Sunrise Market Commentary

Government bonds surge on weak Payrolls report and cautious ECB
Yesterday, the US Payrolls report poured cold water on hopes for a rapid turnaround in the US economy. In response, in-vestors fled to safe haven government bonds and sold off equities and commodities. Today, trading may be quiet, as the US markets are closed.
FX: Post-payrolls risk aversion triggered the 'logical' reaction on the currency markets
A flaring up in risk averse investor behaviour after a disappointing US payrolls report supported the yen and the dollar. The euro and higher yielding currencies came under pressure. EUR/GBP tested the 0.8600 resistance, but the test of this key level was rejected.

The Sunrise Headlines

US Equities fell sharply lower after a weak payrolls report stoked investors' con-cerns of a prolonged recession. Dow/S&P ended 2.63% / 2.91% lower led by finan-cials. This morning, Asian shares show limited losses.
World Bank President Zoellick said yesterday that the World Bank may need to raise additional resources if lending remains at record levels as counties try to combat the global recession.
The Swedish Riksbank surprised markets yesterday by cutting its rate by 25 basis points to 0.25% and also announced to offer 100 billion crowns of 12-month loans to the banks.
Japanese Economics Minister Yoshimasa Hayashi expressed concerns about the US economy as he said that the US economy had not bottomed out yet.
After a three day court hearing, a new General Motors could emerge from bank-ruptcy protection next week if a federal bankruptcy judge approves its restructur-ing plan, which seems likely.
On Thursday, crude oil ($66.82) fell sharply as weaker than expected jobless num-bers in the US and euro zone raised concerns over the global economic outlook.
Today, the calendar contains the euro zone retail sales, final figure of services PMI and UK services PMI. US markets are closed in observance of the Fourth of July

Currencies: Post-Payrolls Risk Aversion Triggered The 'Logical' Reaction On The Currency Markets

EUR/USD

On Thursday, the EUR/USD pair was under pressure from the start of trading in Asia/Europe and the move lasted till the end of the session. As usual, the stock mar-ket performance was an important guide for EUR/USD trading and stocks were al-ready negatively oriented in Asia and early in Europe. The two main events for global markets yesterday were the ECB interest rate decision and the US payrolls report. The ECB decision and press conference didn't bring much new info for trading. Mr. Trichet remained very cautious on the prospects for an economic recovery. He reit-erated that current rates may not be the lowest but avoided any questions on a pos-sible credit crunch in Europe. However, the US payrolls delivered quite a nasty sur-prise. The jump in the number of job losses raised serious questions on the pace of the US recovery and triggered a new spike in global risk aversion. Stocks nosedived, oil extended the decline from Wednesday and investors returned to the dollar and the yen and sold the euro and high yielding currencies. So, bad news from the US was still good for the dollar. EUR/USD closed the session at 1.4003 compared to 1.4142 on Wednesday evening.

EUR/USD: hammered by new flaring up of investor risk aversion

Support comes in at 1.3938 (Reaction low), at 1.3880 (Reaction low), at 1.3866/66 (Daily envelope/weekly envelope), at 1.3826 (Reaction low) and 1.3791 (Boll bottom).

Resistance stands at 1.4035/38 (Daily envelope/STMA), at 1.4109 (Reaction high), at 1.4163 (Boll Top), at 1.4202/11 (Reaction high/weekly en-velope), at 1.4247 (daily downtrend line since Sept 2008) and at 1.4338 (Reaction high).

The pair is in overbought territory.

USD/JPY

Today, the calendar is very thin. US markets are closed in observance of the Fourth of July holiday. In Europe only the (final) services PMI and the May retail sales are on the agenda. The retail sales are interesting to see whether there is any improve-ment in final demand. However, the series is a bit outdated and is usually no market mover at all. So, on one can expect thin trading conditions today. The swings on the stock markets will probably again be to key driver for EUR/USD trading. In this re-spect, the losses on the Asian stock markets this morning were rather limited if com-pared to the losses in the US and Europe yesterday. This gave EUR/USD some downside protection this morning. With respect to the issue of the dollar's status as reserve currency, one might still expect some headlines to pop up ahead of next week's meeting of the G8 Ministers of Finance.

