Sunrise Market Commentary
- Rates: Jury still out on potential trend reversal
We expect EMU eco data to beat consensus (including HICP) while we hold a more neutral stance towards US eco readings. Such scenario should be sufficient to keep core bonds away from key resistance levels or even inflict some additional losses. Tuesday’s potential technical trend reversal signal could also still be at play. - Currencies: USD extends rebound, but confirmation is still needed
Yesterday, the dollar extended its rebound against the euro and the yen even as rise in core yields remained modest. The EMU and US price data will take center stage today. Will the euro ignore higher EMU headline inflation? The dollar made a nice technical rebound, but conformation from strong US data is needed, starting with tomorrow’s US payrolls.
The Sunrise Headlines
- US equities extended gains yesterday with Nasdaq outperforming (+1%) and Dow Jones underperforming (+0.1%). Overnight risk sentiment on Asian stock markets is more mixed with China notable underperformer.
- Trump has warned that talking to North Korea is “not the answer” as tensions mount. Defence secretary Mattis, a stabilising influence in the administration, softened that stance by saying that “we’re never out of diplomatic solutions”.
- Official Chinese August PMI’s printed mixed this morning. The manufacturing PMI increased to 51.7 from 51.4 in August (51.3 forecast), but the non-manufacturing PMI dropped from 54.5 to 53.4.
- South Korea’s central bank kept its key interest rate unchanged at a record low 1.25%, as expected, as it assesses the effects of government measures to cool the housing market and recently introduced fiscal stimulus.
- British and EU negotiators exchanged recriminations over a lack of progress in the latest round of talks on Britain’s withdrawal, with both sides demanding change to meet looming deadlines.
- Mr Trump said he wants to cut the corporate tax rate to 15%, simplify the tax code, reduce the burden on the middle class – including helping parents afford child care — and bring back to the US corporate profits parked offshore.
- Today’s eco calendar contains German & EMU unemployment data, EMU inflation numbers, US personal income/spending data, weekly jobless claims, PCE inflation and Chicago PMI.
Currencies: USD Extends Rebound, But Confirmation Is Still Needed
Dollar extends rebounds. Confirmation still needed
Yesterday, dollar extended the rebound that started Tuesday. The move was primarily a technical correction on the recent USD decline, but good US eco data (strong ADP and upward revision of the US GDP) and positive risk sentiment reinforced the rebound. EMU inflation was also higher than expected, but couldn’t inspire euro bulls. EUR/USD finished at 1.1884 (from 1.1974). USD/JPY closed at 110.24 from 109.71.
Overnight, Asian equities are trading mixed. Japan and Australia outperform. Japanese exporters profit from weaker yen even as July industrial production disappointed. USD/JPY trades in the mid 110 area. Official Chinese PMI’s painted a mixed picture. The manufacturing PMI rebounded to 51.7 from 51.4, but the nonmanufacturing measure eased from 54.5 to 53.4. Chinese equities underperform as bank shares are under pressure. The dollar also extends its comeback against the euro and trades below 1.19.
Today, the EMU August HICP inflation and the July unemployment rate will be released. The risks for the euro area inflation are on the upside of the expected 1.4% Y/Y. The EMU unemployment rate is expected to have stabilized at 9.1% in July. In the US, the calendar is busy with personal income and spending (July) and the PCE deflators, the weekly jobless claims (stable?) and the Chicago PMI (August). We expect personal consumption to have picked up in July supporting the case for strong quarterly consumption growth. The PCE deflators most likely rose only slowly in July, keeping the Y/Y-rise at 1.4% Y/Y, well below Fed’s target. The Chicago PMI is expected to have dipped, but risks are on the upside. Yesterday, European yields and the euro didn’t rise after higher than expected inflation in EMU members states. The dollar rebound was the main feature. Interesting to see whether the euro also ignores a rise in overall EMU inflation. At the same time, the USD rebound continues this morning, especially EUR/USD declines further. For now, we consider the move as nothing more than a correction on the protracted USD decline of late. Markets will look forward to tomorrow’s payrolls (including the wage development). Today, the dollar rebound might shift into a lower gear. Strong data and a higher US yields are needed to give the USD comeback a more solid base.
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 for the dollar. EUR/USD set a correction top north of 1.19 before consolidating in a 1.1662/1.1910 range. EUR/USD jumped temporary above 1.20 after Jackson Hole. Sentiment on the dollar remains fragile, but there are signs of a EUR/USD topping out. Strong US data are needed for a further USD comeback. In MT perspective, the EUR/USD rally has gone far. 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 break below the 1.18/1.1775 area would be a sign of a loss off upside momentum.
A downward correction in core (US and European) yields supported the yen in August. USD/JPY declined from mid-114 mid-July and came within reach of the key 108.13 range bottom, but the support did its job. We maintain the working hypothesis that this level won’t be broken as a lot USD bad news is discounted. A cautious buy-on-dips (with stop-loss protection below 108) may be considered.
EUR/USD extends correction after rejected test above 1.20
EUR/GBP
EUR/GBP extends correction below 0.92
Global positioning also dominated sterling trading yesterday. EUR/GBP declined even as UK specific news was sterling negative and the stalemate in the Brexit negotiations persisted. EUR/GBP joined the correction of EUR/USD. Cable held up relatively well despite the overall USD rebound. This suggests some underlying GBP strength. EUR/GBP closed the session at 0.9194 (from 0.9267). Cable finished the session at 1.2925 (from 1.2918)
Overnight, UK GFK consumer confidence improved from -12 to -10, a decline to – 13 was expected. Sterling remains well bid this morning, but we assume it is a simple continuation of yesterday’s move rather than a reaction to the data. The UK calendar contains no other data, but BoE’s Saunders speaks in Cardiff. The headlines from the Brexit negations remain negative, but for now there is no additional negative impact anymore. After the recent decline, sterling probably came closer to the point where the BoE might be ‘forced’ to give more weight to the inflation impact of the decline of sterling. This might have helped to put a floor.
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: correction time, at last
