Good Morning London (office_based);
Safe haven flows reversed to a degree through the N.Y. session on Tuesday, following the initial risk-off reaction to the Brussels terror attacks. Treasury yields steadied, as Wall Street did not stray far from flat through the session. The dollar was steady overall versus the euro, while USD-JPY picked up ground on improving risk levels. Cable remained under pressure amid softer U.K. CPI and ongoing Brexit risk. USD-CAD traded slightly heavier, as oil prices largely maintained the $41 handle.
EUR-USD was mired inside a 1.1201 to 1.1238 range through the U.S. session, with little apparent interest to sell the pairing, despite the attacks in Brussels. Decent European data this morning likely mitigated euro losses, though bigger picture, with divergent ECB and Fed policy paths, along with a generally faltering EU growth outlook, we continue to target EUR-USD at the 1.1000 level in the coming session.
USD-JPY rallied to 112.44 highs, up from 111.55 lows earlier in the session. The easing of risk-off conditions allowed the pairing to rally, as U.S. stocks recovered, and as for the most part, markets become more and more immune to terror threats. There is nothing on the Japanese calendar overnight, though yen players will look ahead to Japan CPI on Thursday.
Sterling losses continued, as cable logged a six-day low at 1.4190 and has more than unwound gains seen last Thursday after the BoE MPC policy announcement, where the minutes surprised some by retaining the “more likely than not” to hike language. While UK inflation data today undershot expectations a tad, with CPI coming in at unchanged in February at +0.3% y/y, the pound’s slide today is all about Brexit risk. The bombings in Brussels is apparently leading to the deduction that this will increase support for leaving the EU ahead of the June referendum. And this comes on the day that Moody’s warned that the economic costs of Brexit would “outweigh the potential benefits,” arguing that it would be “highly unlikely” the UK’s prevailing trade deal with the EU will be “replicated in full.”
The franc posted a fresh high against the euro as the Brussels drama unfolded, with EUR-CHF falling to three-week lows of 1.0875. As safe haven flows later abated, the cross edged back over 1.0910. The Swiss currency had already been underpinned the wake of the SNB announcement of unchanged policy last Thursday, which left the sight deposit and mid-point Libor target rates at -0.75%. The SNB stressed once again that the currency remains overvalued, and that it will “remain active in the foreign exchange market”. Inflation and growth projections were cut and the implicit easing bias seems to remain in place, although the statement didn’t explicitly state the possibility of further easing, while the inflation outlook seems to assume that there are no second round effects from the prevailing negative CPI rates.
USD-CAD rallied to four-session highs of 1.3138 from near 1.3100 in the aftermath of the Brussels attacks, before making its way back into 1.3060 into the North American open. The pairing had steadied in a 1.3060-80 band, though when oil prices briefly fell under $41/bbl, USD-CAD headed back over 1.3100. The CAD remains joined at the hip with oil prices overall, and a later rally in WTI crude saw the pairing headd back under 1.3050.