Sunrise Market Commentary

• Bund fails to move above contract high
  Global bonds had another constructive session, but the failure of the Bund to sustain above the contract high in a context of increased volatility should be taken seriously. It means that the resolve of the bulls is now tested in earnest. A new month, more normal trading conditions and eco data will decide in next sessions whether another up-leg is likely or whether it is correction time.
• Major cross rates blocked in tight ranges
  Yesterday, global uncertainty still prevailed, but the impact on the major currency cross rates was limited after all. EUR/USD is holding close to the 1.27 mark and USD/JPY is paralyzed, too. Sterling ceded some ground even as there was no high profile news to explain the move.

The Sunrise Headlines

• US Equities ended flat on Tuesday ahead of some key economic releases later this week. This morning, most Asian shares trade in positive territory after encouraging Australian GDP data, while Chinese shares are losing some ground.
• China's manufacturing economy staged a moderate rebound in August after slowing for several months following the government's measures to reign in credit and deter property speculation. Chinese manufacturing PMI rose from 51.2 to 51.7.
• US President Barack Obama formally declared an end to combat operations in the seven-year-old Iraq War and, during an Oval Office address, promised to refocus the government from prosecuting wars to rebuilding the US economy.
• Australia's economy grew last quarter at the fastest pace in three years as household spent far more than expected while exports enjoyed an Asian-driven boom, reviving the risk of a further rise in interest rates.
• The outlook for the US economy would have to deteriorate appreciably to spur fresh support from the Federal Reserve, the minutes of the latest FOMC meeting showed.
• Thomas Hoenig, the Fed's lone dissenter in recent months, said in an interview that the US economy will continue to show modest growth until the end of the year.
• German retail sales disappointed in July, marking a second consecutive monthon- month dip, but the previous figure was significantly upwardly revised.
• Today, the eco calendar contains the euro zone (final) and UK manufacturing PMI, the US manufacturing ISM and ADP employment report.

Currencies: Major Cross Rates Blocked In Tight Ranges

EUR/USD

On Tuesday, investor uncertainty continued to weigh on global market sentiment. However, this time the negative impact on EUR/USD was much less than was the case on Monday. EUR/USD was seen in the 1.2640 area at the start of trading in Europe but the pair even managed to reverse part of Monday's/overnight losses, testing offers at around 1.2700 around noon in Europe. As was often the case of late, there was again no specific trigger to explain this recent flaring up of global negativism. The EU data (German and EU unemployment data and CPI) were almost perfectly in line with expectations and they had no impact on (currency) trading. So, currency investors had no option but to wait for the US eco data, even as it was highly doubtful that they would be able to give a clear signal for EUR/USD trading. There was a limited/temporary positive reaction of the equity markets on the better than expected US consumer confidence release. EUR/USD moved higher in step and tested offers in the 1.2740 area. However, once again the pair was not able to clear the recent highs (1.2780 area), confirming that there is no real momentum in EUR/USD trading. The Minutes of the previous Fed meeting brought no new factors after Bernanke's speech on Friday. The pair closed the session at 1.2680, compared to 1.2663 on Monday evening.

Elsewhere, the Swiss franc continued to set new record high levels against the euro. The EUR/CHF pair already touched the 1.2900 level early in the session and even the temporary easing in global market tensions after the publication of the US consumer confidence was not able to stop the ascent of the franc.

Overnight, most Asian equity indices are in positive territory on the back of the publication of a better than expected manufacturing PMI in China and strong Q2 growth figures. This is a slightly supportive factor for EUR/USD, too.

Today, the calendar contains quite a series of important eco data. In Europe, the final PMI's for the month of August will be published. They are probably not that important for the FX market. On the other hand, the US data for sure have market moving potential with the ADP labour market report and the ISM of the manufacturing sector scheduled for release. The consensus estimate expects these data to confirm that the US economy is in a soft patch. The ISM is expected to decline from 55.5 to 52.8. For the ADP labour market report, private sector employment is expected the have increased by only 15K. So, these reference points are not really high. Does this leave room for a positive surprise? The reaction of EUR/USD to US data was far consistent of late. Sometimes global uncertainty prevailed. Sometimes, the focus turned to US economic weakness, which then was seen as (slightly) USD/EUR negative. The jury is still out on this issue, but at this stage we have the impression that EUR/USD still tends to be mostly inspired by the swings on the equity markets, especially in case of an outspoken reaction.

MT picture and technicals. From early June to early August, EUR/USD succeeded a remarkable rebound. This move was partly a technical correction on the steep sell-off of the euro in the previous months due the European government debt crisis. In addition, during June and July, European eco data came out reasonably good. At the same time, US data suggested a cooling down in the pace of the recovery in the US. Interest rate differentials between the US and Europe (Germany) turned sharply to the disadvantage of the US currency. EUR/USD reached a recovery high at 1.3334 early August, going into the Fed August meeting. At this meeting, Bernanke and Co admitted the slowdown in US growth and kept the door open for additional monetary stimulus (QE). Intrinsically, one would expect this to be a USD negative message from the Fed. However, the (currency) market played another card after the Fed meeting. Global risk aversion came again to the forefront and uncertainty on the global recovery was still seen a USD supportive factor, even as the negative surprises recently came from the US rather than from Europe. So, EUR/USD came off from the early August highs. Intra-EMU government credit spreads moving wider again was a negative factor for the euro, too. So, the EUR/USD currency pair was captured in a downward correction. This move is in the first place driven by global market sentiment rather than by the specific economic news flow from the US or Europe. Last week, the EUR/USD decline slowed.

