Sunrise Market Commentary
- Rates: French election fever temporary out of the way?
Bayrou’s shout out to Macron might ease French election fever short term and trigger some spread narrowing. On core bond markets, the Bund could return some of yesterday’s impressive gains, also as the Bund rally ran into 165.48 resistance, the 62% retracement level of the Oct-Dec decline. Today’s eco calendar isn’t really inspiring for trading.
- Currencies: Euro decline slows as French political tensions ease
Yesterday, the euro reversed initial steep losses as French centrist candidates join forces, avoiding further fragmentation. Today, the eco calendar is thin. Some consolidation on the recent wild (euro) swings might be on the cards. However, we don’t see a change of trend, yet. EUR/GBP again failed to break the 0.8450 support in a sustainable way
The Sunrise Headlines
- US stock markets extended their record race, gaining more than 0.5% after Monday’s public holiday. Overnight, Asian equity sentiment is less bullish, with most indices recording small gains.
- Shares in Fannie Mae and Freddie Max tumbled by more than a third on after a court struck a blow to a group of investors in their quest to overturn the government’s decision to take all of the US mortgage giants’ profits
- China home prices increased last month in the fewest cities in a year, signalling property curbs to deflate a potential housing bubble are taking effect. New home prices, excl. subsidized housing, gained last month in 45 of the 70 cities
- BoJ Governor Kuroda said the chance the central bank will deepen negative interest rates is low for now, backing market expectations that no additional monetary easing is forthcoming in the near future.
- The head of Australia’s central bank, Lowe, gave the clearest signal yet that further cuts in interest rates would not be in the national interest as the danger of a debt-fuelled boom and bust was just too severe.
- Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.
- Cleveland Fed Mester said policy makers don’t want to surprise the market on interest rates and they have to be “nimble” to adjust their outlook amid global and domestic risks.
- Today’s eco calendar contains German IFO, the second reading of UK Q2 GDP, finale EMU CPI data, US existing home sales and FOMC Minutes. Fed Powell speaks on the economic outlook and Germany and the US tap the market
Currencies: Euro Decline Slows As French Political Tensions Ease
Euro sell-off slows, at least temporary.
Yesterday, euro weakness due to political uncertainty dominated FX trading. The euro sold off even as regional data (IFO) were strong. EUR/USD dropped temporary below 1.05. The decline of EUR/JPY also weighed on USD/JPY. Later, uncertainty on France eased as centrist Bayrou supported independent candidate Macron, avoiding further fragmentation and diminishing the risk of a Le Pen victory. The euro rebounded. Later, the Fed minutes didn’t provide concrete evidence on a March rate hike and weighed slightly on the dollar. EUR/USD rose further to close the session at 1.0558. USD/JPY finished at 113.31.
Overnight, most Asian equity indices show modest losses. Yen cross rates made quite some big swings yesterday and the yen trades still rather strong. This is a slightly negative for regional markets. Even so, Japanese/regional equities reversed part of the earlier losses. USD/JPY is trading in the 113.25 area. EUR/USD is little changed in the 1.0560 area.
Today, EMU eco data are second tier (final Q4 German GDP, French INSEE business confidence and Italian retail sales). US data have also limited potential to move USD. The January Chicago National Activity Index is expected flat (versus 0.14 previously). Initial claims have been very low in past weeks and no change is expected. We listen closely to the speeches of ECB Praet, especially as tensions in EMU markets flared up. Atlanta Fed Lockhart speaks but retires at the end of the month. Dallas Fed Kaplan is a moderate hawk. Over the previous days, French election worries fuelled uncertainty on European markets and weighed on the euro. The political uncertainty in France eased a bit after centrist Bayrou support centrist candidate Macron. Uncertainty might easily return later on, but in a dayto- day perspective, it might ease pressure on the euro. Even so, we don’t expect the EUR/USD rebound go far. Markets await Trump’s fiscal plan and its impact on Fed thinking. A decent fiscal easing (tax cuts/spending) should be USD supportive. However, we don’t see much pro-USD prepositioning yet. If there is no high profile news on France or on US fiscal policy, some consolidation in EUR/USD and USD/JPY is likely, with equities guiding the intraday moves
Global context. The dollar corrected lower since the start of January as the Trump reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump’s tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY was rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains a key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields. We keep a USD positive bias, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD: rebounds off recent lows on Bayrou comments
EUR/GBP: again no sustained break of 0.8450 support
Euro weakness pushed EUR/GBP further below the 0.8450 support. The pair touched an intraday low just north of 0.84. Some ST consolidation kicked in. The details of the UK Q4/2016 GDP painted a mixed picture and weighed on sterling. EUR/GBP initially rebounded to the 0.8440/50 area. Later in the session, the pair was further supported by the post-Bayrou rebound of EUR/USD. EUR/GBP closed the session at 0.8481. Cable finished the day at 1.2450. Sterling trading was dominated by the gyrations in the euro cross rates. Even so, yesterday’s price action should have disappointed sterling bulls.
Today, UK CBI Retail/Distributive trades reports will be published. Usually, the FX market doesn’t react much to the data and so the report won’ be a game-changer. However, the CBI data are interesting after recent very poor ONS retail sales data. We especially look for the market reaction in case of a poor report. EUR/GBP recently hovered in a tight range north of the 0.8450 support. Sterling sentiment softened slightly as a BoE rate hike is still very far away. Yesterday, a (temporary) acceleration of the euro sell-off pushed EUR/GBP temporary to the 0.84 area, but a sustained break of the 0.8450 level again didn’t occur. Longer term, we have a sterling negative view as the Brexit will negatively impact the UK economy. However, this is no issue at this stage. Euro weakness prevails. A sustained break below 0.8450 would open de way for a return to the EUR/GBP 0.8304 correction low, the next key support. We maintain a neutral bias on sterling short-term. Both EUR/GBP and cable show no clear trend.
EUR/GBP: no sustained break of 0.8450 support