Sunrise Market Commentary
- Rates: Short term cautiousness is warranted for bond bears
Trumps’ administrations’ policy errors and failed test of technical resistance in US yield terms might balance the bearish bond sentiment, especially if the scandal explodes further. Cautiousness is therefore warranted. Ahead of the weekend, core bonds might be preferred. The eco calendar is empty.
- Currencies: Dollar extends correction, but losses remain modest
Yesterday, the dollar extended Wednesday’s correction as the reflation trade slowed. However, no important technical levels are broken. A big USD repositioning is unlikely before the announcement of the Trump fiscal plan. Sterling traders will keep an eye at the UK retail sales. For now, sterling is confined to tight ranges against the euro and the dollar.
The Sunrise Headlines
- US stock recovered from early weakness despite stronger eco data and ended flat. Overnight, most Asian stock markets lose ground (-0.5%) in a rather dull session with China underperforming (-1%).
- In late US and early Asian trading, the offshore renminbi briefly traded weaker than its onshore counterpart against the dollar in what would have been a reversion to type, as well as a signal that weakening was back on the agenda.
- EMU FM’s will miss next week’s deadline for an agreement with the IMF to release €7B in aid to Greece, forcing the bailout fight into the Dutch and French election season where diplomats fear it could become highly politicised.
- President Trump dismissed a growing controversy about ties between his aides and Russia as a ruse and scam perpetrated by a hostile news media, and denied any of his associates had contacts with Moscow before last year’s election.
- The Justice Department told an appeals court that President Trump would soon rescind and replace his executive order on visas and refugees, adding the court had no further reason to consider the current version.
- President Erdogan has made abundantly clear how he sees a referendum to change Turkey’s constitution and create a stronger presidency – those who vote "no", he says, are siding with supporters of terrorism and a failed coup.
- Norway’s government has proposed big changes to the world’s largest sovereign wealth fund, increasing its risk by investing about $90B more in stock markets and cutting the amount of oil money it can use in the budget.
- Today’s eco calendar only contain UK retail sales
Currencies: Dollar Extends Correction, But Losses Remain Modest
US dollar softens as reflation trade slows
On Thursday, a mild risk-off correction captured global markets. US eco data (housing starts and permits, jobless claims and in particular the Philly Fed outlook) printed again strong to very strong. However, the data couldn’t reverse the cautious risk-off sentiment in Europe (and to a lesser extent in the US). Core bond yields and the dollar drifted lower. EUR/USD closed the session at 1.0674 (1.0601 on Wednesday). USD/JPY finished the session at 113.24 (from 114.16).
Overnight, Asian equities are mostly ceding further ground as they join the pause in the reflation trade. The decline of the dollar this time doesn’t help regional equities. Even so, the correction remains modest. The decline of the dollar and of the US bond yield even stalls this morning; USD/JPY is changing hands in the 113.40 area (ST correction low 113.09 late yesterday). EUR/USD hovers in the 1.0670 area.
Today, there are only second tier eco data. So, technical considerations and global sentiment on risk will dominate USD trading. Regarding risk sentiment, the reflation trade slowed on Wednesday and on Thursday even as US data were strong/very strong. At the same time several Fed members including Fed’s chairwoman Yellen indicated that the Fed is close to meeting its targets, opening the way for a rate hike in the coming months. Markets maybe slightly reduced bets on the reflation trade as they fear political uncertainty in Washington. That said, we don’t expect investors to go outright short equities just days before US president Trump is expected to announce its fiscal stimulus plan. The picture might change when markets adapt positions once the details of the plan are known. In the meantime, the correction of equities and of the dollar, if any, should remain limited. So, for today, we expected relatively calm technical trading. The correction of the dollar might slow as markets are counting down to the Trump tax plan.
Global context: The dollar was in a corrective downtrend since the start of January as the Trump reflation trade slowed down. Last week, the dollar showed tentative signs of a bottoming out process, supported by the ‘Trump tax promise’. Underlying euro weakness due to political uncertainty in the area is a factor too. As we see the 1.0874 as solid resistance, a sell EUR/USD on upticks approach remains favoured. 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. Post-Yellen, the downside of the dollar is better protected. Even so, we are still more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD: dollar extends correction despite strong US eco data
EUR/GBP drifting cautiously higher
On Thursday, there was little UK specific news to guide sterling trading. Cable profited slightly from the broader correction of the dollar, but failed to sustain above the 1.25 barrier. The EUR/GBP cross rate gradually found a better bid throughout the session. The EUR/USD short-squeeze and the cautious risk sentiment propelled EUR/GBP. The pair closed the session at 0.8547 (from 0.8507). Cable finished the session at 1.2489. In a broader perspective, both cross rates are locked in tight ranges.
Today, UK retail sales might inspire sterling trading. Sales are expected to have rebounded in January after an unexpectedly sharp setback in December. Headline sales are expected at 1.0% M/M and 3.4% Y/Y. Given the sharp decline in December, a positive surprise is likely. Of late, UK activity data remained fairly strong. At the same time price data were soft. A modest positive surprise of the retail sales might be slightly supportive for sterling in a daily perspective. However, the focus is more on the price data. So, we don’t expect today’s data to change the broader picture for sterling trading, unless there is a really big deviation from consensus. EUR/GBP recently hovered in a tight range north of the 0.8450 support, but a break didn’t occur. Sentiment on sterling is a rather neutral. Euro weakness in case of rising political uncertainty is a risk for all euro cross rates, including for EUR/GBP. Longer term, we have a sterling negative view as the negative impact from Brexit still has to impact the UK economy. However, this is no issue at this stage. For now, the test of the 0.8540 support is apparently rejected, but the upside momentum isn’t really convincing either
EUR/GBP: new test of the 0.8450 support is avoided, but picture remains fragile