Sunrise Market Commentary

• Global bonds continue to correct ahead of the payrolls
  The payrolls today will be key for the near-term fate of global bonds. While there might be risks on the downside of ex-pectations, markets may look at the report through rose-coloured glasses. This means that if the report is not too bad, equities could move higher as can bond yields.
• Sentiment remains EUR/USD supportive, but markets are in a wait-and-see mode ahead of the payrolls
  Yesterday, EUR/USD easily preserved its recent gains, but failed to take further advantage from additional (US) equity gains. Also the impact of the ECB press conference was limited. USD/JPY is still locked near the recent lows. Sterling had to concede some additional losses against the euro in the wake of disappointing UK eco data. Today, the reaction of the equity markets to the payrolls will decide whether risk trades on the currency markets might continue.

The Sunrise Headlines

• US Equities rose for a third consecutive day on Thursday as an unexpected in-crease in pending home sales provided some encouragement to investors that the housing market might start to stabilize again. This morning Asian shares trade mixed ahead of the US payrolls report later today.
• The ECB upgraded yesterday its economic forecasts, but Trichet remained cau-tious and prudent and a first rate increase still seems a very long distance away. The extensions of liquidity support measures are broadly as expected, but under-line continuing problems in peripheral economies.
• The White House stressed yesterday that no second economic stimulus pack-age is being considered as part of new measures under review by President Barack Obama's team.
• China's purchasing managers' index for the non-manufacturing sector stabi-lized at 60.1 in August following a moderate rebound in the previous month.
• Japan's economy probably grew more than double the government's initial estimate, economists said after a report showed companies cut spending at the slowest pace since 2007 as a result of strong overseas demand.
• China offered this morning a rare glimpse into its foreign exchange reserves, confirming that they are overwhelmingly allocated in US dollars, while a central banker said the mountain of cash could face depreciation risks.
• Today, all eyes will be on the US payrolls report, but also the euro zone retail sales, euro zone (final) and UK services PMI and US non-manufacturing ISM are on the calendar.

Currencies: Sentiment Remains EUR/USD Supportive, But Markets Are In A Wait-And-See Mode Ahead Of The Payrolls

EUR/USD

On Thursday, European (equity) markets started the trading session on a cautions footing, digesting the strong gains from Wednesday. A similar reaction was visible on the FX markets as EUR/USD fell temporary back below the 1.28 mark. However, the underlying sentiment toward the single currency remained constructive and any dips were still considered a buying opportunity especially as European equity markets gradually managed to overcome the (small) early losses. The European Q2 GDP fig-ure was in line with expectations. The details were constructive as, next to the con-tribution from net exports, also consumption growth was reported at a decent level. However, these considerations as usual had hardly any impact on EUR/USD trading. The pair settled just below Wednesday's highs going into the ECB press conference. At the ECB press conference, the ECB president as expected upgraded the Bank's forecasts for European growth this year and next. In addition, the Bank also made a small amendment to technical specifications for its 3-month refi operation. However, the currency market did not pick this up as the ECB moving a small step closer to the exit of its extraordinary measures. There was some market nervousness at the start of the ECB press conference, but after all the impact on currency trading was very limited. Nevertheless, we retain that the ECB is still tentatively giving more weight to the modeling of its exit strategy while the Fed recently still gave the impression that the internal debate was still more about whether or not extending its supportive monetary policy (for an in extenso analysis from the ECB meeting/press confer-ence see our KBC flash). Later in the session, better than expected US pending home sales underpinned US equities throughout the session. However, this time the euro failed to profit from it. The EUR/USD pair closed the session 1.2825, only slightly higher from 1.2809 on Wednesday evening.

Today, PMI/ISM confidence indicators from the services sector will be published. It is an interesting piece of information and sometimes it even leaves some traces on the (currency) graphs. However, especially the impact of the European indicators on currency trading will be limited as all traders and investors will be looking forward to the key US payrolls report. Until Wednesday, markets were positioned for a weak figure. However the strong US Manufacturing ISM caused some doubts with the bears. We don't have hard arguments to take a different view from the consensus. However, after the strong ISM, a poor payrolls release might now trigger quite a sharp reversal of the optimism as mirrored by the gains on the equity markets and, to a lesser extent also in EUR/USD. Of course for the letter, the case is once again less straightforward, but for now, we still assume that pair will continue to mirror the swings in equities, especially in case of a sharp (negative) move.

