Sunrise Market Commentary
- Rates: Reflation trade (temporarily) on hold?
Investors will further digest yesterday's Trump comments. Or better: they'll remember what he didn't touch upon: details of his fiscal stimulus plans. The US Note future is back near 125-09 resistance. We await the outcome of the test, but expect that some investors are willing to put the “reflation trade” at least temporary on hold.
- Currencies: Dollar extends correction after Trump press conference
Yesterday, the dollar traded strong early in the session, but lost ground as president elect Trump failed to given concrete guidance on its policy. Today, the eco calendar is again thin. If investors turn more cautions on the post-Trump reflation trade, the dollar correction might still go further.
The Sunrise Headlines
- US equities recovered initial losses on disappointment about Trump and closed with modest to moderate gains. Asian stocks trade mixed with Japanese equities in the red on a stronger yen. China underperforms as well.
- The US dollar closed lower overnight as president-elect Donald Trump, in a press conference, gave no further clarification about his proposed fiscal stimulus and infrastructure spending plans.
- Brent crude rose 2.7% to $55.08/barrel, after two days of heavy selling. A weaker dollar and record amount of processed oil apparently trumped the higher inventories, suggesting that sentiment and technicals played a role.
- The Brazilian central bank cut its policy rate by 75 bps, exceeding the consensus call for a 50 bps cut and sharply picking up the pace on an easing cycle it began with 2 cuts of 25 bps each in October and November.
- Japan's trade surplus shrank to ¥313.4B in November from ¥587.6bn in October, driven by an 8.1% rise in imports. Exports still managed to carve out a 2.5% gain, suggesting overseas demand for Japanese products is still solid.
- The political deadlock in Poland extended into the new parliamentary term that began on Wednesday, amid continued failure to reach a compromise deal that would end a sit-in by opposition MPs that has lasted throughout the break.
- US Secretary of State nominee Tillerson has set the stage for a major diplomatic clash between Washington and Beijing after he said China should not be allowed to access islands it has built in the South China Sea. Trump also criticized China in harsh wordings.
- Today's eco calendar remains thin with EMU production, US import & initial claims. There is a barrage of Fed speakers and Dec. ECB Minutes
Currencies: Dollar Extends Correction After Trump Press Conference
USD profit taking after Trump press conference
On Wednesday, the dollar set intraday highs against the euro and the yen just before the press conference of President elect Donald Trump. Trump didn't provide much detail on the economic policy he wants to implement. The reaction on various markets differed. Equities held up well, while the dollar declined as some FX investors took some profit on the reflation trade. EUR/USD closed the session at 1.0582 from 1.0554 (but compared to an intraday low of 1.0454). USD/JPY finished the session at 115.41 (from 115.77).
Overnight, Asian equities trade mixed. Japanese and Chinese markets trade in negative territory. The dollar remains in the defensive. However it is not sure whether this is due to investors' disappointment after the Trump press conference. US yields are also declining after yesterday's late session rebound. USD/JPY trades currently at 114.34/40, near the recent low. The dollar is also in the defensive against the euro (1.0625).
Today, the EMU November industrial production is expected to have rebounded by 0.6% M/M and 1.6% Y/Y. In the US, import prices are expected to have recovered further in December, while initial claims are expected to have jumped higher by 20K to 255K after an extremely low figure in the previous week. In addition, several Fed members will speak. The eco data will only be of second tier importance for currency trading. We also keep an eye how markets react to the communication from the president elect Trump. For now, there is no clear sign that the markets are already at of point of aggressively reversing bets on the reflation trade. Even so, there might be a growing risk that markets, including the dollar, turn more cautious on the Trump trade, at least until the administration provides better information on its policy. Over the previous days, the dollar was already a bit in the defensive even after decent US payrolls. This correction might go a bit further. In this respect, we keep an eye on the interest rate developments as spreads between the US and Europe show signs of topping out.
Global context: EUR/USD touched a multi-year low at 1.0341 last week. After the Trump rally, there is a lot good USD news discounted. Interest rate differentials between the dollar and the euro remain very high, but didn't widen anymore of late, slowing the rise of the dollar.The absolute interest rate support should provide a USD floor as long as US data remain good and as there are no profound doubts on the ability of the new government to execute its pro-growth agenda. A buy the dollar on dips strategy remains preferred. EUR/USD 1.0653/70 is a first resistance. A return north of 1.0874 would question the USD positive momentum. On the downside, EUR/USD 1.0341 is still the first key support. A test of parity remains possible MT. USD/JPY started a correction last week and remains in the defensive. A fist important support at 114.74/115.07 has been broken, if confirmed this is a USD/negative short-term. We stay USD/JPY positive long-term, but are in no hurry to rush in right now. An equity correction or a further decline in core yields might be a short-term negatives for USD/JPY.
EUR/USD: dollar in the defensive post-Trump
EUR/GBP holding in the 0.86/0.87 area.
On Wednesday, UK November production data printed stronger than expected, but the trade deficit widened much more than expected as imports rose more than exports. Sterling lost temporary ground after the trade data and EUR/GBP returned to the 0.87 area, but the move had no strong legs. The intraday decline of EUR/USD also capped the topside of EUR/GBP. BoE's Carney suggested that the BoE could raise its growth forecast, but still saw risks to the Brexit process. Sterling didn't react much to the comments. Sterling basically followed the USD movements post-Trump. Cable and EUR/USD rebounded. Cable closed the session at 1.2213. EUR/GBP finished the session at 0.8665
Today, there are no important UK eco data. So, trading in the major sterling cross rates will be driven by the global market context. EUR/USD is well bid this morning. The global reflation trade, which supported sterling more than the euro, is a bit in the defensive. This context might be more favourable for the euro than for sterling short-term. Sterling held strong in November and December, but lost some momentum in the second half of last month. EUR/GBP held a sideways trading pattern in the 0.85 area. Uncertainty on the next steps in the Brexit debate are again weighing on sterling in the run-up to the end of March article 50 deadline. We prefer a buy-on-dips strategy for EUR/GBP. If the break beyond 0.8668 is confirmed, it would improve the EUR/GBP picture.
EUR/GBP tries to hold north of 0.8668 previous resistance
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