Sunrise Market Commentary
- Rates: Risk sentiment and technical factors are favourable for US Treasuries
Risk aversion (North Korea, Irma, debt ceiling) is positive for core bonds via safe haven flows. The technical picture comes into play as well with US yields erasing last week’s potential trend reversal signal and dropping below key support. A strong non-manufacturing ISM probably can’t change the tide. The Bank of Canada meeting serves as a wildcard. - Currencies: Dollar has no safe haven roll to play, at least for now
The dollar remains in the defensive. Uncertainty on North Korea and several US political issues prevent the US currency to take up its usual safe have role. The US currency is also losing more interest rate support. EUR/USD looks some kind of immune to global uncertainty. This stalemate probably will continue till tomorrow’s ECB meeting
The Sunrise Headlines
- US markets corrected up to 1% lower after returning from the long Labour Day Weekend. Tensions with North-Korea caused the risk aversion. Most Asian stock markets lose ground overnight, but to a lesser extent.
- Japanese workers’ wages fell in July on a drop in summer bonus payments, casting some doubt on the sustainability of a recent improvement in consumer spending. Wages fell in both nominal and inflation-adjusted real terms.
- Minneapolis Fed Kashkari argued recent rate increases may be ‘actually doing real harm to the economy’. Dallas Fed Kaplan said he could advocate for another hike this year, but he wants to see how inflation plays out. While Harvey will drag on third-quarter growth, it doesn’t change his view on monetary policy.
- Britain is developing a strict post-Brexit immigration policy which will mean tougher hurdles to work in the UK for all but the highest-skilled EU migrants, according to a leaked Home Office document.
- Senate GOP leaders signaled they will tie an increase in the nation’s borrowing limit to an aid package for victims of Harvey, a move that could boost the debt-limit legislation’s chances of passage ahead of a deadline this month.
- The CNB does not need to rush with the next interest rate hike following strong economic data and can wait for the next quarterly update of its forecasts due in early November before deciding what to do next, Governor Rusnok said.
- Today’s eco calendar only contains the US Non-manufacturing ISM. The Bank of Canada’s rate decision will receive some attention as well with the market split on the possibility of a new hike. Germany sells bonds
Currencies: Dollar Has No Safe Haven Roll To Play, At Least For Now
For now , the dollar has no safe haven role to play
Yesterday, European equities and the dollar traded with a negative bias as investors still pondered the impact of the tensions on the Korean peninsula. The European and US eco data were softer than expected, but were not to blame. Sentiment deteriorated further during the US session and US yields nosedived. North Korea was maybe still partially to blame , but other political issues in Washington were also in play. The dollar remained under moderate pressure. EUR/USD closed the session at 1.1914. The loss of USD/JPY was more substantial. The pair finished the session at 108.81.
This morning, Asian markets trade with a modest risk-off bias, but the losses are limited compared to the US yesterday. The yen is holding near the recent highs against the dollar (108.65/70 area). EUR/USD remains immune for global uncertainty and is little changed at around 1.1915. Other euro cross rates (EUR/JPY, EUR/GBP, …) are feeling some stronger headwinds. The Australian Q2 GDP was slightly softer than expected. AUD/USD rebounded north of 0.80 on overall USD weakness yesterday, but loses slightly ground after the GDP this morning. (currently 0.7990).
The EMU eco calendar is empty ahead of tomorrow’s ECB meeting. In the US, the July trade deficit is expected to have widened modestly in July but, if confirmed, net trade would still add positively to Q3 GDP. The August nonmanufacturing ISM is more important. The headline ISM fell sharply in June. Markets expect a rebound to 55.5. We see risks on the upside of consensus. The Fed Beige book probably will be in line with the eco data releases, but maybe there are already some signs about the impact of Harvey. All in all, it shouldn’t affect markets much.
Yesterday, global investor sentiment turned again more fragile. The tension on Korea, a new hurricane in the US and other pending political issues clouded the (US) economic outlook. The yen remains the preferred safe haven. The dollar lags the other majors. The EUR/USD shows no clear pattern even as interest rate differentials between the dollar and the euro narrowed substantially. Global investors sentiment will remain cautious today , but the eco data (US ISM) might be slightly USD supportive. If US yields were to bottom out, it might contain further USD losses. However, sentiment on the dollar remains fragile. Will the trade-weighted dollar and USD/JPY sustain above the recent lows? EUR/USD shows not clear ST direction and this probably won’t change ahead of tomorrow’s ECB meeting.
Global context. Dollar sentiment improved slightly after the Jackson-Hole selloff, but USD didn’t regain any technically relevant level. There is no sign on a Uturn in favour of the dollar. The data might be USD supportive, but a (moderate) risk-off sentiment weighs on the dollar. Therefore, we maintain a EUR/USD neutral bias ahead of the ECB meeting. EUR/USD falling below the 1.18/1.1775 area would suggest more downside short-term. For such a move, the USD needs good data and higher US yields. On the euro side of the story, Draghi has to convince markets that low inflation is enough a reason for the ECB to maintain a loose monetary policy. On the topside, the 1.2070 correction top remains the first reference.
A downward correction in core (US and European) yields supported the yen in August. USD/JPY declined from mid-114 mid-July and came within reach of the key 108.13 range bottom, but the support did its job. We maintain the working hypothesis that this level won’t be broken easily as a lot of USD bad news is discounted. A cautious buy-on-dips (with stop-loss protection below 108) may be considered. USD/JPY needs to regain the 110.95 level to suggest an improved upside momentum. Such a break might be difficult as long as global sentiment remains risk-off.
EUR/USD going nowhere even as global uncertainty mounts
EUR/GBP
Sterling rebounds despite Brexit stalemate
The technical rebound of sterling resumed yesterday. The UK data didn’t provide a valuable explanation. The UK August services PMI even declined slightly more than expected. We consider the GBP rebound mainly as technical in nature. Last week’s Brexit negotiations didn’t yield any concrete progress, but sterling shorts apparently are taking some chips of the table, in particular against a strong euro. EUR/GBP drifted south even as EUR/USD stabilized. EUR/GBP closed the session at 0.9141 (from 0.9202). Cable rebounded north of 1.30.
Global factors, technical considerations and Brexit headlines will set the tone for sterling trading today. A risk-off context is usually a negative rather than a positive for the UK currency. However, this was not the case over the previous days. We have a long term sterling negative bias, but wait for a deeper correction higher of sterling before stepping in and sell sterling.
From a technical point of view, EUR/GBP cleared 0.8854/80 resistance (top end June), opening the way for further gains. The move was the result of euro strength. Simultaneously, UK price data were soft enough to keep the BoE sidelined. MT, we maintain a buy EUR/GBP on dips approach as we expect the combination of relative euro strength and sterling softness to persist. The 0.9415 ‘flash-crash spike’ is the next target on the charts. However, we wait for a correction, e.g. to the technical support in the 0.88/89 area, to sell sterling again versus the euro.
EUR/GBP: sterling resumes (technical) rebound