Global context. During the month of June, EUR/USD basically kept a sideways trading pattern. The May euro rally stalled as global investors turned again more cautious on the strength of a potential economic recovery. This lower risk appetite capped the ascent in EUR/USD. However, the dollar was also not able to take the lead either. After all, the correction on the stock markets was rather muted. On top of that, any hopes that the Fed would raise rates rather soon proved not justified and from time to time the debate on the status of the dollar as reserve currency resur-faced, causing temporary set-backs for the US currency. Regarding the European side of the story, we recently took notice of the fact that some ECB members had become more concerned that the ECB measures didn't filter through enough into bank lending (cf supra). The ECB potentially moving further in the direction of new unconventional measures might, at some point, become a negative factor for the euro, too. However, at least for now, ECB's Trichet didn't give any signals that the ECB is preparing any additional unconventional policy steps to address this issue. So, this leaves the global picture for EUR/USD trading rather neutral and indecisive. None of those themes is currently able to set the tone for EUR/USD trading. So, the easiest option for EUR/USD traders remains to watch global investor sentiment and track the swings on the stock markets

Looking at the technical charts, the medium term outlook remains euro construc-tive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). Last month the EUR/USD currency pair settled in a sideways trading pattern between 1.3739 and 1.4338. Recently the pair moved closer to the top of this range, but a real test of the 1.4338 didn't occur. Recently, we advocated that break of this area would be difficult and maintained a sell-on-upticks approach. We hold on to that bias. More stock market weakness might open the way for return action to the range bottom at the 1.3750/39 area.

On Wednesday, the US payrolls report was also the key factor for USD/JPY trading. Early in the session, the pair move cautiously higher (supported by chatter on Japa-nese buying of foreign assets at the start of the new quarter). However, the poor US payrolls report and the subsequent sell-off on the stock markets also hammer the USD/JPY cross rate. The pair dropped from the 96.80 area to the 95.75/70 area and closed the session at 95.94 compared to 96.65 on Wednesday evening.

There were no eco data in Japan this morning. Asian stocks trade mostly lower (ex-cept for the mainland China indices). However, the losses are very much contained if compared to the steep losses in the US and Europe yesterday. This gives USD/JPY downside protection this morning.

Global context. Since March, USD/JPY developed a sideways trading pattern be-tween 101.40 and 93.86/54 (May low/March low). The 'traditional link' between USD/JPY and the performance of global stock markets/risk appetite still played a role, but is no longer as tight is it used to be some time ago. At the end of May, USD/JPY came relatively close to the key 93.54 range bottom, but a real test/break didn't occur and USD/JPY returned higher in the medium term trading range. The subsequent rebound ran into resistance ahead of the first resistance area (the early May highs). In a longer term perspective, this remains a range trading story. We ex-pect the range bottom (MT reaction lows at 93.85/93.55) to hold and the 95.00/94.88 area provides some intermediate support short term. In this context, we maintain a cautious buy-on-dips approach.

USD/JPY: holding a tight sideways trading range

Support stands at 95.70 (Reaction low hourly), at 95.37 (Daily envelope), at 95.16/04 (Reaction lows), at 94.88(Reaction low), at 94.58/44 (Boll Bottom/Reaction low) and at 93.85/55 (May low/19 March low).

Resistance comes in at 96.58/62 (Boll Midline/Daily envelope), at 97.00/20 (Reaction highs), at 97.56 (Daily downtrend line), at 98.58 (Break-down) and at 98.90 (MT reaction high).

The pair is in neutral territory

EUR/GBP

On Tuesday morning, EUR/GBP tested the key 08605 range top. The pair temporary broke above this level, but no follow-through action occurred and this caused the pair to return with the established trading range. The UK construction PMI came out weaker than expected at 44.5 but had not impact on currency trading. BoE's Besley in a speech said that is was too soon to know when to unwind the quantitative eas-ing. BoE's David Miles in its appointment hearing before the Parliaments Treasury Committee indicated that he thought that a sustained return to growth above the long-run trend of 2.5% seems pretty unlikely. As most other UK policy makers he ac-knowledged the positive contribution of a weak sterling to growth. EUR/GBP closed the session at 0.8542, compare to 0.8581 on Wednesday.

Today, the calendar only contains the PMI survey from the services sector. Last month, the index surprisingly regained the 50 boom-or-bust level. It will be interest-ing to see whether the return above this level can be sustained. If, so that would be good news for the UK economy. Nevertheless, we think that quite a positive surprise is needed to cause any material sterling gains.

