamentals
  • Crude surges to six-month highs

Currently, there are a lot of moving parts in capital markets that are keeping investors on their toes. If it’s not exploding sovereign bond yields or new yearly high crude prices, then it’s the dollar that’s causing dealers and investors most of the pain. Speculators are trying to pick tops and bottoms pre-nonfarm payrolls (NFP), but most of their newly minted positions have become quickly overstretched, compounding some of the market price moves.

The EUR (€1.1270) is being led by moves in longer dated bonds. The German bund continues to selloff rapidly. The 10-year yield is currently at +0.58% — the highest since before the European Central Bank (ECB) announced its intention to launch a quantitative easing (QE) program last January. Two weeks ago, German 10s hit an all-time low of +0.05%, spurring predictions of zero or even negative yields on Europe’s benchmark bond. The market call for the “greatest short of a lifetime” ignited the spike in bond yields, and a massive bear steepening of the German curve.

No Relief in Spreads

The backup in bunds has caused the 10-year U.S.-bund spread to tighten -19 basis points to +165 basis points over the past week. Currently, the market is technically straddling its March low print. A momentum breakthrough of +160 basis points should spur more EUR/USD buying, exposing the vulnerable short EUR positions in front of the psychological €1.1300 print. The EUR bear will be hoping that German 10s yielding +0.58% will hold, otherwise much more significant losses can be expected to the +0.70% region or even +0.81% on cash.

This morning’s European data is also providing the single unit some support. Major European services purchasing managers’ indexes are improving (54.1 — Spain, Italy, France and eurozone all beat expectations and remain in growth territory; while Germany missed but stays in growth territory). The region seems to be finally emerging from its long period of near stagnation, aided by lower oil prices, a weakening EUR and strengthened confidence following the ECB launch of its QE program in March.

US Fundamentals Produce Mixed Results

The U.S. Treasury bond selloff really reignited yesterday despite disappointing U.S. trade data. The headline print was distorted by the west coast ports strike. The trade deficit rose +43%, year-over-year, to +$51.5 billion in March (a six-month high), reflecting a surge of imports that followed the settlement of the port dispute. Exports edged up +0.9% to $187.8 billion, but imports leaped by a record +7.7% to $239.2 billion. Nevertheless, the dollar has taken the bulk of the pain, trading under pressure against Group of Seven currencies, as the trade numbers were viewed as being less favorable than those used to calculate advance U.S. first-quarter gross domestic product (GDP). The market now expects first-quarter GDP to be revised down, even a potential drop into negative territory. This is allowing the market to bet on a Federal Reserve going lower for longer with its interest rates, which is undercutting the long USD trade.

The Institute for Supply Management’s service reading (57.8) was unmistakably positive, with strong showings in the new orders and employment components. Maybe this morning’s U.S. ADP nonfarm employment change (+199,000 expected) will give the dollar a lift? If not, Friday’s highly anticipated NFP report is sure to cause some movement one way or another. A strong report (+223,000 and +5.4% unemployment) will satisfy dollar bulls and have fixed-income traders re-pricing the Fed’s first rate hike. A similar print to last month’s disappointing jobs data (+126,000 and +5.5% unemployment) and the dollar naysayers will have control.

UK Economy: ‘Eggs All in One Basket’

U.K. Prime Minister David Cameron is getting very few breaks. Just one day ahead of the U.K.’s general election, the Conservatives continue to champion economic growth as a key achievement of their government. Data this morning confirms that the story of the U.K. recovery continues to be limited to services (80% of the economy). Today’s services PMI print (59.5) recorded an eight-month high in activity, soundly beating manufacturing and construction. April’s GDP figures suggested that the U.K. economy continues to remain over reliant on services sector for economic growth.

Even before today’s PMI print, the pound (£1.5180) struggled to attract friends ahead of tomorrow’s opening polls. Sterling’s price action this morning is putting support at £1.5120 at risk that guards Tuesday’s bear trap low at £1.5091. The GBP bears believe that a breach of this week’s low will open the doors to a new downside risk to £1.4840 very quickly. On the EUR/GBP cross a new 10-week high has been already been achieved 0.7416.

Commodity Currencies Supported by Crude

The Aussie, Canadian loonie, and Norwegian krone continue to be supported by the recent surge in crude prices. West Texas Intermediate crude is up nearly +$2.50 since yesterday, and trades north of $60 per barrel (+$61.81), while Brent is trading firmly above $68 — prices last seen in December. The black stuff is being supported by reports of Yemen rebel activity, and Organization of Petroleum Exporting Countries (OPEC) officials stating that improved pricing over recent months means the cartel will most likely maintain its production quotas at the June 5 OPEC meeting. A weaker USD is again a problem, and the market does not seem too surprised to see further upside from here. Obviously, that will depend on yields and how this week’s U.S. job reports will shape the dollar’s next move.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell