Bond markets recover

Financial markets in general and the forex market in particular have been nervous since the Monday’s warning from the S&P agency. Even though a moderate optimism prevailed on Wall Street, the EURUSD couldn’t really take off, despite defending the support.

One could say this shows a skepticism ahead of another EU summit once again if not for what is going on the bond market in Europe. Bond prices have been rising across the board even though the ECB reduced a scale of purchases waiting for a signal from politicians. Since late November 10y yields in Spain and Belgium (a country that narrowly avoided being targeted by the market) fell by as much as 150 bps. Italian 10y yields fell from far above 7% to less than 6% on Monday and ca. 6,30% yesterday. Finally yields of countries like France and Austria declined as well which is a substantial relief – doubts about a credibility of the core of the euro zone posed a systemic risk for the whole euro project.

This rally is yet to be felt on the EURUSD. The pair is surely under interest rate spread pressure as the US data proved to be better than expected and the ECB is heading for the second cut within 2 months. However, after the cut is implemented and should the EU summit confirm a willingness to implement structural changes to the euro zone, the pair may advance in a short term on increased risk appetite. Technically, we might see it aiming for an upper limit of the corrective channel – currently at 1,36.

EURCHF – deflation may push the SNB to act again

The business surveys released last week (KOF and the PMI) confirmed that the economy of Switzerland faces a rough ride. Now the consumer price data pointed at a deflation progressing faster than the markets anticipated. The economy is taking hits from both the slowdown in Europe and the strong currency and that might convince the SNB that more needs to be done to minimize chances of a deflationary recession. Regardless if the bank lifts the intervention target rate (say to 1,25) or implements negative interest rates (such suggestions appeared in the Swiss press last week) the target remains the same – weaker frank. The EURCHF advanced somewhat on those macroeconomic reports but still remains lower than the Bank would like to see it.

Przemysław Kwiecień PhD, Chief Economist

Investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. None of the published information can be treated as a recommendation, disposition, promise, or guarantee that the investor will achieve a profit or will minimize risk using the information published on this website. Transactions including investment instruments, especially derivatives using leverage, are in its nature speculative and can provide both profits and losses that can exceed the initial deposit engaged by the investor. more