Sunrise Market Commentary
- Rates: Can US eco data start a 2nd downleg in US T’s this week?
Core bonds corrected lower since Friday afternoon as risk sentiment improved with new closing highs for main US equity indices. Technically, US yields regained lost support levels at key tenors. For a new upleg in US yields, we probably need strong eco data today (PPI) and later this week (CPI, retail sales, industrial production,…) - Currencies: Will (US) data support further USD gains?
Earlier this week, the dollar profited from a positive reversal in global sentiment. This risk-rebound might ease. Today and tomorrow, the focus might shift to the US price data. Will they be good enough to sustain a further USD rebound. Sterling is propelled higher by an unexpected rise in inflation. Today’s wage data, if better, might reinforce the move
The Sunrise Headlines
- The bullish start to the week for US equities is still going strong, with the Dow Jones, Nasdaq and S&P 500 all notching new record closing highs. Asian stock markets trade mixed overnight.
- The Trump administration has warned China that the US will target Chinese banks unless Beijing takes much stronger measures to impose economic pain on North Korea by reducing trade and financial transactions with the regime.
- US Treasury Secretary Mnuchin casts doubt on President Trump’s chances of cutting the corporate tax rate to 15%. Trump met with 6 senators including 3 Democrats who set clear conditions for future cooperation with him on taxes.
- US oil inventories jumped 6.18 million barrels last week as refineries recovered from weather disruptions. The EIA cut US output forecasts for 2017 and 2018, while also reducing its demand outlook for next year.
- The total volume of bad debts held by Italian banks shrank by €18bn in July to €173bn (lowest since 2014), in a sign that Italy’s struggling financial sector is starting to benefit from stronger economic growth and greater investor interest.
- Brexit negotiators postponed next week’s scheduled round of talks, adding to signs Theresa May is planning a public speech on her divorce strategy. EU and UK officials will now likely meet starting Sept. 25, people familiar said.
- Today’s calendar contains EMU industrial production, US PPI number and UK labour market data. Germany, Italy and the US tap the bond market and ECB Praet speaks in Frankfurt
Currencies: Will (US) Data Support Further USD Gains?
Will (US) data support further USD gains?
The risk rebound continued yesterday, but at a slightly lower pace. This was also the case for the rise in core yields and of the dollar. Investors further reduced ‘excessive’ USD long positions as tensions eased. USD/JPY still outperformed and managed to regain the 110 mark to close to session at 110.17. The dollar’s rebound against the euro petered out. EUR/USD finished the session at 1.1967, from 1.1953 on Monday.
The risk rebound is losing momentum in Asia despite record closings of the Nasdaq and the S&P on WS. The rise in US yields also slows. USD/JPY stabilizes in the low 110 area. EUR/USD is returning slightly higher in the 1.19 big figure (currently 1.1985). Geopolitical tensions (North Korea) have eased this week, but the bickering continues even after the approval of new UN sanctions. The PBOC again weakened the fixing of the yuan against the dollar. This follows other measures that are seen as the PBOC trying to prevent a further protracted rebound off its currency. The CNY/CNH trade marginally stronger this morning.
The eco calendar is better filled today. Final German August inflation data and the EMU July production data won’t change the picture for FX trading. In the US, the focus is on tomorrow’s CPI data. However, today’s PPI’s might also move markets in case of a substantial surprise. Recently, moves in the dollar were mainly driven by global investor sentiment. It is interesting to see whether the data regain impact on interest rates and on the dollar. The August PPI is expected substantially higher at 0.3% M/M and 2.5% Y/Y (from 1.9%). August inflation data in other countries tended to be a bit higher than expected, but there is no one-to-one link, especially not on the level of the PPI’s. The dollar is trying to build a bottoming out pattern. This process could become more solid if US data are good, or at least if they don’t create new doubts. Later in the session, we keep an eye at a speech of ECB’s Praet in Frankfurt. He maintained a rather soft bias of late. The dollar made a nice rebound earlier this week. The sentiment-driven rally might lose momentum and it is not that obvious that other news will already be able ready to trigger a further upleg. So, some consolidation might be on the cards
Global context. The euro remained strong last week 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 fairly good. A technical correction occurred this week. 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. In this context, we want more confirmation that the recent USD bottoming out process might be the start of more sustained USD gains. For now we assume that further gains will be tough an limited.
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 108.13, but more confirmation is needed to conclude that the dollar is bottoming. Regaining the 110.67/95 would be a first positive sign.
EUR/USD off recent top, but technical picture hasn’t changed
EUR/GBP
Will wage data support further GBP-gains?
UK eco data came in the spotlight yesterday. UK August inflation rose much more than expected from 2.6% Y/Y to 2.9%. Core inflation was also above consensus at 2.7% Y/Y. At the August policy meeting, the BoE kept a wait-and-see bias even as it was aware that inflation could reach 3.0%. The current uptick will probably force the BoE to give more weight to inflation, even as growth slows and as Brexit uncertainty persists. The sterling rebound accelerated after the CPI release. EUR/GBP dropped temporary below the 0.90 mark and finished the session at 0.9009. Cable closed the session at 1.3283, even as the dollar was well bid across the board. The UK announced that the next round of Brexit negotiations will be postponed, but it had little impact on trading.
UK labour market data will be published today. Job market data are expected to remain solid. Wage growth is expected to rise from very low Y/Y-levels (average earnings from 2.1% to 2.3%). A positive surprise will raise speculation on a (limited) BoE rate hike furhter down the road. We don’t expect the BoE already to take action this week, but more positive inflation news might force Carney and Co to adapt their rhetoric. Sterling made already a good run of late, but it might still go a bit further;
From a technical point of view, EUR/GBP cleared 0.8854/80 resistance (top end June), opening the way for 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. Recent price data amended this story. We maintain a buy-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 versus the euro
EUR/GBP: correction continues on higher inflation data