Global context. During the month of May, sterling performed a remarkable rebound against the euro (and the dollar). Improving eco data were a good reason for inves-tors to turn sterling positive. The break below the EUR/GBP level of 0.8637 was a clear signal that something had changed in investor sentiment towards the UK cur-rency. This move forced us to leave our longstanding buy-on-dips approach in the EUR/GBP pair. We turned to a neutral approach vis-à-vis the UK currency. Never-theless, there is still a lot of uncertainty on the BoE policy going forward (additional buying of assets?). On top of that, recent comments from BoE policy members gave the impression that they felt quite comfortable with a weak pound to support the economy.

Over the previous two weeks, the ascent of sterling ran into resistance. Apparently, enough good news had been priced in for sterling at the current levels. Neverthe-less, sterling showed rather resilient until now. Recently, we cut EUR/GBP short ex-posure and adopted a neutral bias for EUR/GBP. Regaining the 0.8605 area in a sustainable way would call off the ST alert in EUR/GBP and would be an indication that the EUR/GBP rebound could have some further to go. Yesterday, a first attempt of such a break failed. So, for now this remains a range trading story. Nevertheless, we have the impression that the downside in this pair has become better protected

EUR/GBP: First test of the key 0.8605 area rejected

Support comes in 0.8521/14 (Boll midline/MTMA), at 0.8488/74 (Daily enve-lope/Break-up), at 0.8437/26 (Week low/Break-up hourly) and at 0.8400 (Reaction low).

Resistance is seen at 0.8567/72 (Breakdown hourly/Daily envelope), at 0.8605/07 (Neckline HS/LTMA), at 0.8627 (Reac-tion high) and at 0.8631 (50% retracement).

The pair is in neutral territory.

News

US: payrolls report disappoints in June

In June, US employment dropped by 467 000, according to the official payrolls re-port. This is significantly weaker than expected as markets had expected a decline by 365 000. The April figure was downwardly revised from -504 000 to -519 000, while the May outcome was upwardly adjusted from -345 000 to -322 000. Looking at the details, private payrolls dropped by 415 000 and government payrolls fell by 52 000. In the goods-producing sector, 223 000 (from -215 000) jobs were lost of which 136 000 (from -156 0000) in manufacturing. In the service providing sector employ-ment dropped by 244 000, more than twice as much as last month (-107 000). The civilian labour force dropped from 155.08 million to 154.93 million, while the number of people unemployed rose from 14.51M to 14.73M. The unemployment rate rose from 9.4% to 9.5% in June, slightly below the consensus estimate of 9.6%. After the improvement in temporary help agencies in May (-8 000 from -54 000), they fell back again in June (-38 000). Education and health was the only sector that added jobs. Average weekly hours worked fell from 33.1 to 33.0 and the aggregate hours worked index dropped from 99.8 to 99.0. This employment report comes as a disap-pointment to the markets as it raises fears that the improving trend was only temporary and it is too early for a sustained labour market recovery.

Factory orders surprised on the upside of expectations in May, rising by 1.2% M/M, while an increase by 0.9% M/M was forecasted. The previous figure was however downwardly revised from 0.7% M/M to 0.5% M/M. The breakdown shows a 1.8% M/M increase in durables goods orders, while non-durable orders rose by 0.7% M/M. Part of the increase was aircraft related, but also computers and machinery rose.

In the week ended June 27, initial claims dropped by 16 000 from an upwardly re-vised 630 000 to 614 000, broadly in line with the consensus. Continuing claims, which are reported with a one-week lag, dropped from an upwardly revised 6 755 000 to 6 702 000, while the consensus was looking for an outcome of 6 740 000.

EMU: unemployment increase to 9.5% in May

In the euro zone, the unemployment rate rose from an upwardly revised 9.3% in April to 9.5% in May, while the consensus expected a slightly lower outcome. Ac-cording to Eurostat's estimates, the number of people unemployed rose by 273 000 in the euro zone, compared with April. The unemployment rate is now at its highest level since May 1999 and is forecasted to increase further in the coming months. Compared with one year ago, the lowest increases were observed in Germany and the Netherlands.

Other: Riksbank suprises by cutting rates and offering bank loans

The Swedish Riksbank surprised markets by cutting the repo rate by 25 basis points to 0.25% and added that the repo rate is expected to remain at this low level until autumn 2010. The Bank decided that the lower rate was needed to counteract the fall in production and employment and to attain the inflation target of 2%. The Risksbank also decided to offer 100 billion crowns of loans to the banks at a fixed in-terest rate and a maturity of 12 months saying that supplementary measures were needed to ensure that monetary policy had the intended effect.

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