Sunrise Market Commentary
- Rates: More neutral positioning into Jackson Hole speeches?
Core bond markets are rather dovish positioned. More subdued inflation readings questioned central banks’ urge to complete a near term tightening push. Expectations of pre-announced policy changes by Draghi and/or Yellen tomorrow are (too) low. Therefore, some investors might be willing to take some chips off the table, resulting in more neutral positioning. - Currencies: Dollar resists Trump’s comments rather well
Yesterday, USD soon found a bottom after a series of unconventional comments from US president Trump. Today, more wait-and-see trading can be expected going into the Jackson Hole symposium. Draghi needs to convince investors that the ECB will go very slowly to trigger a meaningful correction of EUR/USD. EUR/GBP extends its impressive ascent.
The Sunrise Headlines
- US equities managed to limit losses to 0.4% yesterday, despite US President Trump’s latest controversial comments on NAFTA and a government shutdown. Asian stock markets are mixed with China and Japan underperforming.
- ECB policy maker Hansson said he isn’t currently concerned about the strength of the euro as officials prepare to discuss how to wind down their bondpurchase program.
- The ECB should quickly end asset buys next year as the outlook does not warrant the extension of its €2.3 trillion scheme, Bundesbank President Weidmann said, weighing in on the biggest issue facing the ECB this autumn.
- Fitch Ratings said that it could put the US’s top-notch ‘AAA’ sovereign rating on review for a possible downgrade if lawmakers fail to raise the country’s debt limit in a timely manner.
- Dallas Fed President Kaplan reiterated that he wants to be patient on raising interest rates, adding that he’s not saying it should happen again this year. The central bank should start soon in paring its balance sheet, he said.
- The UK’s financial sector is seeking an ‘ambitious’ trade pact between Britain and the EU to try to prevent a costly shift of jobs and business to the continent once the country leaves the bloc, according to a draft report seen by Reuters.
- Today’s eco calendar contains the second reading of UK Q2 GDP, US weekly jobless claims and US existing home sales. The annual Jackson Hole Economic Symposium starts.
Currencies: Dollar Resists Trump’s Comments Rather Well
Modest USD damage after Trump comments
A new wave of unconventional comments of US president Trump on NAFTA and on a government shutdown aborted Tuesday’s USD rebound. Poor US housing data were also a slight additional USD negative. At the same time, the euro was supported by strong EMU PMI’s. EUR/USD returned north of 1.18 and closed the session at 1.1807. USD/JPY drifted to the 109 barrier, but the pace of the decline slowed during US session as the damage from the Trump comments on equities remained modest.
Overnight, Asian equities mostly show modest gains with Japan and China underperforming. Volumes remain thin as investors look forward to the Jackson Hole symposium. ECB’s Hansen, a hawk, isn’t overly worried about recent euro strength. At the same time, he left plenty of options open on the degree of monetary policy stimulation. At least for now, his comments don’t cause any further euro gains. EUR/USD stabilizes in the 1.18 area. USD/JPY holds in the low 109 area. So, for now, the 108.60 ST correction low ‘survived’ the unconventional trump comments.
The EMU calendar contains only second tier national data which are unlikely to affect EUR/USD trading in a profound way. Also the US initial claims, Existing Home sales and the Kansas Fed manufacturing survey will at best only have intraday significance as traders are focused on Jackson Hole. The meeting starts today, but key speeches of Yellen and Draghi are only scheduled for tomorrow . Regarding the Fed: the timing of the start of the tapering but also the Fed’s views on the missing link between buoyant employment, wages and ultimately inflation are important. Regarding the ECB, the outlook for the tapering of the APP programme matters most. Inflation, the ECB target, and the strength of the euro are crucial variables. Today, we expect more wait-and-see trading in EUR/USD. The market needs a ‘reassurance’ from Draghi that the ECB will move extremely slowly to trigger a meaningful correction of the EUR/USD. The modest reaction of USD/JPY (and of equities) on Tuesday’s Trump comments suggest that the decline of USD/JPY is taking a pause, awaiting more clear guidance from central bankers and the Trump administration
Broader context and technical picture. Late June, EUR/USD started a new upleg as investors anticipated a reduction of ECB bond buying to be announced in autumn. The Fed was expected to remove policy stimulation only in a very gradual way as US inflation remains soft. Uncertainty on the policy of the Trump administration was an secondary negative factor for the dollar. EUR/USD set a new correction top north of 1.19 before consolidating in a narrow 1.1662/1.1910 range. We expect this range to hold going into the Jackson Hole symposium. If US data remain ok (as most were this month) and if Draghi gives little information on next ECB steps, there might be room for a modest USD comeback. A return of EUR/USD to the 1.15/16 area is possible. Pockets of US political risk are a (negative) wildcard for the dollar. A downward correction in core (US and European) yields supported the yen in August. USD/JPY declined from mid 114 mid-July to 108.60. The April correction low (108.13) remains the line in the sand. For now, this level won’t be easy to break as quite some USD bad news is discounted after the recent protracted setback. A cautious buy-on-dips approach (with stop-loss protection below 108) may be considered.
EUR/US: awaiting clearer CB guidance
EUR/GBP
EUR/GBP: another day, another new ST top
Yesterday, sterling selling persisted. There were plenty of press articles on the role of the ECJ (Court of Justice) and on how the UK and the EMU will handle juridical disputes post-Brexit. Some comments considered the British language that it will accept no ‘DIRECT’ jurisdiction of the court as an easing on earlier tough separation rhetoric, but it didn’t help sterling. EUR/GBP jumped north of 0,92, admittedly in the first place due to strong EMU PMI’s. Cable also dropped below 1.28. The lack of progress in the Brexit talk still makes selling sterling the way of least resistance. EUR/GBP closed the session at 0.9224. Cable finished the day at 1.2800.
Today, the details of the UK Q2 GDP and the CBI August retail data will be published. UK growth is expected to be confirmed at a soft 0.3% Q/Q and 1.7% Y/Y. The details (e.g. on private consumption) are interesting, but the report is a bit outdated to have a lasting impact on sterling. CBI retail sales data are expected to have eased in August. However, we expect a slight positive surprise, as UK activity data weren’t too bad of late. Still, it won’t be a sterling game-changer. The focus for trading remains the Brexit negotiations and to a lesser extent inflation. Sterling’s decline can’t however continue till eternity without a pause or a temporary correction on which we put our money.
From a technical point of view, EUR/GBP cleared the 0.8854/80 resistance (top end June), opening the way for further gains. The move was the result of euro strength (strong EMU data and expectations of the ECB QE reduction). At the same time, UK price data rare soft enough to keep the BoE side-lined as the Brexit negotiations continue. MT, we maintain a buy EUR/GBP on dips approach as we expect the combination of relative euro strength and sterling softness to persist. The 0.9415 ‘flash-crash spike’ is the next target on the charts. However, we don’t jump on the up-trend and wait for a correction, e.g. to the technical support in the 0.88/89 area
EUR/GBP: uptrend continues unabatedly. Is the sky the limit?
