Germany’s 10-year bond yield dips to two-month low

The euro surged to its highest level since January 2015 against the United States dollar early on Monday (Aug 28), after European Central Bank president Mario Draghi failed to talk down the single currency’s strength as had been expected.

US Federal Reserve Chairwoman Janet Yellen defended Friday regulations put in place after the 2008 financial crisis even as President Donald Trump has questioned the measures.

USA gasoline futures hit a two-year high on Monday as Hurricane Harvey struck at the heart of the US energy industry, while the euro rose to a 2-1/2-year peak after the European Central Bank President refrained from talking down the single currency, Reuters reported.

There had been some speculation that Draghi could use the opportunity to tame a strong euro, which hurts exporters and helps dampen inflation by keeping down the price of imported goods.

Investors were not expecting Yellen to make a policy statement anyway, but some market participants were hoping for some signal at least on the Fed’s planned balance sheet reduction, if not on the outlook for USA interest rate hikes.

The euro rose to as high as $1.19665 early on Monday and was last up 0.1 percent at $1.1927, extending Friday’s 1 percent jump.

But lower bond yields gave Wall Street a slight boost, with the Dow and the S&P 500 both ending about 0.15 percent higher on Friday, although the Nasdaq closed about 0.1 percent lower. Other euro zone bond yields were also down around 1-2 bps.

“Markets will be closely watching the damage from Harvey and its effect on the USA economy”, wrote FXPro analysts in a note to clients, pointing out that Hurricane Katrina had in 2005 halved US economic growth in the quarter that followed.

After a summer lull, supply from euro zone governments picks up this week and is expected to put some upward pressure on bond yields as investors make way for new bond issuance.

Germany sells 5 billion euros of two-year bonds on Tuesday.

The week ahead also sees the release of key economic releases such as German inflation data and USA employment numbers. “A likely drop in euro area core inflation and euro strength add juice to next week’s (ECB Governing) Council discussions”, analysts at Commerzbank said in a note.

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