In medium term perspective, we changed our bias on the USD from positive to neutral as the case for sustained dollar gains supported by a relative outperformance of the US economy has been postponed 'until further notice'. The dollar is even at risk to suffer the consequences of additional loosening of monetary policy by the Fed. Short-term, the momentum was EUR/USD negative due to global uncertainty/ risk aversion. Until now EUR/USD failed to really profit from poor US eco data. Nevertheless, last week's price action suggested that the downside in EUR/USD was becoming less easy. This might partially be due to growing doubts on the dollar overall. In addition, Friday's price action showed that also a technical rebound on the equity markets is still possible as global investors at some point might come to the conclusion that enough bad news was discounted in current prices. Of course, this week's price action puts this scenario again in question. The key US data that will be published from today onwards and, to a lesser extent the market reaction to the ECB policy meeting/press conference, might decide on the next big move in this cross rate. At least for now, it looks that EUR/USD will have difficulties to succeed a protracted rebound as long as negative sentiment on the equity markets persists.

From a technical point of view, EUR/USD failed to regain the 1.2732 resistance area (neckline H&S) in a sustainable way. This is a disappointment. Last week, we turned a bit more positive on EUR/USD even as we were well aware that the global context would remain shaky. In the current environment with no clear theme to guide de price action, one can not but keep a close eye on the technical charts. The 1.2588 reaction low is the short-term line in the sand for EUR/USD bulls. A break below this level would suggest the risk of more stop-loss selling in this pair.

EUR/USD: still looking for a clear driver.

Support comes in at 1.2661 (Reaction low hourly), at 1.2626 (Reaction low), at 1.2588 (Last week low), at 1.2552 (Weekly envelope), at 1.2522 (13 July low) and at 1.2479 (reaction low).

Resistance stands at 1.2734/43 (MTMA/Reaction high), at 1.2780 (Reaction high) and at 1.2844 (Daily Boll Midline).

The pair is in neutral territory.

USD/JPY

On Tuesday, USD/JPY was again locked in a very tight sideways trading range. The major factors for trading in this currency cross rate (investor risk aversion, being yen supportive and the fear that Japanese authorities would finally move to currency interventions to block the rise of the yen) kept a perfect balance and caused the deadlock in this currency cross rate to persist. The pair yesterday held a tight sideways trading range roughly between 84.05 and 84.65. The Japanese Fin Min advocating for unsterilized interventions had no lasting impact on the currency market. There was a brief uptick in this pair after the better than expected US consumer confidence, but once again the gains could not be sustained. USD/JPY dropped even temporary below the 84.00 mark. The pair closed the session at 84.20 compared to 84.62 on Monday.

This morning, the focus on Asian markets is on the reasonably strong Chinese manufacturing PMI and on the strong Q2 GDP in Australia. These data give some support for riskier assets and it also gives USD/JPY some breathing space. Nevertheless, the 'gains' in USD/JPY remain very limited and the pair is still within striking distance of the year lows.

Recently, we indicated that we didn't expect a sustained weakening of the yen as long as the global picture doesn't change. For that to happen, an improvement in global economic sentiment is needed. Recent price action looks like confirming this hypothesis. With respect to the Japanese side of the story, markets are obviously not impressed by recent BOJ action. So, the feeling was reinforced that the BOJ has not that much of ammunition to really turn around the course of events on the currency markets. The pace of a further rise of the yen will remain the key factor for Japanese authorities to decide whether they will step into the market. As long as the decline in USD/JPY develops in a gradually way, we don't expect immediate BOJ action. Only a swift move toward/beyond the 80 area, if it were to occur, would change the picture. So, for now we expect the current stalemate in USD/JPY to persist. We wouldn't be surprised to see USD/JPY being blocked at current levels for some time to come.

USD/JPY: blocked, with the multi-year lows still within striking distance

Support is seen at 83.97/83 (Daily Boll Bottom/Reaction low) at 83.58 (year low), at 83.03 (Weekly Boll Bottom) and at 82.41 (Irr B). .

Resistance comes in at 0.8458 (Reaction high +STMA), at 84.92 (MTMA), at 85.02 (Boll midline), 86.06/13 (Daily downtrend line Weekly envelope), at 86.43 (Boll Top), at 87.25 (Breakdown daily).

The pair is in neutral territory.

EURGBP

On Tuesday, sterling ceded quite some ground, both against the dollar and the euro. There were no eco data to explain this move. However, there was a lot of market chatter on end-of-month-buying in the EUR/GBP cross rate. The UK lending data were mixed to slightly better than expected (mortgage approvals) but they failed to give sterling any lasting support. EUR/GBP trended higher throughout the session as stops on shorts were hit. The pair closed the session at 0.8261, compared to 0.8190 on Monday.

