Sunrise Market Commentary
- Rates: Steeper yield curve after ECB decisions?
We expect ECB president Draghi to announce an extension of APP until June 2018, while simultaneously reducing the amount of purchases from €60B/month to €30B/month starting from 2018. Such scenario should trigger a steepening of the German yield curve. Long term EMU bond yields could temporarily decline if Draghi delays a decision on APP to October. - Currencies: Will ECB tapering announcement support further euro gains?
Yesterday, the dollar found some comfort as the issue of the debt ceiling was delayed. Today, the focus turns to the ECB. Several options are open. If the ECB announces a further reduction of APP, the euro might return to pole-position, at least temporary.
The Sunrise Headlines
- US stock markets traded fairly uneventful, but managed to hold on to 0.3% opening gains in the end. Most Asian equity indices record similar gains overnight.
- President Trump forged a deal with Democrats in Congress to extend the US debt limit and provide government funding until Dec 15, embracing his political adversaries and blindsiding fellow Republicans in a rare bipartisan accord
- President Trump is unlikely to nominate Cohn, his top economic adviser, as the next Fed chair, according to people familiar with the matter, adding to the uncertainty over the US central bank’s leadership and policies next year.
- Stanley Fischer has submitted his resignation as vice-chairman of the Federal Reserve, adding to the turbulence at the US central bank as it faces a host of vacancies at its most senior levels.
- The Spanish government asked a top court to block the Catalan regional government’s bid to hold a referendum on independence, the latest clash in what has become Spain’s most pressing political issue.
- Brazil’s central bank slashed interest rates to a four-year low, from 9.25% to 8.25%, but said the pace of monetary easing would probably be reduced next month as policymakers prepared to gradually stop cutting rates.
- All eyes turn to Frankfurt today for the ECB’s policy meeting. Will Draghi already announce the central bank’s intentions with APP in 2018? The Swedish Riksbank meets as well and US weekly claims will be published. Spain and France tap the market and Fed Mester speaks on the economy.
Currencies: Will ECB Tapering Announcement Support Further Euro Gains?
Draghi ‘ to decide’ on further euro gains.
Yesterday, the dollar initially stayed in the defensive. Global uncertainty and political noise in Washington deprived the dollar from highly needed interest rate support. Later, US yields jumped higher as President Trump secured an agreement to postpone the US debt ceiling. Still, the USD gains were modest. The problem will return and several other political issues aren’t solved yet. USD/JPY finished the session at 109.40 (from 108.81 on Tuesday). The correction in EUR/USD was even more modest. The pair finished little changed on a daily basis (1.1917 from 1.1914).
This morning, Asian equities trade flat to modestly higher mirroring WS modest gains. USD/JPY is drifting off yesterday’s ‘top’ and trades in the low 109 area. EUR/USD holds within its recent range, changing hands in a tight 1.1915/35 range. AUD/USD hovers around the 0.80 pivot. The pair faced a modest setback overnight, as retail sales missed the consensus.
The eco calendar in Europe and the US only contains second tier eco data. The focus will be on the ECB decisions and the press conference. Will Draghi announce any changes to the APP today or postponed it till October? We don’t see the advantages of keeping the market in uncertainty. We expect the ECB to extend the APP purchases beyond 2017 to the end of June 2018 at a reduced pace of €30B/month. To soften the announcement effect on markets, we expect the ECB to keep the option open that they might extend APP if conditions warrant. The ECB will will also reiterate that ‘a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.” Finally the ECB may keep its forward guidance on rates ‘we expect rates to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.
Over the previous days, global uncertainty weighed on the dollar. Today, the focus shifts to euro side of the story. Of late, markets pondered whether ECB’s Draghi would ‘use’ recent euro strength to delay an announcement on reducing APP. Several options are open. We take the view that bringing clarity to the market has its merits. This might (temporary) support further euro gains. Will delaying the ‘inevitable announcement’ till October would make much difference for the euro?
Even so, the ECB announcing an reduction in APP today might cause a further lift of EUR/USD. Will the 1.2070 top hold?. If so, it could indicate that enough good news is already discounted for the euro.
Global context. Dollar decline slowed after the Jackson-Hole sell-off, but USD didn’t regain any technically relevant level as a (moderate) risk-off sentiment continued to weigh. At the same , the euro also showed no clear trend. On the topside, the 1.2070 correction top remains the first reference. This level might be retested if ECB start normalize policy today However, we don’t preposition for a new euro up-leg right now. EUR/USD falling below the 1.18/1.1775 area would suggest more downside short-term. The USD needs good data and higher US yields, a postponement of an ECB normalisation is not enough.
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 easily as a lot of USD bad news is discounted. A cautious buy-on-dips (with stop-loss protection below 108) may be considered. USD/JPY needs to regain the 110.95 level to suggest an improved upside momentum. Such a break might be difficult as long as global sentiment remains risk-off.
EUR/USD: will the announcement of a reduction in APP caused further sustained euro gains.?
EUR/GBP
Sterling remains well bid, but focus turns to the ECB
There was no UK economic news yesterday. However, no news was again good enough news to further support a technical sterling rebound. EUR/GBP held near the recent lows even as EUR/USD remained well bid. EUR/GBP closed the session at 0.9137. Sterling also gained a few more ticks against the dollar. Cable closed the day at 1.3043. There was again plenty of Brexit-noise from politicians on both sides of the English channel, but that didn’t prevent a sterling rebound.
Halifax house prices are no mover for sterling trading today. Global factors and the ECB policy decision will be the drivers for GBP-trading. A post-ECB euro rebound might temporary block the recent correction of EUR/GBP. However, given recent sterling resilience, we are not convinced that this correction has already run its course and that euro strength will continue to dominate further out. So for now, we assume that the correction has still some further to go.
From a technical point of view, EUR/GBP cleared 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 wait for a correction, e.g. to the technical support in the 0.88/89 area, to sell sterling again versus the euro.
EUR/GBP: ECB to interrupt sterling rebound
