Sunrise Market Commentary
- Rates: Geopolitical tensions boost US Treasuries, but for how long?
Risk aversion reigns cross markets overnight following the latest North Korean missile launch. The US Note future tests the contract high overnight. Geopolitical trading themes generally don’t last very long. Some investors probably decide to hold a neutral view ahead of key US eco releases and a rumoured speech by US President Trump on his fiscal stimulus plans. - Currencies: no safe haven bid for the dollar
Yesterday, EUR/USD extented the post-Jackson hole gains and neared 1.20. Overnight, markets shifted in risk-off modus as a missile launch of North Korea triggers harsh verbal protest. This is a negative rather than a positive for the dollar. UK-EMU Brexit talks are still in a stalemate preventing a sterling rebound for now.
The Sunrise Headlines
- US equities ended nearly unchanged yesterday with Nasdaq slightly outperforming (+0.26%). Risk aversion reigns overnight following the latest North Korean rocket launch. Main Asian indices lose around 0.5%.
- North Korea has launched a ballistic missile that overflew Japan, undermining protracted US efforts to bring it to the negotiating table with an aggressive step it has not taken in almost 20 years.
- Saudi Arabia and Russia are pushing to extend their deal to limit crude oil production for another three months, which would leave the (non-)OPEC output deal in place through the end of June 2018, people familiar with the matter said.
- The EU’s chief Brexit negotiator Barnier accused the UK of not "negotiating seriously" over its withdrawal and called on May’s government to remove ambiguity about its stance.
- Romania, one of the fastest growing EU members, may join the euro zone in 2022, once the incomes of its poorest citizens rise, foreign minister Melescanu said.
- Greece must press ahead with implementing its reforms-for-aid programme and become more competitive, German FM Schaeuble was quoted as saying, adding that debt relief for Athens was "currently" not on the agenda.
- Today’s eco calendar remains rather thin with only US consumer confidence and S&P housing prices.
Currencies: No Safe Haven Bid For The Dollar
EUR/USD nears 1.20 mark
On Monday, EUR/USD and USD/JPY initially held extremely tight ranges after Friday’s ‘Jackson Hole decline of the dollar’. The lack of a correction on Friday’s EUR/USD break higher convinced euro bulls of more upside. EUR/USD came within reach of the 1.20 barrier and closed the session at 1.1969. The decline of USD/JPY was more modest as equities performed rather well. The pair closed the session little changed at 109.25.
Overnight, markets shifted into risk-off modus as North Korea fired a missile that few over the north of Japan. The missile provoked a sharp verbal reaction from South Korea, Japan and the US. Japanese premier Abe and US president Trump extensively discussed the issue and agreed to raise the pressure on North Korea. South Korean stocks (-0.4%) and the won are underperforming. The yen plays its safe haven role with USD/JPY trading in the 108.80 area. The losses on Asian equity markets remain modest. The rise of tensions in Asia has little impact on EUR/USD. The pair trades in the 1.1975 area, holding within reach of the MT top.
The EMU calendar contains only French July consumer spending and the final Q2 GDP. No market impact is expected. US consumer confidence is expected to have declined slightly in August, (120.7 from 121.1). Other measures of consumer confidence (Michigan, Bloomberg) improved in August. The expected decline would be no reason of concern and we even don’t exclude a rise in confidence instead of a decline. Strong consumer confidence might be lightly USD supportive. However, investors will give more weight to more important data later this week. The N-Korea inspired risk-off sentiment is a wildcard for FX trading. In the recent past, the impact of political event risk on global markets was limited and short-lived. The political rhetoric sounds a bit more harsh this time. That said, geopolitical tensions are currently not supportive for the dollar. Its safe haven appeal is rather low. The dollar needs in the first place data that are strong enough to raise rate hike expectations. This won’t occur today. So some consolidation in USD/JPY is likely. A test of EUR/USD 1.20 is becoming ever more likely. Or will a risk-off topping out process in EUR/JPY help to stop the rise in EUR/USD?
Broader context and technical picture. Late June, EUR/USD started a new up-leg as investors anticipated a reduction of ECB bond buying. The Fed was expected to normalize policy only in a very gradual way as US inflation remains soft.
Uncertainty on the policy of the Trump administration was a 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. The top of this range was broken after Jackson hole. The day-to-day momentum remains euro positive. However, in MT perspective, we assume that the EUR/USD rebound has gone far enough if the recent improvement in US eco situation will be confirmed. 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. We wait for a technical signal.
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/USD: ‘by default’ euro buying persists. 1.20 within striking distance
EUR/GBP
EUR/GBP holding near the recent top
Yesterday, sterling trading volumes were low as UK markets were closed for the Summer Bank holiday. Cable and EUR/GBP basically maintained the moves after the Jackson hole speeches of Yellen and Draghi on Friday. EUR/GBP held in the mid-0.92 area. EUR/GBP closed the session at 0,9263 on a strong close of the euro. Cable finished the day at 1.2933.
Overnight, the reactions after the start of the third round of the Brexit talks shows that little progress has been made. EU negotiator Barnier repeated that the UK needs to bring clarity on the separation issues. For now, this stalemate in the negotiations has little negative impact on sterling, but UK sterling traders still have to return from a long weekend. The Halifax house prices were slightly softer than expected at -0.1% M/M and 2.1% Y/Y. There are no other UK data, but again plenty of Brexit headlines. For now, they are not sterling supportive. Even so, EUR/GBP already discounts plenty of UK negative news. We look for a signal that the rally slow.
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. Simultaneously, UK price data were soft enough to keep the BoE sidelined. 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 anymore after the recent rally and wait for a correction, e.g. to the technical support in the 0.88/89 area.
EUR/GBP: holding near recent top on euro strength
