The Chinese Yuan continues to trade in the defensive

Markets

EUR/USD was among the worst cross rate performers yesterday. The currency pair dropped as low as 1.046, down from 1.058 at the open. French politics beat the common currency down after PM Barnier forced through part 1 of the budget using article 49.3 through which he circumvented parliament. Both the left and the right bloc in the opposition were against. Shortly after Barnier’s risky move, the far-left party La France Insoumise tabled a motion of no confidence. The far-right (Rassemblement National) said they would support it this time around in frustration of Barnier not incorporating enough of its demands in the bill. A vote and therefore the fall of the government could come as soon as Wednesday. Apart from the euro, French assets suffered. Equities (CAC40) clearly underperformed. OAT spreads vs Bund and swap rose to new 12-year highs. The dollar kept a strong bid overall. A slightly better-thanexpected November US manufacturing ISM ahead of more important data later this week triggered little volatility. Influential Fed Waller saying he’s leaning towards a rate cut in December did cause some late-night USD weakness but barely enough for EUR/USD to close the day at 1.05 instead of below. Waller’s comments also capped the Treasury yield rebound to 0.1-3.8 bps. The front-end underperformed even as such a 25 bps rate is still not fully discounted. Rates in Europe dropped around 5-6 bps across the curve, both in Germany and in swap. Euro weakness filtered through in EUR/GBP too, dropping to an intraday low of 0.827 but closing around 0.83. JPY eked out small gains against the dollar (< USD/JPY 150) while showing a stronger performance against the rest of G10 peers. It’s backtracking a bit on those gains this morning. The Chinese yuan continues to trade in the defensive. USD/CNY jumped to the highest level since November last year, just below 7.3. Usual suspects for CNY weakness include ongoing economic worries, sliding Chinese yields & the US tariff threat. Next week’s annual Central Economic Work Conference is the next high-profile meeting to watch for clues on next year’s growth target and stimulus plans. Today is an in-between in terms of economic data. On the FX side we remain cautious on the euro in a daily and short-term perspective. Geopolitics, national politics, the economy or monetary policy, neither is looking good for the common currency for now. EUR/USD 1.0335 (November low) is the key reference. European yields have dropped sharply but we wouldn’t row against the tide. Germany’s 10-yr is closing in on 2%. We do look out for US yields at the long end of the curve to show signs of bottoming out after the recent correction on the Trump-trade.

News and views

Inflation in South Korea printed lower than expected. Both the headline and core inflation stayed below the 2.0% target of the Bank of Korea. Headline inflation declined -0.3% M/M, but unfavorable base effects caused the Y/Y figure to rise from 1.3% to 1.5%. Markets expected a 1.7% Y/Y rise. Core inflation (ex. food and energy prices) rose marginally from 1.8% to 1.9%. The Bank of Korea last week unexpectedly cut its policy rate by 25 bps for the second consecutive meeting, bringing the policy rate to 3.0%. The BoK further prioritized growth in its policy assessment as inflation shows further signs for easing. Uncertainty on the impact of trade protectionism for the economy probably was a factor behind the unexpected rate cut alongside risks to domestic demand from consumers being hampered by a high debt load. Today’s lower than expected inflation keeps the door open of addition easing in Q1 next year. The won recently also suffered from a strong dollar and at USD/KRW 1403 is holding the YTD low within reach.

October UK retail sales showed a disappointing performance in November according the BRC sales monitor for November. Sales declined 3.3% compared to the same month last year (same store sales -3.4% Y/Y). Total sales were up 0.6%Y/Y in October. The November reading was the weakest since April of this year. Food sales were up 2.4% Y/Y but non-food sales declined 2.1% Y/Y in the three months to November. Interpretation of the data is complicated as Back Friday sales this year were not included in the November figure but will be part of the December publication. Still the data suggest a poor sales dynamics. Higher energy prices due to lifting the cap in energy bills and low consumer confidence are as mentioned as potential explanation for the poor performance of non-food sales.

Download The Full Sunrise Market Commentary