MT picture and technicals. From early June to early August, EUR/USD suc-ceeded a remarkable rebound. This move was partly a technical correction on the steep sell-off of the euro due the European government debt crisis. In addition, dur-ing 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 disad-vantage of the US currency. EUR/USD reached a recovery high at 1.3334 early Au-gust, 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 recov-ery was still seen a USD supportive factor, even as the negative surprises came from the US rather than from Europe. So, the EUR/USD currency pair was captured in a downward correction. This move is in the first place driven by global market senti-ment rather than by the specific economic news flow from the US or Europe. Last week, the EUR/USD decline slowed/bottomed.

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 outperfor-mance 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. Throughout the month of August, the market momentum was EUR/USD negative due to global uncertainty/risk aversion. Nevertheless, last week's price ac-tion suggested that the downside in EUR/USD was becoming less easy. This might have partially been due to growing doubts on the US economy and thus on the dollar overall. In addition, last Friday's price action showed that also a technical rebound on the equity markets was still possible as global investors at some point might come to the conclusion that enough bad news was discounted in current prices. Even reac-tion of EUR/USD on US eco data (good and bad) is not always consistent, we still assume that global sentiment will remain the most dominant factor for EUR/USD trading.

From a technical point of view, EUR/USD regained the 1.2732 resistance area (neckline H&S) and put in place a ST double bottom formation with neckline at 1.2780. Last week, we turned a bit more positive on EUR/USD even as we were well aware that the global context would remain shaky. Recent price action in EUR/USD was constructive. We hold a ST positive bias/buy-on dips approach. The targets of the short-term double bottom formation with neckline at 1.2780 area at 1.2935/72. However, tight stop loss protection is warranted to protect a ST trend reversal in case of a big surprise of the payrolls and subsequent reaction on the equity markets

EUR/USD: holding recent gains. Limited reaction to the ECB press conference.

Support comes in at 1.2780/76/72 (Neckline ST double bottom/ Reaction low/Daily envelope), at 1.2760 (STMA), at 1.2644/38 (Break-up/MTMA), at 1.2687 (Break-up hourly) at 1.2625 (Reaction low) and at 1.2588 (Last week low).

Resistance stands at 1.2856/58 (Re-action high/weekly envelope), at 1.2872 (38 % retracement), at 1.2892 (Daily envelope), at 1.2923/35 (18 August high/1st target ST double bot-tom) and at 1.2972 (Last target dou-ble bottom).

The pair is in neutral territory.

USD/JPY

Still no news from USD/JPY trading. The pair is apparently already in some kind of hibernation. In more or less erratic trading, the pair slipped close to the 84.00 mark during the morning session in Europe. European stocks gradually moving off from the lows and the positive reaction of the US equity markets to the pending homes sales also helped USD/JPY a few ticks higher. neveertheless, the price dy-namics in this cross rate were again very boring. The pair closed the session at 84.28, compared to 84.44 on Wednesday.

This morning, Asian/Japanese equities are again slightly higher. However, this is again not enough to inspire USD/JPY traders. Later today, the payrolls are a factor that has the potential to even move this cross rate, in case the release would be able to set a clear trend for the equity markets. Recently, the reaction to the rebound on the equity markets was limited. We don't have a strong view on the outcome of the payrolls (maybe the risk is still for a slightly weaker figure), but if the report would in-spire further, sustained equity gains, this might gradually filter through into the USD/JPY cross rate.

Recently, we indicated that we didn't expect a sustained weakening of the yen as long as the global picture doesn't change. Recent price action looks like con-firming this hypothesis. Even more, recent upticks on the equity markets had only a limited impact on yen trading. Apparently, more convincing signals on the global economy are needed. 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 84.13/00 (reaction lows), at 83.77/66 (Boll Bot-tom/Reaction low), at 83.58 (Daily envelope/Reaction low) at 83.03 (Weekly Boll Bottom) and at 82.41 (Irr B).

Resistance comes in at 0.8464/72 (Daily envelope/MTMA), at 85.04 (Boll midline), at 85.87/91 (Daily downtrend line/reaction high) and at 86.39 (Re-action high). .

