Sunrise Market Commentary
- Rates: US yield resistance difficult to break ahead of payrolls or even Fed
Fed chairwoman Yellen sealed the deal for a March rate, which is completely discounted in rate markets. Given this week’s back loaded calendar (payrolls on Friday) and last week’s failed test of US yield resistance (2y: 1.3%, 5y: 2%), we believe that consolidation is likely. On EMU bond markets, more French spread narrowing is likely if Juppe nevertheless replaces Fillon.
- Currencies: Dollar falls prey to profit taking. Euro remains well bid
Late on Friday, the dollar was captured by a buy-the-rumour, sell-the fact-move after Fed’s Yellen ‘approved’ the scenario of a March Fed rate hike. The euro was well bid as French political uncertainty eased. Today, the eco calendar is thin. There is probably no trigger from a new USD up-leg short-term
The Sunrise Headlines
- US equities closed Friday’s session nearly unchanged, as early losses were gradually erased. Asian equities trade modestly higher with Japan underperforming, suggesting a continuation of the global equity rally.
- China wants to strike a balance between growth and risk, PM LI said, trimming its GDP target to 6.5% and cutting its money supply target to about 12%. China also wants to liberalize further the yuan’s FX rate, a change from last year.
- A Kantor Sofres poll showed Fillon lost ground in the first round (17%). Le Pen wins (26%), narrowly followed by Macron (25%). If Juppe would be candidate (24,5%), Macron (20%) would not make to the 2nd round, with Le Pen at 27%.
- Moody’s affirmed the Belgian Aa3 rating (stable). It expects that Belgium will avoid a return to the excessive debt procedure (EDF) for the foreseeable future and that the structural debt reduction will resume in 2017.
- Fitch affirmed France’s AA rating (stable), but will reassess its fiscal forecasts after the elections. S&P confirmed Sweden’s AAA rating (stable).
- Brent crude is modestly lower at €55.70/barrel despite Libya halting exports from two of its biggest ports and cutting production.
- Francois Fillon said Sunday he won’t give in to pressure from his party to quit the presidential race and be replaced by Juppe. Party leaders meet today to discuss the issue.
- Today, the market calendar contains only second tier eco releases. BoE Haldane and Hogg speak. Highlights this week are the ECB meeting (Thursday), the US payrolls (Friday) and the Chinese Congress
Currencies: Dollar Falls Prey To Profit Taking. Euro Remains Well Bid
USD profit taking: Euro better bid
Thursday’s rejected test of the EUR/USD 1.0494 support triggered a further EUR/USD short-squeeze on Friday. Tensions surrounding the French elections eased. After European closure, Fed’s Yellen rubberstamped the scenario of a March rate hike. The dollar already lost ground versus euro ahead of Yellen and a further buy-the-rumour sell- the fact reaction led to more dollar selling. A the same time, the euro was fairly well bid across the board. EUR/USD finished the session at 1.0622 (from 1.0507). The correction of USD/JPY was more modest. The pair closed the week at 114.04 (from 114.41).
Overnight, Asian equities are trading modestly positive, with Japanese equities underperforming as South Korea launched missiles towards Japanese waters. The modest reaction to Yellen’s comments on Friday supports regional risky assets. The yen trades slightly stronger on the North Korean geopolitical tensions. USD/JPY is changing hands in the 113.85 area. The euro preserves Friday’s gains. EUR/USD is changing hands near 1.06.
Today, the euro area February Markit retail PMI and the March Sentix investor confidence are up for release. In the US, the January factory orders will be published. We don’t expected a lasting impact on USD trading. Further out this week, the ECB meeting on Thursday and the US payrolls on Friday will be the highlights. (Currency) markets will also keep an eye at the political developments in France. If Juppé would become the Republican candidate for the French Presidential election, it might reduce political uncertainty and be a temporary supportive for the euro. Markets will also ponder whether ECB’s Draghi would sound a bit less soft at Thursday’s press conference. We don’t expect a material change in the ECB assessment, but uncertainty on the issue might be a tentative euro supportive. In a day-to-day perspective, we start the week with a USD neutral bias. The US currency fell prey to modest profit taking at the end of last week and there is no obvious trigger for the USD rally to restart right now. The rejected test of EUR/USD 1.0494 and of the high USD/JPY 114 area is also slightly USD negative. Investors are also scaling back euro shorts. We still look to sell EUR/USD into strength, but are in no hurry to do so right now. EUR/USD 1.0679 is a first ST reference
Global context: Last week, the focus shifted from US fiscal policy to the Fed’s monetary policy, as the Fed prepared markets for a rate hike in March. EUR/USD 1.0874 is a solid resistance and we still favour a sell EUR/USD on upticks approach. On the downside, the test of the first intermediate support at 1.0494 was rejected as a March Fed rate hike is discounted. So, some ST USD consolidation might be on the cards. The payrolls are the next key issue for USD trading. The downside test of USD/JPY was 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. Last week’s correction suggests that it is too early for a break and a new USD/JPY up-leg.
EUR/USD: test of 1.0494 support rejected even as Yellen keeps door wide open for a March Fed rate hike
EUR/GBP regains first technical resistance
On Friday, sterling was heavily sold, as the UK services fell more than expected for the second consecutive month. The rift between PM May and the Scottish PM Sturgeon was also sterling negative. May accused PM Sturgeon of sacrificing living standards in Scotland in her pursuit of a breakaway from the UK. EUR/GBP rose above the first resistance at 0.8592 and closed the session at 0.8631. Underlying euro strength also supported the EUR/GBP rebound. Cable dropped to the 1.2215 area after the PMI’s were released but rebounded later on USD softness. The pair closed the session at 1.2291.
Today, the UK eco calendar is nearly empty. Later this week, sterling traders will look out for the continuation of the Brexit debate and for the Budget statement (on Wednesday). The UK government will probably indicate that it will set aside some money to counter the consequences of Brexit, but the budget might stay rather restrictive. If anything, we don’t expect the budget to be a supportive sterling factor. Sterling sentiment has softened of late. At the same time, the euro was in better shape at the end of last week, helping EUR/GBP to regain the 0.8592 support. The break above this level improves the short-term picture of EUR/GBP. We don’t expected the EUR/USD rebound to go far, but a combination of a temporary improving euro sentiment and at the same time ongoing sterling softness might trigger some further EUR/GBP gains short-term. A sustained break north of 0.8645 might reinforce the ST positive momentum. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK.
EUR/GBP: clears first resistance at 0.8592. 0.8645 resistance on the radar