Sunrise Market Commentary
- Rates: Markets show signs of habituation to North-Korean tensions
The downside in US Treasuries was blocked yesterday by a new North-Korean threat despite a hawkish signal of the BoE and higher-than-expected US CPI data. The missile threat was put into practice overnight, but markets show signs of habituation. The past week’s extreme safe haven flows didn’t materialize, suggesting that US eco data will prime today! - Currencies: Will US data be strong enough to lift the dollar beyond first resistance?
A further rise in core yields and of the dollar was blocked by geopolitical tensions yesterday. The dollar failed to clear first important resistance against the euro and the yen. Will today’s US data be strong enough to do the job? Sterling might remain well bid as the BoE signaled a rate hike yesterday
The Sunrise Headlines
- The market reaction to the latest missile test by North Korea was muted this morning, with investors largely shrugging off news that a missile launched by Pyongyang had once again overflown Japan. Asian stocks trade mixed.
- US secretary of state Rex Tillerson has called on China and Russia to take “direct actions of their own” against North Korea following Pyongyang’s missile test on Friday that flew over northern Japan.
- Theresa May will attempt to break the Brexit impasse with a speech next week in Florence setting out her plans for a transition deal that is seen in London as the “key” to addressing Brussels’ concerns about a €30B budget hole.
- While the Bank of Canada’s inflation targeting regime has worked well, the central bank is open to alternatives and wants to communicate in a way that avoid unproductive volatility, deputy governor Wilkins said.
- Top congressional Republicans signaled that they wouldn’t be pressured into enacting an immigration framework reached between President Trump and top Democrats.
- EU finance ministers discuss deepening of economic and monetary ties, developing a capital-markets union and tax matters today in Tallinn. EC Juncker will also push for the creation of a regional finance and economy minister post.
- Today’s calendar heats up in the US with Empire Manufacturing, retail sales, industrial production and University of Michigan consumer confidence. ECB Nouy, ECB Lautenschläger and BoE Vlieghe are scheduled to speak
Currencies: Will US Data Be Strong Enough To Lift The Dollar Beyond First Resistance?
Will US data help USD to overcome first resistance?
The dollar couldn’t extend gains yesterday even as the interest rate context and the data were initially supportive. Core yields rose after the BoE signalled a rising probability on a rate hike and a higher-than-expected US CPI. Headlines that North Korea was preparing a new missile test in the direction of Japan blocked further USD-gains. The dollar almost immediately reversed post-CPI gains and returned to the levels seen earlier in the session. EUR/USD finished the session at 1.1919 (from 1.1885 on Wednesday). USD/JPY closed at 110.24 (from 110.49).
Overnight, North Korea indeed launched a new missile over Japan’s Northern Island Hokkaido. However, the multiple North Korean actions have a ‘diminishing impact’ on markets. There were some jitters in regional equity indices and in USD/JPY as the headlines on the test flashed on the screens. However, any risk-off reaction was much more limited than at previous occasions. Asian equities currently mostly show limited losses. Japan even trades in positive territory. USD/JPY spiked briefly below 110 but trades again in the 110.40 area. The EUR/USD chart hardly shows any ripples. The pair trades just north of 1.19. That said, the geopolitical noise still prevents USD/JPY and EUR/USD to clear first key levels respectively at 110.95 and 1.1823.
Today’s EMU calendar only contains the trade balance which is no market mover. The US calendar is again interesting with the Empire manufacturing survey, retail sales, industrial production and consumer confidence from the U of Michigan. The consensus expects a limited setback for the confidence data (NY manufacturing and Michigan,). Retail sales growth is expected to slow after a strong August figure. In general, we think that expectations on the US data are no that high. Positive surprises are especially possible in retail sales and production.
Of late, global factors were the main driver for the dollar. Regarding the data, the focus of FX markets was more on price data rather than on activity data. Even so, if yesterday’s slightly higher than expected CPI would be followed by a set of decent activity data, it should solidify a ST floor for the dollar going into next week’s Fed meeting. Yesterday, USD/JPY and EUR/USD tested/came closer to first technically significant resistance/support at respectively 110.67/95 and 1.1823. A break /real test was blocked by the North Korea headlines. Will today’s US eco data be able to do the job? Clearing these levels in a sustainable way would call off the USD negative momentum short-term. However, if the break doesn’t succeed today, it would be disappointing for USD bulls.
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 apparently took the view that ECB 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. Finally, the decline in US yields and of the dollar had gone far enough given recent US eco data, which remained 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 might become noisy due to the impact of the hurricanes and can cloud the Fed’s outlook and complicate a USD rebound. In this context, we want more confirmation that the recent bottoming out process in US yields and in the dollar might be the start of more sustained USD gains. We keep a close eye on how the test of first important technical levels turns out (cf supra). A break of EUR/USD below 1.1823 would open the way to the 1.1662 correction low. We remain cautious on a sustained upside break in USD/JPY .
EUR/USD consolidation off recent top. Will US data be strong enough for a downside test/break?
EUR/GBP
BoE rate hike signal propels sterling
Yesterday, the Bank of England voted 7-2 to leave its policy rate unchanged. However, the BoE clearly signalled that the recent up-tick in inflation can no longer be ignored if eco data continue to come in as expected. A rate hike in the coming months is very well possible. Sterling started a new upleg. EUR/GBP declined more than one big figure and fell below the 0.89 big figure. Cable also set a new ST top in the 1.34 area.
There are no important UK eco data today. However, BoE’s Vlieghe will give a speech. He is a well-known dove. We don’t expect that he will be able to change to market repositioning after yesterday’s clear message from the BoE Minutes. After yesterday’s jump of sterling, quite some good news should gradually be discounted. Even so, we don’t row against the sterling positive tide yet. The EUR/GBP correction 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 and the ST-trend reversal of sterling was confirmed/reinforced by yesterday’s BoE comments. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the combination of relative euro strength and sterling softness to persist. However, the prospect of some withdrawal of policy stimulus probably has put a solid floor for sterling ST term. We let the current correction do its job, before selling sterling versus the euro.
EUR/GBP: BoE rate hike signal accelerates GBP-rebound
