Sunrise Market Commentary
- Rates: Dovish positions scaled back; neutral ahead of Fed?
Core bond markets lost ground last week despite mixed to weaker US eco data, scaling back too dovish bets against monetary policy normalisation. With markets now positioned more neutral, we expect sideways trading given the empty eco calendar and the approaching Fed meeting. Portuguese bonds can outperform after regaining “investment grade” from S&P. - Currencies: Dollar mixed ahead of FOMC. Sterling gets additional support from BoE
USD/JPY remains well bid as sentiment on risk improves further and as the yen suffers from higher core yields. However, poor US data prevented further USD gains against the euro. The dollar will probably trade in wait-and-see modus ahead of Wednesday’s FOMC decision. Sterling rebounds further as the BoE made a hawkish U-turn.
The Sunrise Headlines
- US equities ended Friday’s trading with minor gains, but worth mentioning the S&P closed above 2500 threshold. Overnight, Asian equities started the week on a strong footing with overnight gains around 0.5% to 1% on hopes the US seeks a peaceful resolution in the N-Korean issue.
- The cost of new housing in China rose at the slowest pace on more than a year in August as price growth in top-tier cities experiencing a marked deceleration
- S&P upgraded the Portuguese rating to investment grade (BBB-) stable outlook due to progress in reducing its deficit. Since 2012 the country had a junk S&P rating. The upgrade might raise investors’ appetite for Portuguese bonds.
- Moody’s raised Ireland’s rating with one notch to A2, positive outlook, due to stronger than expected growth and progress regarding its public finances.
- Japanese PM Abe appears to be considering calling a snap election when parliament resumes later this month, according to reports. The media leaks might be a trial balloon to gauge the public mood.
- The world’s central banks can’t sit back and ignore the growth in cryptocurrencies as it could pose a financial system risk, according to the BIS.
- Today’s calendar is super light with only the final September EMU inflation and the US homebuilders’
Currencies: Dollar Mixed Ahead Of FOMC. Sterling Gets Additional Support From BoE
USD trading mixed going into FOMC decision
The dollar showed a mixed picture on Friday. Core yields kept an upward bias even as US data (retail sales and production) disappointed. The euro outperformed and EUR/USD rebounded into the high 1.19 area. At the same time, USD/JPY and EUR/JPY were in good shape. This was mainly yen weakness as the Japanese currency suffered from higher US/EMU yields. Sentiment on risk also improved throughout the session as the impact from the North Korean missile test ebbed further. EUR/USD finished the session at 1.1945. USD/JPY end the session at 110.83.
Overnight, Asian equities show gains between 0.5% and 1.0%, supported by record closing levels on WS on Friday. Chinese house price increases slowed further in August, reducing the need for additional measures to cool house prices. This adds to the Chinese risk-on sentiment. Japanese markets are closed, but sources suggest that Japanese PM Abe may call snap elections as soon as next month. The yen holds near recent lows and USD/JPY trades in the 111.15 area. The dollar is slightly better bid against the euro. EUR/USD trades in the 1.1940 area.
Today the eco calendar only contains the EMU (final) August inflation and the US September NAHB housing index. The former is expected to confirm the preliminary outcome. The latter is expected marginally lower (67) from August (68), but still close to the cycle high. No sustained market reaction is expected. BoE Carney speaks at the IMF. Markets will look for more warnings about a rate hike. Further out this week, the main event is the FOMC meeting on Wednesday. The FOMC will likely announce the start of a gradual balance sheet tapering (Q4) and keep the FF rate unchanged. Most attention will go to the rate projections (dots). Will the median projection still point to another rate hike in 2017 (December)? What about the long run FF rate projection (currently 3% but likely revised lower)? North Korea (and the US handling of the conflict) and the debate on US tax reduction remain a wildcard for (USD) trading
Last week, the dollar cautious rebound on a more positive risk sentiment was not convincing, as softer than expected US data created a mixed dollar context. Despite disappointing US data, core yields extended their rise at the end of last week, suggesting that markets don’t expect an overly soft FOMC. This might prevent further USD losses going into the FOMC policy meeting. We start the week with a neutral bias on the dollar. EUR/USD hovers in the middle of a sideways consolidation pattern between 1.1823 and 1.2070. It was disappointing for EUR/USD bears that last week’s correction didn’t reach this range bottom. More confirmation is still needed that the recent bottoming out process in US yields and in the dollar might be the start of more sustained USD gains (against the euro). The day-to-day momentum in USD/JPY is a more constructive. The pair tries to sustain above the 110.67/95 previous support. Yen weakness prevails, but we are still not convinced that current cautious break above 111 will be the start of a protracted uptrend.
EUR/USD consolidation off recent top, but no test of first significant support level yet.
EUR/GBP
BoE gives GBP rebound more fuel
On Thursday, sterling jumped sharply higher as the BoE minutes revealed that a majority of MPC members expected a gradual withdrawal of monetary stimulus over the coming months. On Friday, BoE’s Vlieghe, a notorious dove, supported the call for a rate hike. This hawkish turn of a BoE dove triggered further GBP gains. EUR/GBP dropped temporary below 0.88 and closed the session at 0.8789 (from 0.8896). Cable (currently 1.3575) jumped temporary north of 1.36, but eased late in the session on the dollar rebound. BGP/USD finished at 1.3594.
Overnight, Rightmove UK House prices declined 1.2% M/M to rise only 1.1% Y/Y (from 3.1% in August). Prices in London are coming under further pressure. For now, the report has no noticeable impact on sterling trading. BoE’s Carney speaks at an IMF meeting in Washington. Markets will be keen to see whether he joins the hawkish chorus of BOE speakers of late. After last week’s jump of sterling, a lot of good news should 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 at the August meeting. Recent price data amended this story and the ST-trend reversal of sterling was reinforced by recent BoE comments. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of relative euro strength and sterling softness to persist. However, the prospect of withdrawal of BOE stimulus probably put a solid floor for sterling ST term. We let the current correction do its job, before selling sterling versus the euro. EUR/GBP is nearing next support at 0.8743 and 0.8652
EUR/GBP: BoE rate hike signal accelerates GBP-rebound
