The Week in Review: Europe's QE Pushes Long End of U.S. Curve Lower
The Week Ahead
- Treasuries saw a mixed holiday-shortened week as selling took place up front while buyers were in charge in the back.
- Sellers were in control early in the week, but an aggressive bid developed in response to the European Central Bank launching its QE program.
- The ECB announced it will purchase EUR60 bln worth of securities each month until September 2016. However, there has been talk the program will be open ended.
- Money flooded into European sovereign debt in response to the initiative, pushing yields across the region to all-time lows. This caused money to move into the long end of the U.S. curve as traders played rate differentials.
- Recent declines in energy prices caused the Bank of Japan to lower its inflation forecast for the fiscal year to 1% (1.7% previous).
- A quiet week on the data front was mostly limited to housing numbers. Housing starts (1089K actual v. 1040K expected) posted the lone upside surprise while NAHB Housing Market Index (57 actual v. 58 expected), building permits (1032K actual v. 1060K expected), and existing home sales (5.04M actual v. 5.10M expected) missed. Elsewhere, leading indicators (0.5%) matched expectations.
- Up front, the 2Y ticked up +1bp to 50bps. Current levels remain under close watch as the area has served as a key pivot since June.
- In the belly, the 5Y edged up +2bps to 1.324%. Action probed the 1.400% level early Thursday, but pulled back after the ECB announced its QE program.
- The 10Y fell -3bps to 1.817%. The benchmark yield ended the week near 1.800% support.
- Outperformance at the long end pushed the 30Y down -6bps to 2.394%. The yield on the long bond ended the week with its lowest close ever.
- Curve flattening persisted as the 2-10-yr spread tightened to 131.5bps.
- There is no data on Monday.
- Data for the week kicks on Tuesday with durable orders (8:30), Case-Schiller 20-city Index (9), consumer confidence, and new home sales (10). Treasury will auction $26B 2Y notes.
- Wednesday's data is limited to the weekly MBA Mortgage Index (7). The latest FOMC rate decision (14) will be announced. Treasury will hold a $35B 5Y note auction.
- Thursday's data includes initial and continuing claims (8:30) and pending home sales (10). Treasury will auction $29B 7Y notes.
- Friday's data is the most anticipated of the week as GDP-Adv., Employment Cost Index (8:30), Chicago PMI (9:45), and Michigan Sentiment - Final (9:55) are due out.
Dollar Fights for 95.00:
- The Dollar Index flirts with its first close above 95.00 since September 2003.
- EURUSD is -145 pips @ 1.1220 as sellers remain in control following yesterday's announcement quantitative easing will begin in Europe. The single currency pressed to an 11-year low off 1.1115 early in U.S. trade before paring its losses. Greece's parliamentary elections are set for Sunday, providing some headline risk into the weekend as the anti-euro Syriza party is expected to mage large gains. Data scheduled for Monday is limited to German Ifo Business Climate.
- GBPUSD is flat @ 1.5010 as action contends with its lowest close since July 2013. Sterling pressed below the psychologically important 1.5000 level despite the strong retail sales data, but has managed to reclaim the mark as selling exhausted. Britain's BBA Mortgage Approvals will be released on Monday.
- USDCHF is +75 pips @ .8780 as trade fights for its best close since the Swiss National Bank surprise removal of its EURCHF1.20 floor. The past week has seen action bookended by .8400/.8800.
- USDJPY is -75 pips @ 117.75 as trade holds near its worst levels of the day. The pair has tested resistance helped by the 50 dma (118.75) in each of the past four sessions, but remains unable to breakout. The 117.00 area is being watched closely as a break puts key support at 116.00 in focus. The trade balance and latest Bank of Japan minutes are set for release Sunday evening.
- AUDUSD is -105 pips @ .7920 as trade flushes to its worst level in five and a half years. The hard currency has come under pressure in recent days as fears have begun to surface the Reserve Bank of Australia will follow the Bank of Canada in cutting rates. Australian banks are closed Monday in observance of Australia Day.
- USDCAD is +45 pips @ 1.2425, and at a six-year high. Today's bid comes as Canada's core retail sales (+0.7% MoM actual v. +0.5% MoM expected) outpaced estimates and Core CPI (-0.3% MoM) was in-line. The 1.3000 area is setting up as a key level.
Afternoon Update: 2Y +01/32 @ 100 07/32...3Y +02/32 @ 100 00/32...5Y +07/32 @ 101 12/32...7Y +10/32 @ 103 08/32...10Y +15/32 @ 103 26/32...30Y +1 05/32 @ 112 27/32...EURUSD -105 pips @ 1.1260...GBPUSD +10 pips @ 1.5020...USDJPY -65 pips @ 117.85...USDCHF +70 pips @ .8770...AUDUSD -105 pips @ .7920...USDCAD +20 pips @ 1.2400
Treasuries Hold Firm:
- Treasuries are off their best levels of the session, but still hold solid gains.
- A choppy U.S. trade has kept yields in a tight 4bp range following the initial overnight bid.
- This morning's gains have the 30Y -7.6bps @ 2.393% and flirting with its lowest close on record.
