The week that began with fears that default of China's Evergrande would lead to a “domino effect” ends with substantial upside in risk assets and procyclical currencies. It does not seem that the markets discount exactly the default of the Chinese developer, but rather systemic risks of this event. This week, the PBOC pumped enough liquidity into the banking sector (90 bn RMB through repo) to keep credit risk subdued and there was more evidence that Western banks were generally isolated from the risks of bankruptcy of the Chinese firm.
It is no coincidence that the dollar failed to take off this week - the rally was held back by growing demand for risk. However, the US currency has a strong mid-term support factor - the Fed's hawkish position, announced this week. The Fed's median forecast for the timing of the first rate hike has moved from 2023 to 2022, while other major central banks, which voiced their position last week and this week, were slightly more cautious in their forecasts. As a result, we saw the yield on 10-year US T-bonds breaking through resistance at 1.38%, near which it’s has been consolidating since the end of July:
Rising Treasury yields, all other things being equal, will attract foreign investors fueling investment demand for USD as well.
The economic calendar is quite calm today, and only the data on home sales in the United States can be of interest. However, a number of Fed speakers are scheduled to speak today, including Powell, Mester, Clarida, George and Bostic. In general, the Fed's position is clear, but it will be interesting to see whether officials will again give a special importance to employment growth and whether they will share any details of tapering of asset purchase program.
The week full of events failed to trigger any sweeping move in EURUSD, which walks in the range of 1.17-1.175. Weak PMI in services and manufacturing in the Eurozone today were offset by the IFO data on the German economy, which was in line with rather optimistic forecasts. Nevertheless, a breach of 1.17 looks like likely development in EURUSD, given that, following the results of the past meetings of the Fed and the ECB, the growth trajectory of real rates in the US looks more attractive than in the EU, which will ensure the flow of investors into US bonds. From a technical point of view, EURUSD were unable to leave the short-term downtrend following major events of this week, so it is preferable to consider a movement to the next point of the lower bound: