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The European currencies (CHF, GBP, EUR) battled for supremacy during the morning London session, with the Swissy ultimately coming out on top, even though there were signs that risk aversion was easing.

The yen, meanwhile, was the biggest loser of the session, likely because of the rise in bond yields. However, fading risk aversion also likely had a role to play since the Greenback was also reeling in pain and was the second biggest loser of the session.

But then again, the Greenback’s weakness appears to be a reaction to Chinese Foreign Ministry Spokesperson Geng Shuang’s threat that China will retaliate if the U.S. imposes fresh tariffs on Chinese goods.

  • Italian trade balance: €5.68B vs. €4.82B expected, €5.17B previous
  • Euro Zone final HICP y/y: no change from 2.0% as expected
  • Euro Zone final core HICP y/y: no change from 1.0% as expected

Major Events/Reports:

Trade war (of words)

Chinese Foreign Ministry Spokesperson Geng Shuang gave a presser earlier. And he was asked about the validity of a Wall Street Journal report that claimed that China may pull out of trade talks if the U.S. decides to go ahead and impose additional tariffs on Chinese goods.

And, well, Geng Shuang didn’t really answer the question but he did warn that China will retaliate if the U.S. does impose fresh tariffs on Chinese goods when he said that (emphasis mine):

“On the economic and trade issues between China and the United States, my colleagues in the Ministry of Commerce and myself have responded many times last week. I would like to emphasize two points.”

“First, if the US introduces any new tariff measures to China, China will have to take necessary counter-measures and resolutely safeguard our legitimate rights and interests.”

“Second, the escalation of trade disputes does not meet the interests of either party. We have always maintained that dialogue and consultation on the basis of equality, integrity and mutual respect are the correct way to resolve Sino-US economic and trade issues.”

For his part, U.S. President Trump tweeted the following some time after Geng Shuang’s presser.

Brexit-related rumor

Earlier today, The Times newspaper claimed in a report that it had seen a diplomatic note from the E.U.

And according to this diplomatic note, E.U. Brexit Negotiator Michel Barnier and his team want to use “technological solutions to minimise customs checks between Northern Ireland and the Irish Republic,” as well as “trusted trader schemes” in order to settle the Irish border issue.

However, the diplomatic note also supposedly said that “In these talks the UK is not at all helpful,” adding that “They are now working on a new version of the protocol themselves in which for the most part the words ‘Northern Ireland’ would not be mentioned.”

Bundesbank report

The Bundesbank (Germany’s central bank) released its monthly report about halfway through the session. And it noted that the German economy didn’t do too well recently, mainly because of weaker vehicle production.

However, the report also noted that (translated from German):

“As soon as the conversion problems in the automotive industry have been solved, the pace of macroeconomic expansion should pick up again significantly.”

Italy-related news

According to a report from Corriere Della Sera, Italian Economy Minister Giovanni Tria would meet later today with Prime Minister Giuseppe Conte and Deputy Prime Ministers Matteo Salvini and Luigi Di Maio.

And the topic of their meeting will supposedly be the budget. More importantly, the report claimed that Tria is supposedly determined to keep Italy’s 2019 budget deficit within 1.6% of GDP, thereby following the E.U.’s budget rules and reducing the risk of roiling financial markets, contrary to the coalition government’s plans to increase spending.

Investors apparently welcomed this news since demand for Italian bonds ramped up, market analysts say.

Easing risk aversion in Europe

The major European equity indices opened the new trading week on a weak footing. However, most of them eventually regained their footing and began to retrace their steps. Some were even already in positive territory by the end of the session, which heavily implies that risk aversion prevailed but is beginning to fade.

Market analysts attributed the risk-off vibes to risk sentiment spillover from the earlier Asian session, namely the WSJ article over the weekend about Trump’s to announce additional tariffs on Chinese goods by today.

As to why risk aversion appeared to ease as the session progressed, market analysts attributed that to positive results and strong demand for defensive stocks such as utilities and telecoms.

However, it’s also likely that the report from Corriere Della Sera that I mentioned earlier also helped to improve sentiment since the financial sector made an impressive recovery, thanks largely to strong demand for Italian banks.

  • The pan-European FTSEurofirst 300 was already up by 0.04% to 1,478.47 after hitting an intraday low at 1,473.52
  • Germany’s DAX was still down by 0.27% to 12,091.10 but is off the day’s low at 12,049.91
  • The blue-chip Euro Stoxx 50 was still down by 0.06% to 3,345.05 but is off the day’s low at 3,332.85

Global bond yields rise

Another sign that risk aversion may be fading is the broad-based rise in global bond yields. In fact, the only one in the red among the major Euro Zone economies is Italy, thanks to that report from Corriere Della Sera that I mentioned earlier.

  • German 10-year bond yield up by 4.00% to 0.468%
  • French 10-year bond yield up by 1.83% to 0.781%
  • Italian 10-year bond yield down by 3.32% to 2.885
  • U.K. 10-year bond yield up by 1.27% to 1.487%
  • U.S. 10-year bond yield up by 1.05% to 1.547%
  • Canadian 10-year bond yield up by 0.72% to 2.362%

Major Market Mover(s):

CHF

The Swissy managed to score small wins against the euro and the pound and was therefore the best-performing currency of the morning London session.

It’s not really clear why the Swissy was in strong demand, though, since there were signs that risk aversion was fading in Europe. However, it’s also possible that lingering trade-war jitters may have spurred safe-haven demand for the Swissy.

USD/CHF was down by 37 pips (-0.38%) to 0.9632, EUR/CHF was down by 8 pips (-0.07%) to 1.1237, CAD/CHF was down by 20 pips (-0.27%) to 0.7396

GBP

The pound edged out a win against the euro to claim second place. And market analysts were pointing to a report from The Times about Barnier’s efforts to resolve the Irish border issue, even though the report also noted that the U.K. is playing hard ball.

GBP/USD was up by 42 pips (+0.32%) to 1.3120, GBP/JPY was up by 52 pips (+0.36%) to 147.02, GBP/CAD was up by 36 pips (+0.21%) to 1.7089

EUR

The euro got a bullish boost when that report from Corriere Della Sera was released and then got another bullish boost when the Bundesbank report was report.

However, demand for the pound and the Swissy were apparently stronger since the euro only finished in third place.

EUR/USD was up by 35 pips (+0.31%) to 1.1664, EUR/JPY was up by 44 pips (+0.34%) to 130.68, EUR/CAD was up by 30 pips (+0.20%) to 1.5190

JPY

The yen was the biggest loser of the morning London session, very likely because of fading risk aversion and higher global bond yields.

USD/JPY was up by 4 pips (+0.04%) to 112.03, CHF/JPY was up by 46 pips (+0.40%) to 116.29, CAD/JPY was up by 12 pips (+0.14%) to 86.02

Watch Out For:

  • 12:30 pm GMT: Foreign security purchases in Canada ($4.35B expected vs. $11.55B previous)
  • 12:30 pm GMT: U.S. Empire State manufacturing index (23.2 expected vs. 25.6 previous)
  • 1:00 pm GMT: ECB Executive Board Member Yves Mersch is scheduled to speak
  • 1:30 pm GMT: CB’s U.K. leading index (-0.2% previous)
  • 2:30 pm GMT: CB’s Australian leading index (0.2% previous)