Sunrise Market Commentary
- Rates: Can US payrolls US 10-yr yield away from 2.1%?
We expect a strong payrolls report today even if statistical distortions aren’t excluded. Such scenario should pull the US 10-yr yield away from key 2.1% after this week’s earlier lackluster attempt. Oil prices are finally affected by the consequences of hurricane Harvey, which is an additional negative. The US long weekend could dampen the blow by the end of US dealings. - Currencies: Dollar in need of strong payrolls
The dollar’s upward correction ran into resistance after comments of US Secretary Mnuchin who said the weaker dollar is positive for US trade. The US payrolls need to be strong to avoid renewed dollar weakness. Sterling trading will be guided by the EUR/USD reaction on the payrolls. The EUR/GBP downward correction also stalled, but triggered no key level
The Sunrise Headlines
- US equities extended their winning positive run, gaining around 0.5% with Dow Jones underperforming (+0.25%). Most Asian stock markets record similar gains overnight with Japan (flat) underperforming.
- The havoc wrought by tropical storm Harvey began to spread well beyond the Houston area as the damage to the US’s energy infrastructure sent the gasoline price sharply higher and forced Washington to step in to prevent fuel shortages.
- China’s manufacturing activity expanded at the fastest pace in six months in August, according to the Caixin PMI (51.6 from 51.1 vs 51.0 expected), buoyed by a surge in export orders and higher prices.
- The dollar extended losses after Treasury Secretary Mnuchin told CNBC that a weaker currency is "somewhat better" for US trade. He also said Congress may have to raise the federal debt limit sooner to account for funds to help Texas.
- President Emmanuel Macron unveiled the ambitious labour overhaul at the center of his drive to revive France’s economy, drawing muted criticism from traditionally combative unions that have stymied such efforts in the past.
- China’s President Xi Jinping will reveal the new leadership team for his second term in mid-October, official Xinhua news agency said. The ruling Chinese Communist party’s 19th congress would convene in Beijing on October 18.
- Today’s eco calendar contains US payrolls, unemployment rate, average hourly earnings and manufacturing PMI’s in the EMU (final), UK and US (ISM).
Currencies: Dollar In Need Of Strong Payrolls
Dollar correction stalls and partially reverses
The dollar’s upward correction initially continued yesterday after ECB rumours that the strong euro raised concerns inside the ECB general council. EUR/USD fell to an intraday low of 1.1823, off opening levels around 1.1885. Comments of US Treasury Secretary Mnuchin initiated a reversal. He said that a weaker dollar was ‘somewhat better” for US trade. EUR/USD closed at 1.1910, slightly up from 1.1884 at Wednesday’s close. USD/JPY showed a similar picture of initial additional dollar strength with an intraday high at 110.67, followed in the US session by a dollar re-weakening that pushed USD/JPY to a 109.98 close, slightly down from the 110.18 previous close.
Overnight, Asian equities trade flat (Japan) to modestly higher. FX moves are modest as investors await the US payrolls. EUR/USD is marginally lower at about 1.19 while USD/JPY is little changed at 110.04. The Canadian dollar, which performed strong yesterday on the back of strong GDP, higher oil prices and some overall USD weakness in the US session, strengthens still a bit further versus the USD overnight.
Today, the focus will be almost exclusively on the US payrolls, but we keep an eye on the debt ceiling debate as well. It looks, after the damages caused by storm Harvey, like the law raising the debt ceiling will meet less resistance in Congress, which is a MT dollar positive. Regarding the payrolls, we think the labour market is strong, but the August report typically has some statistical issues that urge for caution. These issues include the AHE (wages), a key component that is closely watched by the Fed. The early timing of the payrolls usually dampen the AHE increase. The dollar has been in the defensive for a long time with an exhaustion move (?) in the days following the JH conference. Tuesday afternoon, investors started to take profits on short dollar positions. Yesterday afternoon, the profit taking on dollar shorts was already abruptly aborted. The dollar correction didn’t take out any key dollar positive technical level.
In case of a strong payrolls report (plus 200K new jobs, 0.3% M/M or higher AHE and/or a drop in the unemployment rate), we will see whether the dollar is able the resume the correction and take finally out technically relevant levels. In case of EUR/USD, a sustained drop below 1.18/1.1775 is needed to open the possibility for a further correction direction 115 area. If not, the current 1.2071 top would remain in danger. For USD/JPY, a break above 111 is needed to call off the downside alert and make the 108 support more robust.
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 sustained 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: downward correction still technical irrelevant. Will strong payrolls push the pair below first serious support?
EUR/GBP
Sterling rebound against the euro slows
Sterling’s upward correction against the euro ran already into resistance. EUR/GBP closed at 0.9211, slightly up from 0.9195 Wednesday’s close. The pair still trades around these levels. Hawkish comments of BoE Saunders had no impact either and neither had the stalemate in the third Brexit negotiation round. GBP/USD closed little changed at 1.2930. US payrolls and the impact on EUR/USD (see above) will give direction for EUR/GBP and cable today.
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 aborted?
