Fri, Jun 02, 2023 @ 20:54 GMT
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Dollar Extends Gradual Rebound

Sunrise Market Commentary

  • Rates: Calm start of the week?
    The eco calendar is empty today. Sentiment in Asia is modestly risk-on. In this context, core bonds may feel some modest downside pressure, especially as investors will also be cautious ahead of Yellen’s testimony on Tuesday and a raft of US eco data, including inflation to be released Wednesday.
  • Currencies: dollar extends gradual rebound
    The dollar still profits from a constructive risk sentiment. The positive tone from the meeting between president Trump and Japanese PM Abe eased market fears on global trade and is marginally supportive for the dollar. The prospect of important tax measures in the US still prevents investors from going short equities and the dollar.

The Sunrise Headlines

  • On Friday, US equities eked out modest gains, setting again new all-time highs in an uneventful session. Asian equities start the week with moderate gains, as the yen weakens and dollar slightly strengthens and ahead of key US eco data.
  • Japanese investors culled their stakes of US Treasuries in December by the most in four years. It’s not just Japanese investors, as across the world foreigners are pulling back from USD debt like never before.
  • Fed Tarullo, dove and architect of the Fed’s banking regulation, will leave the Fed early April. It gives Donald Trump the opportunity to nominate 3 new Fed governors and to reshape the Fed’s oversight of Wall Street and monetary policy.
  • Commodities opened the week excellent with copper and iron ore surging, while oil stabilizes. Copper futures hit the highest level since 2014. It pushed producer shares higher in Asia.
  • Fitch affirmed Sweden’s AAA+ rating stable outlook and Slovakia’s A+ rating stable outlook
  • Fed vice chair Fischer said over the weekend that significant uncertainty remains over the outlook for US fiscal policy
  • Tokyo stocks gained as PM Abe and president Trump refrained from arguing about FX levels during their meeting. Japanese GDP grew for the 4th consecutive quarter, but the advance (0.2% Q/Q) was slightly below expectations.
  • Today’s eco and event calendar is empty. Attention might go to the Italian BTP auction. Later this week, Yellen will hold her semi-annual testimony before Congress and manifold interesting US eco data will be released

Currencies: Dollar Extends Gradual Rebound

Dollar extends gradual rebound

On Friday, the dollar traded again higher, as the new phase in the reflation trade continued. USD/JPY trended higher in the 113 big figure, supported by higher core/US yields and by a decent equity sentiment. The decline of EUR/USD was even more pronounced as the pair also suffers from underlying euro softness. The US rally slowed in US trading after Michigan consumer confidence was reported softer than expected. USD/JPY closed the session at 113.22 (from 113.25 on Thursday). EUR/USD finished the session at 1.0643 (from 1.0655).

Overnight, Asian equities show modest gains across the board. The meeting between US president Trump and Japanese PM Abe developed in a constructive environment, easing market fears on global trade tensions. Asian equities are also supported by new equity records (three indices) in the US on Friday. Japan Q4 GDP was reported marginally softer, but had no big impact on trading. Japanese investors cut their Treasury holdings the most on four years in December. This could be a negative for the dollar. However, currently, the risk-on sentiment prevails and is supporting the dollar. USD/JPY is trading in the 113.70 area. EUR/USD also resumed its gradual decline, trading in the 1.0630 area.

Today, the eco calendar is empty. So, USD trading will be driven by global market sentiment. The price action in Asia suggests a positive risk sentiment at the European open. This is USD supportive. Investors apparently still don’t want to go short US equities and/or short USD as US president Trump promised to present its tax plans in the near future. Short-term, markets will also look forward to Fed’s Yellen semi-annual testimony before Congress (Tuesday). The Fed chair will probably keep a balanced approach, but confirm that the Fed is nearing its targets. Yellen’s assessment at least shouldn’t be negative for the dollar. Markets will also keep a close eye on the US CPI and retail sales data (Wednesday). We start the week with a cautious USD-positive bias, but the moves might by modest given the upcoming key events/data

Global context: The dollar is/was in a corrective downtrend since the start of January as the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump’s communication became a source of uncertainty, also for the dollar. At some point, absolute interest rate support should provide a USD floor, especially as the Fed is expected to continue its policy normalisation. Last week, the dollar showed tentative signs of a bottoming out process, supported by the ‘Trump tax promise’. Price action earlier last week showed that euro weakness might be a factor too. As we see the 1.0874 as solid resistance, a sell EUR/USD on upticks approach might be considered. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. The day-to-day momentum improved, but a return to the recent highs looks an uphill battle. The post-Trump highs (118.60/66) are still far away.

EUR/USD: Topside test rejected. Dollar succeeds a cautious/gradual comeback


EUR/GBP holding in the 0.85 area

On Friday, UK eco data were unequivocally positive. Production rose more than expected and so was construction output. At the same time, the UK trade deficit narrowed more than expected. However, for the production output and the trade deficit, the ONS mentioned one-off factors potentially distorting the data. Sterling gained temporary a few ticks after the data, but the gains couldn’t be sustained. EUR/GBP even spiked temporary higher in the 0.85 big figure. Sterling sentiment improved slightly later in the session. EUR/GBP closed the day at 0.8513 (from 0.8526). Cable ended the session at 1.2491.

Today, there are no UK or EMU eco data. For now, we see no driver for sterling trading. A constructive risk-on sentiment and tentative euro softness caps the topside of EUR/GBP short-term. Later this week, important UK eco data including the CPI, the labour data and the retail sales will be published. We still look out whether the 0.8450 support will continue to play its role as ST line in the sand. Context. The ongoing balanced BoE approach capped the topside of sterling and helped a cautious bottoming out process for EUR/GBP. Last week, sterling rebounded as the UK Parliament was allowed to vote on the final Brexit agreement. We don’t see this ‘agreement’ as a reason for further sterling strength though. The EUR/GBP 0.8450 support remains key for EUR/GBP short-term. A cautious EUR/GBP buy-on-dips approach remains preferred, but overall euro softness remains a risk. In case of a break, the 0.8304 area is the next MT support

EUR/GBP still struggles to rebound off the 0.8450 support area

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KBC Bank
KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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