Sunrise Market Commentary
- Rates: US yields back above key levels (previous support)
US 5-yr (1.7%), 10-yr (2.1%), and 30-yr (2.68%) yields closed back above key support levels lost last week. The crisis atmosphere made room for more positive risk sentiment. Could it mark the start of a consolidation phase going into next week’s FOMC meeting? Markets are currently very dovish positioned after this Summer’s uninterrupted decline in yields.
- Currencies: Is there enough ammunition for further USD gains?
The dollar rebounded yesterday as the negative premium on last week’s event risk was priced out. Especially USD/JPY succeeded a nice comeback. Today, there is little economic news to guide trading. The dollar rebound might slow, awaiting more news on the economic front or on other market-sensitive event risk (North Korea).
The Sunrise Headlines
- US equities joined the risk-on correction (>+1%) after a feared missile launch from North Korea never materialized and Irma was downgraded. Asian equity indices remain in positive territory this morning with Japan outperforming.
- One of the UK’s biggest constitutional changes in decades came a significant step closer in today’s early hours when MPs voted by a majority of 36 to move the EU Withdrawal Bill on to the next stage of parliamentary scrutiny.
- The UN Security Council unanimously adopted new sanctions against North Korea after US officials eased their demands to convince China and Russia to approve the measure.
- US inflation expectations slipped last month, with the year-ahead measure hitting its lowest level since early 2016, according to a Federal Reserve Bank of New York survey that adds to the din of surprisingly weak price measures.
- Norway’s centre-right government has won a historic re-election, benefiting from a recent economic upturn and record use of money from its sovereign wealth fund. It will become the 1st right administration to serve out 2 full terms.
- Brussels will push for more thorough vetting of Chinese and other foreign investments as it seeks a more muscular trade policy to respond to criticism that the bloc does not do enough to protect its own companies.
- Today’s calendar remains rather thin with only US NFIB Small Business Optimism and UK inflation data. The Netherlands and the US supply the bond market and ECB’s Constancio is scheduled to speak
Currencies: Is There Enough Ammunition For Further USD Gains?
Has the USD rebound further to go?
Investors left last week’s defensive bias yesterday as the damage of hurricane Irma might be less than feared. Core/US yields and equities rebounded, with the S&P closing at an all-time high. The positive context supported the dollar. USD/JPY rebounded sharply and closed the session at 109.39 (from 107.84 on Friday). The gain against the euro was more modest. EUR/USD finished at 1.1953 (from 1.2036). Comments from ECB’s Coeure suggested that the ECB is not yet overly worried on the rise of the euro, but the issue is on the radar.
The risk rebound continues in Asia this morning. Japan outperforms on yesterday’s sharp decline of the yen. Gains on most other markets are modest. The dollar maintains yesterday’s gains against the euro and the yen, but there is no additional progress. The UN security council approved a watered-down US proposal on additional sanctions against North Korea. Markets ponder the chances on a possible reaction of North Korea. The yuan declines further as recent measures from the PBOC suggest that the central bank doesn’t want a further rise of its currency.
There are again no important eco data in EMU. In the US, the NFIB small business confidence and the JOLTS job openings provide valuable info on the health of the US economy, but the series are no market movers. An unexpected decline in the NFIB sentiment might be slightly negative for the dollar. Global sentiment will probably remain the main driver for USD trading. Speeches from ECB members are a wildcard for the euro. Of late, Draghi and Co slightly reinforced their rhetoric on the impact of the stronger euro. However, they didn’t sound overly worried and the (FX) market doesn’t see it as a good enough reason to really delay APP tapering. So, for now, the ECB isn’t a real negative for the euro yet. On the USD side of the equation, the dollar enjoyed a relief rally yesterday as the impact of potential effect risk (Irma, North Korea) subsided. A USD negative risk premium was priced out, but is there a strong enough story for sustained further USD gains? A reaction of North Korea to the new UN sections is possible and might slow the risk rally and/or the rebound of the dollar. At the same time, the impact of the hurricanes on the US economy remains unclear and this issue won’t be clarified anytime soon. In this context, a forceful rebound of the dollar is not evident. Some ST consolidation might be on the cards, but the dollar remains vulnerable for all kinds of negative event risk. Interesting to see whether the US currency can extend yesterday’s positive repositioning
Global context. Last week, the euro remained strong even as the ECB delayed communication on APP tapering till October and as Draghi kept a soft tone. Markets take the view that ECB policy normalisation will come anyway. At the same time, the dollar lost further interest rate support as global uncertainty kept US yields on a downward trajectory. The decline in US yields and of the dollar has probably gone far enough given recent US eco data, which were still fairly good. However, until now this assessment didn’t help the dollar shortterm.
The dollar in the first place needs an improvement in global sentiment and higher yields. US data will probably become noisy due to the impact of the hurricanes. This might cloud the Fed outlook and complicate a USD rebound. Dollar sentiment remains fragile and this is visible in the technical picture of both EUR/USD and USD/JPY. EUR/USD last week set a minor new correction top at 1.2092. A return below 1.1823 would be a technical sign that the EUR/USD rally has run its course short-term. We are not that far yet. USD/JPY regained the previous range bottom at 118.13, but more confirmation is needed to conclude that the dollar is bottoming.
EUR/USD correcting of recent top, but technical picture hasn’t changed
EUR/GBP correction continues
The sterling rebound that started end of August simply continued yesterday. The move was most visible against the euro as EUR/USD eased off last week’s top. EUR/GBP set a new ST correction low and finished the day at 0.9080 (from 0.9119). There were no UK eco data. Investors perhaps reduced sterling shorts further ahead of Thursday’s BoE policy meeting. The UK government received approval of Parliament to progress with the Brexit bill. The rise of sterling against the dollar stalled on the overall rebound of the dollar. Cable finished the day at 1.3163 (from 1.3200), but the recent top stays within reach.
UK CPI data will be published today. Headline CPI is expected to rise 0.5% M/M and 2.8% Y/Y. The consensus for core inflation stands at 2.5% Y/Y (from 2.4%). Markets will read the CPI with Thursday’s BoE meeting in mind. At the August meeting, the BoE kept a wait-and-see modus and signalled no immediate rate hike. We don’t expect a U-turn, but the decline of sterling and inflation near 3% might again slightly change the balance in the BoE assessment between lower growth and higher inflation. In such a scenario, markets might also raise the chance on a rate hike, supporting the corrective rebound of sterling.
From a technical point of view, EUR/GBP cleared 0.8854/80 resistance (top end June), opening the way a protracted August rebound. The move was the result of euro strength. Simultaneously, UK price data were soft enough to keep the BoE side-lined. 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 let the current correction do its job, e.g. to the technical support in the 0.88/89 area, to sell sterling again versus the euro.
EUR/GBP: correction continues ahead of key data and BoE policy