This morning, UK manufacturing PMI for the month of August is expected the show a limited decline from 57.3, to 57.00. Recently, there was also no clear driver for EUR/GBP trading. Nevertheless, we have the impression that sterling is again becoming a bit more sensitive to negative news, if were to occur.

Since mid July, sterling had a good run against the euro. At the early August policy meeting, the BoE maintained a balanced approach. Inflation is expected to stay well above target in 2011 due to a new VAT hike. Nevertheless, the BoE still sees inflation returning slightly below target once this temporary factors are worked out. Dissenter Sentance got no support for his call for a rate increase. However, this rather soft message didn't prevent a gradual rise of sterling against the euro during the month of August. Recently, the move was supported by some encouraging UK eco data. However, the pair was gradually nearing the key 0.8066 support area (year low). We hold on to our view that high profile news is needed (from Europe or from the UK) for the pair to clear the 0.8066/00 area. At this stage, we don't see this trigger.

Recently, we had the impression that EUR/GBP had entered a consolidation pattern after the recent sterling gains/euro slide and that the downside in the pair has become better protected. So, we installed a cautious buy-on-dips approach. We hold on to this bias. Sustained trading north of the 0.8280 area would be an indication that more upside is possible in this pair.

EUR/GBP: finally moving away from the lows

Support comes in at 0.8232 (Break-up), at 0.8223/13 (STMA/MTMA), at 0.8163 (Reaction low), at 0.8157/52 (Reaction lows), at 0.8143 (Last week low), at 0.8122/02 (Boll bottom/Last target H&S off 83.17) and at 0.8067 (Reaction low).

Resistance is seen at 0.8289/91 (Reaction high/LTMA + 38% retracement), at 0.8333 (Boll top) and at 0.8363 (Reaction high).

The pair is in neutral territory.

News

US: consumers turned more optimistic in August

In August, US Conference Board's consumer confidence improved from an upwardly revised 51.0 to 53.5, while only a marginal increase was expected. The details show that consumers became more optimistic about the expectations (72.5 from 67.5), while sentiment about the present situation worsened (from 26.4 to 24.9). The labour index, in contrast, deteriorated from -40.7 to -41.9. The outcome is an encouraging sign as it indicates that consumer sentiment isn't worsening despite the deteriorating labour market and weak economic news.

The Chicago PMI dropped from 62.3 to 56.7 in August, which was marginally weaker than expected. The details show a sharp decline in production (57.6 from 65.0) and new orders (55.0 from 64.6), while order backlog (56.2 from 57.6), inventories (46.5 from 50.8) and employment (55.5 from 56.6) show more moderate drops. Supplier deliveries rose from 59.4 from 61.2, while prices paid dropped slightly (from 58.1 to 57.2). The outcome indicates that activity in the Chicago region expanded at a slower pace, which is in line with the expectations that US economic growth is slowing in the second part of the year. The manufacturing ISM is expected to show the same pattern today.

In June, the increase in S&P Case Shiller home prices slowed from 4.64% Y/Y to 4.23% Y/Y, which was less than expected (3.50% Y/Y). On a monthly basis, Case Shiller home prices rose by 0.28% M/M from a 0.53% M/M in May. Although the index surprised on the upside of expectations, the index is a three-month moving average, which indicates that the data are still influenced by transactions in April and May, which benefitted from the government's incentives.

EMU: unemployment rate stays unchanged at 10%

In July, the euro zone unemployment rate stayed unchanged at 10.0%, for the fifth consecutive month, which was in line with the consensus estimate. Eurostat estimates that 15.833 million people in the euro area were unemployed in July, 8 000 less than in June. Compared with one year ago, unemployment rose by 0.668 million. Today, Germany released timelier labour market data. These showed that the unemployment rate stayed unchanged at 7.6% in August. The number of people unemployed dropped by 17 000 to a total number of 3.19 million, while the number of vacancies rose by 4 000. In July, the number of people employed rose by 13 000. The euro zone unemployment rate remains at record high levels, but the decline in the number of people unemployed is an encouraging sign that labour market is bottoming out, although there is a big difference in national data.

After rising from 1.4% Y/Y to 1.7% Y/Y in July, euro zone CPI inflation fell back slightly in August, according to the first estimate. On a yearly basis, CPI inflation came out at 1.6% Y/Y, which was exactly in line with expectations despite a downward surprise in German inflation. We are looking forward for the details, and more particular, the development in the core reading which remains at very low levels.

Other: UK mortgage lending falls to 4-month low

In the UK, mortgage approvals unexpectedly rose in July, from an upwardly revised 48.6K to 48.7K, while a decline to 46.5K was expected. Net lending secured on dwellings, on the contrary, dropped to 86 million pounds, a four-month low, and a sharp contrast with 700 million that was expected. As a result, total net lending dropped to 258 million, while consumer credit unexpectedly rose to 173 million. The outcome indicates that the UK housing market remains sluggish as credit conditions remain tight.

Download entire Sunrise Market Commentary