- The 10Y is -7.3bps @ 1.823%. The benchmark yield saw an early test of 1.800% support, but the level held.
- Buying in the belly has lagged with the 5Y -4.9bps @ 1.333%.
- A flatter curve persists as the 2-10-yr spread trades 130.5bps.
- Precious metals remain in the red with gold -$11 @ $1290 and silver -$0.09 @ $18.27.
Euro Tumbles on QE:
The Dollar Index
has hit its best level in 11 years on the heels of the ECB QE announcement. The dollar rallied to 95.60 in early trade, marking an incredible 16% rally since the summer of 2014. The DXY has pulled back to the 94.70 area on what is likely some profit taking following the massive rally. Economic data was generally in-line with expectations with a slight miss in existing home sales and in-line leading indicator expectations. The FOMC is set to meet next Wednesday, but it is expected to be a relative non-event.
- The euro tumbled to an 11-year low, hitting 1.1114 before finally seeing some support. The market is debating the ECB announcement, but the scope and scale of the plan has impressed on paper. Adding to that were comments earlier from ECB board member Benoit Coeure that suggested the bank was prepared to expand on its massive program, if necessary. Now the implementation of the plan will be closely monitored. Focus turns to the Greek elections on Sunday with the Syriza party expected to win the largest portion of the Greek Parliament. It will then need to find partners to form a ruling coalition party. The fear is that, if Syriza wins, the party will lead the country to a potential default on current borrowing programs.
- The pound fell below the 1.5000 support level in early trade, hitting an 18-month low (1.4953). Cable has bounced back above the 1.5000 level on the heels of better than expected retail sales numbers.
- The yen fell to 118.81 in overnight trade, but has recovered most of its losses as it moves back into the 117.00 area. The strength in the yen is interesting as risk assets are being bid for the most part. A preliminary look at the country's Manufacturing PMI number came in slightly better than the December figure.
- Treasuries are seeing little reaction to the mostly in-line existing home sales (5.04M actual v. 5.10M expected) and leading indicators (0.5% actual v. 0.5% expected) data.
- Maturities have been slipping off their best levels of the day over the course of the morning, but remain firmly entrenched in positive territory.
- Early strength is having the biggest impact on the long end as the 30Y holds -6.7bps @ 2.402%. The record low near 2.350% remains in focus.
- The 10Y is -6.1bps @ 1.835%. The benchmark yield continues to test key support in the 1.750%/1.800% region.
- Curve flattening continues as the 2-10-yr spread trades 132.5bps.
- Precious metals remain in the red with gold -$6 @ $1295 and silver -$0.03 @ $18.33.
- Yields are sharply lower across Europe as money pours in following yesterday's implementation of quantitative easing by the European Central Bank.
- Today's bid has yields across the region at record lows.
- Eurozone Flash Manufacturing (51.0 actual v. 51.0 expected, 50.6 previous) and Services (52.3 actual v. 52.1 expected, 51.6 previous) both showed improvement over the prior month.
- German Bunds sport strong gains. The mixed Flash Manufacturing (51.0 actual v. 51.8 expected, 51.2 previous) and Services (52.7 actual v. 52.6 expected, 52.1 previous) PMI data has had little impact as the launch of the ECB's QE program remains the bigger story. A -8bp drop has the 10Y @ 36bps, an all-time low.
- UK Gilts are bid despite the strong retail sales (+0.4% MoM actual v. -0.6% MoM expected) data. The 10Y is off -5bps @ 1.475% and flirting with a record low.
- French OATs have managed to shrug off the contractionary Flash Manufacturing (49.5 actual v. 48.1 expected, 47.5 previous) and Services (49.5 actual v. 50.9 expected, 50.6 previous) PMI readings. The 10Y is lower by -8bps @ 53.5bps.
- Italian BTPs gain along with the rest of the region's sovereign debt. The 10Y hit an all-time low of 1.385% early, but is now -8bps @ 1.465%.
- Spanish Bonos hold onto solid gains. The benchmark 10Y pressed to a record low 1.240% overnight, and is now -9bps @ 1.320%.
- Greek Government Bonds are strong ahead of Sunday's election that is expected to see the anti-euro Syriza party make strong gains. A -90bp drop has the 3Y down to 9.80%.
Euro Cracks 1.1200:
- The Dollar Index threatens the 95.00 level for the first time in more than 11 years.
- EURUSD is -200 pips @ 1.1165 as trade presses to its worst levels since September 2003. The single currency has come under pressure following yesterday's QE announcement, but also coming into play are mixed Manufacturing and Services PMI data from the region and Sunday's Greek election. Most of today's PMI data was close to estimates with the notable takeaway being the weakness in France as both Manufacturing (49.5 actual v. 48.1 expected, 47.5 previous) and Services (49.5 actual v. 50.9 expected, 50.6 previous) PMI readings printed contractionary numbers. Meanwhile, Greece will be in focus on Sunday as the anti-euro Syriza party is set to win the election.
- GBPUSD is -45 pips @ 1.4965 as action drops to levels last seen in July 2013 despite the retail sales (+0.4% MoM actual v. -0.6% MoM expected) surprise. The 1.4800 area is under close watch as a breakdown puts sterling at levels last seen in the middle of 2010.
