EUR/USD bulls hang in there in slower pace Asia, Evergrande digested

EUR/USD holds steady in Asia following Evergrande market turmoil on Monday. 
Eyes turn to the Fed this week for further clues on tapering. 

EUR/USD is flat in a quiet Asian session following a turbulent start to the week. At the time of writing, EUR/USD is trading at 1.1728 between 1.1725 and 1.1731. Forex markets were quite contained given the scale of equity losses on the back of the Evergrande news. 

EUR/USD touched made a one-month low before returning to 1.1725, flat on the day, but that hardly reflected the mood in broader financial and commodity markets. The potential collapse of one of China’s biggest property developers, Evergrande, added to growth and demand concerns. 

Wall Street dropped despite news that Evergrande executives are working to salvage its business prospects. The default scenario is balanced between bad and worse outcomes for which investors woke up to and smelled the coffee on Monday morning. 

What markets fear the most

A messy meltdown at worst or a managed collapse is sending shivers down the backbone of financial markets. The less likely prospect of a bailout by Beijing can be hoped as a best-case scenario for financial markets. In this regard, markets are keeping a watchful eye for a deadline of an $83.5 million interest payment on one of its bonds that is due on Thursday. Overall, the company has $305 billion in liabilities.

All 11 major S&P 500 sectors were lower, with economically sensitive groups like energy down the most. The S&P 500 is down heavily from its intra-day record high hit on Sept. 2 and is on track to snap a seven-month winning streak this month. The US dollar has consequently picked up a safe haven bid which dented the euro’s performance. 

Meanwhile, in local data, German Producer Price inflation in August rose further, +1.5% MoM (est. +0.8%m/m) to 12.0%y/y (est. 11.1% YoY). Once again energy costs (+3.3% MoM) were the main driver, along with basic goods (+1.5% MoM). However, the focus stays very much on the US this week.

All eyes on the Fed

US bond yields fell and the yield curve bull flattened as investors gear up for the FOMC meeting this week for any messages around taper plans. The 2-year government bond yields fell from 0.23% to 0.21%, 10-year government bond yields fell from 1.36% to 1.31%.

”We don’t expect a change to forward guidance on rates or asset purchases, but we do expect a signal that the Fed is getting closer to tapering. Powell is likely to reiterate the statement he made at Jackson Hole, namely that tapering can start later this year,” analysts at ANZ Bank explained. 

EUR/USD technicals