Sunrise Market Commentary
- Rates: Sell-the-rumour, buy-the-fact as Yellen delivers.
Main events today are speeches by Fed vice chair Fischer and Yellen. We expect them to seal the deal for a March rate hike, which is by and large already completely discounted. We believe that there is room for some minor profit taking going into the weekend, especially if stock markets continue to correct lower.
- Currencies: Dollar rally continues amid higher rates and yields
Yesterday evening’s equity correction on Wall Street deepened overnight in Asia. Fed Yellen will probably seal the March rate hike deal today, but it is largely discounted, opening the possibility for a sell the dollar before/on the fact. However, we consider it as a correction and remain dollar positive longer term.
The Sunrise Headlines
- US couldn’t hold on to record gains after Trump’s speech and Fed governors’ hints on a March rate hike. They corrected 0.5% lower yesterday. Overnight, losses on Asian stock markets are even slightly bigger.
- Core inflation has returned to Japan for the 1st time since 2015, with consumer prices ex. fresh food rising by 0.1% Y/Y in January. The return to positive territory was driven by energy.
- An independent gauge of activity in China’s services sector indicates growth slowed further last month, contrasting with a pick-up in bustle at the country’s manufacturers. The Caixin Services PMI declined from 53.1 to 52.6.
- Fed Governor Powell said the case for a rate increase at the US central bank’s March meeting has “come together,” joining the chorus of Fed officials signalling a hike is coming soon.
- China’s leaders are expected to telegraph their willingness at this year’s annual parliamentary meeting to let reforms overtake policy stimulus as their priority amid concerns over financial instability in the world’s second-largest economy.
- Catalonia is organising the logistics for a referendum on independence from Spain it plans to hold by the end of September, even if it goes against the wishes of the national government, the Catalan government’s foreign policy chief said.
- Today’s eco calendar contains services PMI’s/ISM in EMU (final), UK and the US. Fed vice chair Fischer speaks on monetary policy decision making and chairwoman Yellen discusses the economic outlook.
Currencies: USD Extends Gains On Rate Hike Expectations, But No USD Euphoria
USD uptrend continues, albeit a slower pace
The revived reflation trade took a breather (equities lower) yesterday. Even so, the dollar uptrend remained intact, as yields maintained an upward bias. Investors continued to adjust positions for a March Fed rate hike. The 2-yr US/German yield spread widened 4 bps to 215 bps, matching the cycle high, to close at 213 bps, after a late session “rebound” of Treasuries. The dollar rally initially shifted into a lower gear, but got extra fuel from hawkish comments of Fed Powell who explicitly mentioned a March rate hike. Some correction started late in the session. EUR/USD approached 1.0494 support and USD/JPY neared the 114.94 resistance. EUR/USD finally closed at 1.0507 (intraday low 1.0495), while USD/JPY closed at 114.41 (intraday high 114.59). The eco data (EMU inflation and US jobless claims) supported the reflation trade, but had no immediate impact on currency trading.
Overnight, the risk-off sentiment deepened. Japanese data were on the softer side and Chinese Caixin services sector and composition business sentiment were mixed versus January. Asian stocks are lower, with Japan underperforming as the yen strengthens. USD/JPY trades currently around 114.10 (from 114.41 opening). Risk off and slightly lower US yields drive the move. Commodities stabilise after yesterday’s slide, and so does EUR/USD for now (1.0514). US Services ISM and Yellen in the spotlight today
The US Services ISM is expected to have stabilized at a lofty 56.5 in February. However, the manufacturing ISM accelerated in February to 57.7 from 56 previously and both indices have a strong monthly correlation. Therefore, we put the risks on the upside of expectations for the US services ISM despite its high level. No less than 5 Fed governors will appear and give their opinions on the economy and likely policy ahead of the black period that precedes the March 15 FOMC meeting. However, the key speeches will be given by Fed chairwoman Yellen and Vice-chair Fischer at 19:00 CET. Fed governors like Dudley, Williams, Powell and Brainard prepared the road for a March rate hike. It is now the “task” of Yellen/Fischer to seal the deal. This looks highly likely. If not, expect some panic and wild repositioning
Regarding FX trading today, the service ISM may be dollar positive. As markets have now nearly completely discounted a March Fed rate hike, the risk is nevertheless for a counter-intuitive “buy-the-rumour, sell the fact” reaction in various markets before and/or after Yellen’s speech. Yesterday, some traces of such behavior were visible in the equity markets, but not yet in FX markets. The risk-off equity moves and slightly lower US yields overnight may be the precursor of what will follow today. The dollar hit key resistance levels which might also be an invitation for some dollar profit taking. We would take that as a “normal” reaction and no sign of a turnaround in the trend. In this respect, we stay dollar positive longer term and hope to be able to buy it at lower levels in case the correction is more than a superfluous event.
Global context: Over the previous days the focus shifted from US fiscal policy to the Fed’s monetary policy, as the Fed prepares markets for a rate hike in March. EUR/USD 1.0874 is a solid resistance and we favour a sell EUR/USD on upticks approach. The focus is now on the downside of the pair with 1.0494, first intermediate support ahead of the 1.0341 correction low. Too difficult to break ahead of Yellen and the weekend? The downside test of USD/JPY is also rejected. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains key support. On the topside, 114.96 is a first point of reference, but some correction pre/post-Yellen may delay a test.
EUR/USD decline continued yesterday, nearing 1.0492 support, last gate before cycle lows. Risk off may make a break difficult today, unless Yellen helps
EUR/GBP fails to take out first resistance at 0.8592
Yesterday, cable slid lower for the fifth consecutive session, but the pace of the downturn slowed and cable closed around 1.2267 from 1.2293 on Wednesday evening. The intraday decline of EUR/USD was only a small and temporary help for sterling versus the euro. EUR/GBP closed at about 0.8565,virtually unchanged from the previous close (0.8579). The pair came again within reach of the 0.8592 resistance (ST top), but a real test didn’t occur. There were plenty of comments on the Brexit amendment in the Upper House. However, (FX) markets don’t see these as a hurdle for respecting the Brexit timetable.
Today, the UK February services PMI is expected to have declined slightly from 54.5 to 54.1. A negative surprise, after the miss in the manufacturing measure earlier this week, might be slightly sterling negative, but will it be enough for EUR/GBP to break above 0.8592 resistance? Sterling sentiment has softened a bit of late, but an EUR/USD rebound is likely needed to push EUR/GBP above resistance. If the euro loses further ground against the dollar and EUR/USD drops below 1.0494, a break of EUR/GBP above resistance would be difficult at this point. Early last week, the euro sell-off pushed EUR/GBP to the 0.84 area, but a sustained break lower didn’t occur. A break of EUR/GBP above 0.8592 resistance would suggest a further loss of sterling momentum. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy
EUR/GBP: testing first resistance at 0.8592.