Sunrise Market Commentary
- Rates: Consolidation as core bonds entered overbought conditions?
Sunday’s first round of the French presidential elections and geopolitical concerns are set to dominate trading this week. It should underpin core bonds via safe haven slows though the rally could lose some steam with the Bund and US Note future in overbought conditions.
- Currencies: USD decline to slow?
Yesterday, the dollar (USD/JPY and DXY) rebounded after comments from US Treasury Secretary Mnuchin who said that a strong currency was positive longer term. Today, the eco calendar is thin. A sustained bottoming out process of the dollar probably needs support from higher US yields. The topside of EUR/USD looks well protected ahead of the French elections
The Sunrise Headlines
- US equities ended yesterday on a strong foot, recording gains of nearly 1%. Overnight, most Asian stock markets gain ground as well though risk sentiment is less ebullient.
- US Treasury secretary Mnuchin has conceded that the timetable for ambitious tax reforms is set to slip following setbacks in negotiations with Congress over healthcare. He also downplayed Trump’s weak dollar comments.
- International observers said a closely contested vote on Turkey’s presidential powers contravened Turkish law by changing rules on ballot-counting at the last minute, one of several alleged voting irregularities prompting criticism.
- Vice Fed chair Fischer said he doesn’t see a replay of the so-called taper tantrum of 2013 as the central bank rolls out its plan for reducing its big balance sheet.
- North Korea’s UN envoy warned that the US has pushed the Korean peninsula to the "brink of war", as President Trump and his administration kept up their rhetoric against Kim Jong Un’s regime.
- Marine Le Pen and Emmanuel Macron’s support rose half a point to 23% and 24%, respectively, Elabe’s latest poll showed. Francois Fillon and Jean-Luc Mélenchon each slipped half a point to 19.5% and 18%.
- Today’s eco calendar contains US housing starts, building permits and industrial production. Kansas city Fed George is scheduled to speak and Bank of America, Goldman Sachs and Yahoo are among the companies who publish Q1 earnings
Currencies: USD Decline To Slow?
Dollar decline to slow?
On Monday, USD equities and by comments from US Treasury Secretary Mnuchin supported the dollar. The FinMin said he agreed with president Trump that the strength of the dollar was negative for exports, but added that the currency’s strength was a positive longer term. USD/JPY returned to the 109 area after touching a correction low in the 108.13 area in thin trading early in the session. The picture of the dollar against the euro remained a bit different. The euro rebounded against the dollar even as the decline in US bond yields halted. A short-squeeze in EUR/JPY (due to a better US equities) probably was the driver behind the move. EUR/USD closed the session at 1.0643 (from 1.0618 on Friday evening).
Overnight, Asian equities trade with modest gains. USD/JPY is holding off the recent lows and is changing hands in the 109 area. Markets are keeping an eye at meetings between US Vice President Pence and the Japanese PM Abe and FinMin Aso. There might be some frictions between the two countries on trade issues, but the focus will be on a joined strategy against North Korea. EUR/USD shows no clear trend, holding tight in the mid 1.0650 area.
Today, the US the March housing data are expected mixed. Starts are expected to have dropped 3% M/M to 1250K (annual rate while permits are expected to have risen modestly by 2.8% to 1250K.That would keep starts and permits near the cycle highs. The upward trend isn’t broken, but signs of some moderation become gradually visible. Industrial production is expected to have rebounded in March, rising by 0.4% M/M. The more cyclical manufacturing output is expected flat in March after a strong 0.5% M/M in February. All in all, the data won’t have too much impact on USD trading.
Yesterday, there were first tentative signs that the recent downward correction of the dollar is losing momentum. USD/JPY and the trade-weighted dollar rebounded off the recent low. For now, we don’t draw any firm conclusions yet. A sustained outperformance of the dollar probably needs support from a bottoming/rise of US bond yields. We’re not that far yet. So, we look for confirmation that the decline/correction of USD/JPY (and of DXY) has run its course. Of late, EUR/USD was an exception to the overall trend of USD weakness. The pair hovers in a tight range in the 1.06 area
Political uncertainty in Europe (mainly due to the French elections) counterbalances the overall USD decline even as interest rate differentials between the dollar and the euro and narrowed. In a day-to-day perspective, we don’t see much upside for EUR/USD as long as uncertainty on the French elections reigns.
Technicals: USD/JPY decline slows EUR/USD neutral
From a technical point of view, USD/JPY broke through the 110 key support, after having failed to regain the 111.36/60 previous range bottom. We downgraded our USD/JPY assessment to bearish, as long as the pair does not regain and sustains above 112.20 (neckline ST double bottom). Next key support (62% retracement) comes in at 107.18. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March, but the test was rejected. EUR/USD returned lower in the 1.0875/1.05 trading range with the odds for a test of the downside of the range. However, real downside break is difficult as the dollar trade rather weakish of late.
EUR/USD: stabilizes in the 1.06 big figure. Political uncertainty weighs, but no strong dollar momentum
Sterling holding near the recent highs
Of late, EUR/GBP drifted cautiously lower and this trends remained in place yesterday. Technical considerations in a very thin market dominated trading. EUR/GBP touched a minor correction low in the 0.8461 area and closed the session at 0.8470 (from 0.8478 on Friday). Sterling also held strong against the dollar even as the US currency showed tentative signs of bottoming. Cable closed the session at 1.2565.
There are no important eco data in the UK today. So, sterling trading will be driven by technical considerations. With both the dollar and the euro trading soft of late, sterling recorded some by default gains of late. However, both in EUR/GBP and cable there was no really strong sterling momentum. EUR/GBP drifted cautiously lower, but the magnitude of the decline remained modest, awaiting a clear move in the euro (French elections) or some high profile news from Brexit. For now, we don’t see a change of this sterling scenario.
We have a neutral short-term bias on EUR/GBP. The EUR/GBP 0.88/0.84 range should guide trading for now. Early April, the sterling rally/short-squeeze ran slowed, but sterling held near the recent highs. We see no trigger for a real change in sentiment yet. Longer term, Brexit-complications remain a potential negative for sterling. The BoE won’t raise rates anytime soon
EUR/GBP: gradual downtrend continues