The pair is in neutral territory.

EURGBP

On Thursday, the pattern in EUR/GBP trading was not much different from Wednesday. The euro remained relatively well bid overall while sterling felt some headwinds from weaker than expected UK data. Early in the session the NationWide House prices showed monthly decline of 0.9%. Later, the UK PMI for the construc-tion sector disappointed, too. As such, this is not an important economic indicator. Nevertheless, in the current environment, it didn't help sterling either. So, EUR/GBP extended its uptrend from the previous sessions. The pair closed the session at 0.8327 compared to 0.8288 on Wednesday.

Today, the sterling traders will keep an eye on the UK PMI for the services sector. This week's construction and manufacturing PMI's disappointed. So, we put the risk for a weak figure of the services sector, too. If this would com true, this might EUR/GBP to some further gains. Looking at the global picture, we have the impres-sion that a return of risk aversion in case of weak payrolls report would also be slightly negative for sterling.

Since mid July, sterling had a good run against the euro. At the early August pol-icy meeting, the BoE maintained a balanced approach. Despite current high inflation, 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. In the second half of the month, the move was supported by some encouraging UK eco data. However, the pair was gradually near-ing 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 pat-tern after recent sterling gains/euro slide and that the downside in the pair had be-come better protected. So, we installed a cautious buy-on-dips approach. This week, EUR/GBP succeeded a nice move higher. We hold on to our ST positive bias . The pair trading north of the 0.8280 area improved the short-term picture in this pair. Sustained trading beyond 0.8363 (10August high) would further improve the picture.

EUR/GBP: trending higher

Support comes in at 0.8306 (Re-action low hourly + daily enve-lope), at 0.8286/75 (Break-up/STMA), at 0.8232/27 (Boll midline/MTMA), at 0.8197 (Break-up hourly) and at 0.8163 (Reaction low).

Resistance is seen at 0.8339/47 (Boll top/Reaction high) and at 0.8363 (Reaction high) and at 0.8383 (62% retracement) and at 0.8430 (Irr. C).

The pair is moving in slightly overbought territory.

News

US: initial claims continued to trend down last week

In the week ended August the 28th, US initial claims dropped by 6 000, from an up-wardly revised 478 000 to 472 000, slightly below the consensus estimate of 475 000. The four-week moving average fell from 488 000 to 485 500. Continuing claims, which are reported with an extra week lag, dropped by 23 000 for an up-wardly revised 4 479 000 to 4 456 000. Although initial claims dropped for the second consecutive month, they are still at relatively high levels and haven't almost dropped since the start of the year, which indicates that claims are stagnating at relatively high levels.

In July, US pending home sales rose by 5.2% M/M, while a slight decline was ex-pected. Regional details indicate that the improvement was wide-spread as pending home sales rose in all regions led by the West (11.6% M/M) and Northeast (6.3% M/M). On a yearly basis, pending home sales are still down by 20.1% Y/Y (from 20.3% Y/Y). After the sharp decline when the tax credit expired, this outcome indicates that the housing market might start to stabilize again.

After two consecutive declines, US factory orders improved marginally in July. Fac-tory orders rose by 0.1% M/M, while an increase by 0.2% M/M was expected. The previous figure was upwardly revised from -1.2% M/M to -0.6% M/M. Looking at the details, non-durable shipments stayed flat, while durable orders rose by 0.4% M/M due to strength in transportation. The inventory/shipments ratio stayed unchanged from June at 1.26. The report provided however little new info as most was already known from the durable goods orders.

EMU: exports, investments and housholds drove Q2 growth

The preliminary estimate of euro zone Q2 GDP confirmed that the euro zone economy grew by 1.0% Q/Q, which was in line with expectations. Growth for the first three months of the year was upwardly revised to 0.3% Q/Q. More interesting was the first release of the details, which show growth was broad based. Both household consumption and domestic investments rose by 0.3% Q/Q, while change in invento-ries grew by 0.2% Q/Q and government consumption increased by 0.1% Q/Q. Also net-exports showed a significant positive contribution as exports rose by 1.7% Q/Q, while imports fell by 1.6% Q/Q. It will be difficult to extend that very strong per-formance in the coming quarters, although growth is expected to remain on track in the euro zone.

Download entire Sunrise Market Commentary