Sunrise Market Commentary
- Rates: Investors sidelined ahead of key events?
Today’s eco calendar contains the final EMU manufacturing PMI and EMU unemployment rate. We don’t expect them to influence trading ahead of Apple earnings (tonight), the FOMC meeting (Wednesday), payrolls (Friday) and a possible new vote on an health-care bill (end of the week) in US Congress. We have a neutral view for core bonds today. - Currencies: Both EUR/USD and USD/JPY hold near recent correction top
Yesterday, trading developed in thin market conditions. The dollar didn’t react to a disappointing US manufacturing ISM. Today’s calendar contains few clues for USD trading. The dollar probably needs support from better eco data and a confirmation from the Fed’s rate hike intentions to start a sustained, broad-based rebound
The Sunrise Headlines
- US stock markets ended mixed with Nasdaq outperforming, as bipartisan agreement over a US budget deal balanced a weak US manufacturing ISM. Overnight, Asian bourses gain ground with China underperforming.
- China’s factory sector lost momentum in April, with growth slowing to its weakest pace in seven months as domestic and export demand faltered and commodity prices fell. The Caixin manufacturing PMI fell from 51.2 to 50.3.
- Australia’s central bank left its cash rate at 1.5%, a widely expected decision given policy makers have signalled a steady outlook for much of the year ahead. AUD/USD gains marginally ground, rising above 0.7550.
- Greece and its foreign creditors reached a deal early this morning on a package of bailout-mandated reforms, Greek FM Euclid Tsakalotos said, paving the way for the disbursement of further rescue funds and debt relief talks.
- Matteo Renzi recaptured the leadership of Italy’s centre-left Democratic party. He won more than 70% of the ballots cast, allowing him to brush off concerns that the referendum loss had left him fundamentally discredited.
- The White House is pursuing a twisting path in Congress this week, yielding to Democratic demands on a major spending bill while aggressively pushing a partisan health-care measure, gambling on a big win on health but risking setbacks on both fronts.
- Today’s eco calendar contains the April manufacturing PMI’s in the UK and EMU (final). The EMU unemployment rate is also scheduled for release. ECB Nouy and Nowotny speak..
Currencies: Both EUR/USD And USD/JPY Hold Near Recent Correction Top
USD/JPY nears 112 barrier
Trading in EUR/USD and USD/JPY was confined to tight ranges yesterday as European markets were closed. In the US, both the spending and income data and the manufacturing ISM were soft. The latter printed at 54.2 from 57.2 and the details were also disappointing. The dollar lost temporary ground after the publication of the report, but the loss was easily reversed. A good performance of US equities (especially the Nasdaq) and a rise of LT US yields after comments from US Treasury secretary Mnuchin on the issuance of long-dated bonds, kept USD/JPY well supported. The pair closed the session at 111.84. EUR/USD finished the day little changed at 1.0899.
Overnight, most Asian markets partially join the tech-driven rally from the US yesterday evening. China underperforms. The Caixin Chinese manufacturing PMI unexpectedly declined to 50.3 from 51.2 in April. USD/JPY stabilizes in the high 111 area, near the recent correction top. EUR/USD still hovers in the low 1.09 area. The Reserve bank of Australia kept its policy rate as expected unchanged at 1.5%. The RBA keeps a balanced approach on the economy going forward. The Aussie dollar gained a few ticks after the RBA’s policy statement, but the move is insignificant. AUD/USD trades currently just below 0.7550.
The eco calendar is only moderately interesting today with the final EMU manufacturing PMI’s and the EMU March unemployment rate. In the US, only the monthly vehicle sales are on the agenda. The final EMU manufacturing PMI’s are expected to confirm the strong reading from the preliminary release. The US vehicle sales mostly have only limited impact on global markets and on the dollar in particular. However, they might get some more attention as soft car sales weighed on consumer spending of late. Global markets might also be affected by the results of several US bellwethers (including Apple). In a daily perspective, we expect relatively cautious trading in the major dollar cross rates. USD/JPY of late had a constructive momentum. Good US earnings might keep the downside in this cross rate well protected. However, given recent US soft data, the dollar probably needs support from better US eco data and a clear sign from the Fed that it maintains its rate hike intentions for this year to gain sustained further ground. The signal won’t come today. In this context, we also expected EUR/USD to hold near the recent recovery high. The PMI’s might be marginally euro supportive
Last week, FX trading was driven by the global risk trade as (European) political event risk eased. This supported USD/JPY, but also EUR/USD and EUR/JPY. The market also pondered whether declining political risk could bring forward the ECB normalisation process. However this hope was moderated after the ECB press conference. From a technical point of view, the rebound of USD/JPY suggests a bottoming out process has started, but the pair needs to regain the 112.20 level (neckline ST double bottom) to improve the picture. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair returned to the range top after the French election and set minor new highs. We look out how this test turns out. If EUR/USD would regain the 1.10 barrier, next resistance comes in in the 1.1145/1.13 area (US pre/post-election swings). The jury is still out, but we are not convinced that the time is already ripe for a sustained break higher of EUR/USD.
EUR/USD: holding near the post-Macron-top, but no clear break yet
EUR/GBP
Sterling cedes slightly ground on harsh Brexit talk
Yesterday, sterling traded with a soft bias both against the dollar and the euro. Trading developed in thin market conditions as most European markets were closed. The decline of sterling was probably driven by harsh comments from EU leaders this weekend as they discussed the EU strategy for the upcoming Brexit talks. Especially negative/skeptical comments from EU’s Juncker on a possible collapse of the negotiations dominated the headlines. Cable returned back south to the 1.29 area. EUR/GBP closed the session at 0.8458.
Today, the UK manufacturing PMI is expected to decline slightly from 54.2 to 54.00. After some mixed data of late, the (FX) markets will look for clues to whether some further cooling in the UK economy might be at hand. We don’t have strong arguments to take a different view from the consensus, but the market might become a bit more sensitive to negative surprises. We also look out whether Brexit might get some further attention as a driver for sterling trading. However, we doubt that it will become really important already before the UK elections. We start the week with a slight sterling negative bias.
Two weeks ago, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After last week’s rebound, the range bottom is better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations we are inclined to reconsider a cautious EUR/GBP buy-on-dips approach.
EUR/GBP: downside better protected after last week’s rebound