- USDCHF is +65 pips @ .8765 as buyers look to put in a second day of gains. The upper bound of the .8400/.8800 range that has been in place the past week is now in focus.
- USDJPY is -65 pips @ 117.85 as trade continues to struggle at the 50 dma (118.75). The pair has tested the level for four straight sessions, but has been unable to breakout. A breakdown of 117.00 puts the key 116.00 area in the crosshairs.
- AUDUSD is -65 pips @ .7960 as action flushes to a fresh five-year low. Today's selling in the hard currency comes despite China's HSBC Flash Manufacturing PMI (49.8 actual v. 49.5 expected, 49.6 previous) outpacing estimates. USDCNY jumped 0.3% to 6.2275.
- USDCAD is +35 pips @ 1.2415 as trade climbs to a six-year high. The pair will be in focus this morning as Canada's retail sales and CPI data are scheduled to cross the wires.
Rate Differentials Propel Treasuries:
- Treasuries are sharply higher as money pours into the complex following yesterday's QE announcement by the European Central Bank.
- Maturities saw some light selling yesterday, but money is flowing back into U.S. Treasuries thanks to the favorable rate differentials that have occurred as a result of the strong gains in European sovereign debt.
- Yields across the eurozone are at fresh all-time lows.
- Up front, the 2Y is -1.5bps @ 50bps. This area remains under close watch as it has served as a key pivot since June.
- In the belly, the 5Y is -6bps @ 1.322%. Action has pulled back nearly 10bps off yesterday's high (1.410%).
- The 10Y trades -8bps @ 1.816%. The benchmark yield is testing key support in the 1.750%/1.800% area.
- Aggressive buying at the long end has the 30Y -8.7bps @ 2.382%. The yield on the long bond holds just a couple bps above its all-time low (2.351%).
- A flatter curve is in play as the 2-10-yr spread trades 131.5bps.
- Precious metals are weaker with gold -$6 @ $1295 and silver -$0.11 @ $18.25.
- Data: Existing home sales and leading indicators (10).
Yields Firm Amid Volatile Trade:
- Treasuries lost ground amid a volatile trade.
- The complex pressed to session lows ahead of this morning's Mario Draghi press conference before surging back into positive territory as Europe's QE program was announced.
- European QE will consist of purchases totaling EUR60 bln per month through September 2016 and will not discriminate against bonds with a negative yield.
- The volatile session produced a range of 15bps in yields at the long end of the curve.
- Up front, the 2Y added +2bps to 51.5bps. This area remains under close watch as it has been viewed as a key pivot since June.
- In the belly, the 5Y rallied +4.6bps to 1.382%. Resistance in the 1.450%/1.500% region remains in focus.
- The 10Y climbed +4.3bps to 1.896%. The benchmark yield probed 1.950% ahead of the ECB announcement before tumbling to a low of 1.812%.
- Selling at the long end caused the 30Y to edge up +2.9bps to 2.469%. The yield finished today's session at a one-week high.
- A steeper curve won out as the 2-10-yr spread widened to 138bps.
- Precious metals went off near their best levels of the day as gold added +$11 to $1305 and silver climbed +$0.27 to $18.47.
- Data: Existing home sales and leading indicators (10).
Dollar Crosses 94.00:
- The Dollar Index trades above 94.00 for the first time September 2003.
- EURUSD is -230 pips @ 1.1380 as trade presses to a fresh 11-year low following Mario Draghi's introduction of European QE. Today's announcement outlined a EUR60 bln per month of purchases in various securities, 33% of which will be sovereign debt, lasting until September 2016. Mr. Draghi noted the program will not discriminate against bonds with a negative yield. The 1.1000 area is setting up as the next key level. Eurozone data is heavy as Flash Manufacturing and PMI data from across the region is released.
- GBPUSD is -120 pips @ 1.5020 as action slides to an 18-month low. Sterling managed cross 1.5200 early despite the disappointing public sector net borrowing and CBI Industrial Order Expectations numbers, but pushed through key 1.5100 support as traders digested today's ECB action. Britain's retail sales will cross the wires tomorrow.
- USDCHF is +130 pips @ .8720 as buyers take control for the first time in three days. The .8400/.8800 range has been in place for the past week and will be monitored closely.
- USDJPY is +25 pips @ 118.20. Early selling following the ECB announcement pressed the pair onto support in the 117.25 area, but buyers once again stepped up in defense of the level. The bulls will look for another test of the 50 dma (118.71), which served as a headwind during the previous two sessions.
- AUDUSD is -20 pips @ .8060 as action flirts with its lowest close since July 2009. Recent selling has come amid speculation the Reserve Bank of Australia could join the Bank of Canada in announcing a surprise rate cut. Chinese data out tonight is limited to HSBC Flash Manufacturing PMI.
- USDCAD is +55 pips @ 1.2395 as trade climbs to a new six-year high. The late 2008/early 2009 highs near 1.3000 are setting up as an important level. Canada's CPI and retail sales data is due out tomorrow.