Sunrise Market Commentary

  • Rates: Yellen slightly supportive for US Treasuries?
    Yellen’s testimony for the US Senate is probably her final possibility to “pre-announce” tightening in March. We expect her to keep her lips sealed. Odds of a March rate hike are 30% and could suffer a blow, supporting US Treasuries short term, even if she holds on to the Fed’s scenario of 3 rate hikes in 2017. 125-09/16 remains strong resistance for the Note future.
  • Currencies: Dollar rally slows ahead of Yellen testimony
    Yesterday, the dollar gained slightly ground as the global equity rally continued. This morning, the risk-on sentiment eases after the resignation of Trump’s security adviser. There are plenty of eco data, but USD traders will await Yellen’s testimony before Congress. A balanced message might be slightly USD negative. Sterling traders will keep an eye on the UK CPI data.

The Sunrise Headlines

  • Main US equity indices ended around 0.5% higher yesterday. Overnight, Asian risk sentiment deteriorated with indices recording modest losses (Japan underperforming) following the latest lapse of the Trump administration.
  • Mike Flynn, President Donald Trump’s national security adviser, resigned as he was under increasing fire over his conflicting statements about his contacts with Russian officials before the inauguration, the White House said.
  • China’s PPI picked up more than expected in January to near six-year highs (6.9% Y/Y) as prices of steel and other raw materials extended a torrid rally. China’s CPI nears a three-year high (2.5% Y/Y) as fuel and food prices jumped.
  • Dallas Fed Kaplan, voting FOMC member, said the US central bank should act soon to raise rates, or risk having to abandon its plan to do so slowly. Kaplan did not say when he hopes the next interest rate rise will be.
  • US drillers have been bringing oil rigs back online in response to stabilising crude prices and the EIA now estimates that US crude production will climb by 80,000 barrels a day next month. Brent crude dropped back below $56/barrel.
  • Matteo Renzi has triggered a leadership contest in his ruling centre-left Democratic party, opening up a tussle that he hopes to use as a springboard for a comeback at Italy’s next general election.
  • A US federal judge rejected a Justice Department request to suspend Seattle courtroom proceedings over President Trump’s temporary ban on travel from seven Muslim-majority countries until an appeals court has fully reviewed it.
  • Today’s eco calendar heats up with UK CPI, EMU production, German ZEW and US NFIB small business optimism. Fed chairwoman Yellen testifies before the Senate while governors Lacker, Kaplan and Lockhaert speak as well.

Currencies: Dollar Rally Slows Ahead Of Yellen Testimony

Dollar rally slows ahead of Yellen testimony

On Monday, the dollar profited from the ongoing equity rally. However, the rise in core bond yields and in the dollar remained limited, as investors awaited today’s testimony of Fed’s Yellen before Congress. USD/JPY closed the session at 113.74 (from Friday’s close of 113.22). EUR/USD finished the session at 1.0598 (from 1.0643).

Overnight, global risk sentiment deteriorated as the security adviser of US president Trump was forced to leave on allegations of improper contacts with Russian diplomats. The ‘Flynn issue’ provides a good excuse to take profit on the recent equity and dollar rally. Asian equities show minimal losses, but Japan underperforms on yen strength. USD/JPY is trading in the 113.35 area. The China PPI was above consensus but had little impact on the markets. Dollar softness is lifting EUR/USD (1.0620) off the overnight low. The Aussie dollar profits from strong business confidence.

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Today, in EMU the Q4 GDP (expected unchanged) and December industrial production (expected weak) probably won’t have much impact on FX trading. The German February ZEW confidence is more timely. The market expects a small decline (15 from 16.6), but the recent good stock market performance suggests a potentially good outcome. In the US, the NFIB small business sentiment is expected to have declined slightly, following a leap upwards after the Trump election. With the index at a historic high level, the decline may be a bigger than expected, but shouldn’t be a great concern. The January PPI is expected to have eased to 1.5% Y/Y from 1.6% Y/Y. Core PPI is expected to have dropped to 1.1% Y/Y from 1.6% Y/Y in December. If anything, the global data point to a slightly softer dollar, especially if global sentiment would turn further risk-off. However, the focus will be on the Yellen testimony. For an in depth analyses see the fixed income part of this report. The Fed chair will keep a balanced approach, but confirm that the Fed is nearing its targets. However, she will probably refrain from hinting to a march rate hike. The dollar started the week in good shape. A less positive risk sentiment and Yellen abstaining from hints on a March rate hike might (temporary) block the most recent USD rebound. USD/JPY is more vulnerable to negative headlines/soft Yellen speak than USD/EUR.

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 become 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. For now, the USD/JPY rebound doesn’t convince us.

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

EUR/GBP

UK CPI nearing the 2.0% mark

On Monday, EU’s Juncker repeated calls for EU unity going into the start of the Brexit negotiations, but without impact on sterling. EUR/GBP initially held a tight range around the 0.85 pivot. Later in the session, the decline of EUR/USD also weighed (slightly) on EUR/GBP. The pair closed the session at 0.8461 (from 0.8513) nearing the 0.8450 support. The positive risk sentiment was also slightly supportive for Cable that closed the session at 1.2526 (from 1.2491).

This morning, the Flynn risk-off correction is slightly negative for sterling. The global context (Yellen speech) will be important for sterling trading. Even so, the focus will be in the UK price data. The input PPI already showed a substantial rise in pipeline inflation and this is expected to continue (from 15.8% Y/Y to 18.5 Y/Y). CPI is expected to decline 0.5% M/M but due to base affects this will still push Y/Y inflation to 1.9% (from 1.5% Y/Y in December). Core inflation is expected at 1.7% Y/Y from 1.6% Y/Y. Of late, the pass-through of higher PPI inflation into CPI inflation was modest. BoE governor Carney isn’t in a hurry to take a tough stance on inflation. So, data in line with the consensus probably won’t support further sterling gains. CPI jumping above 2.0% might be a short-term sterling positive. Overall euro softness also remains a downside risk for EUR/GBP. We look how the test of the key 0.8540 support turns out. In case of a break, the 0.8304 area is the next MT support. At least partially stop-loss protection on EUR/GBP longs may be considered.

EUR/GBP testing the 0.8450 support ahead of the UK inflation data

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