Sunrise Market Commentary
- Rates: Short covering or US GDP-inflicted losses?
Today’s main item on the agenda is the US Q4 GDP reading. A stronger reading will sour core bond sentiment further while a disappointment could trigger some short covering going into the weekend following this week’s losses.
- Currencies: Dollar rebound gains traction
Yesterday, the dollar found a better bid across the board even as the rise of equities and core yields slowed. This morning, the dollar rebound continues. USD/JPY takes the lead as BOJ bond buying suggest that the bank tries to block a tentative rise in bond yields. Sterling traders will keep a close eye on the Trump/May meeting
The Sunrise Headlines
- US equities ended close to unchanged yesterday. The S&P 500 traded temporary above the 2300-mark for the first time ever, but couldn’t close above. Overnight, Asian stock markets trade mixed with China closed.
- Signals from Japan’s CPI figures were broadly positive. The pace of decline in the core price gauge slowed in December and was above expectations. Headline inflation eased, but this reflected cooling fresh food prices .
- UK PM May cautioned the U.S. against withdrawing from world affairs saying that the relationship between the US and the UK is one of the “greatest forces for progress this world has ever known.”
- Jens Weidmann, the Bundesbank president, has echoed the remarks his fellow German Sabine Lautenschläger, a member of the ECB’s executive board, made Tuesday and indicated the debate on trimming QE should begin soon.
- The White House floated the idea of imposing a 20% tax on goods from Mexico to pay for a wall at the southern U.S. border, sending the peso tumbling and deepening a crisis between the two neighbours.
- Alphabet, the owner of Google, missed earnings expectations in the fourth quarter, as higher taxes and investments in data centres, buying content for YouTube and hardware weighed on margins, despite a big jump in revenue.
- Turkish President Erdogan said he favoured the use of a single central bank policy rate and wanted to do away with the interest rate corridor which the bank uses to set policy, newspapers reported.
- Today’s eco calendar contains EMU M3 money supply data, US Q4 GDP, durable goods orders and the final reading of Michigan consumer confidence. Chinese markets are closed for Lunar New Year and reopen on Friday, February 3.
Currencies: Dollar Rebound Gains Traction
Dollar shows tentative signs of bottoming out
Yesterday, there was no unequivocal driver for USD trading. The data had no impact. Earlier this week, the dollar’s performance was a bit disappointing given the global reflation trade. Yesterday, the uptrend in equities slowed and so did the rise in core bond yields. Even as the reflation trade slowed, the dollar bottomed out. EUR/USD dropped below 1.07 (currently 1.0685). USD/JPY regained the 114 mark.
This morning, several Asian markets ex-Japan are closed for regional holidays. The yen remains under pressure. The rise in USD/JPY is partially due to the overall USD rebound. At the same time, markets source indicate that the BOJ stepped up bond buying in the 5-to-10 year sector. The operate underscores the Bank’s intention to keep the 10-year benchmark yield below 0.1% and illustrates that it wants to keep monetary conditions ultra-easy. USD/JPY extends this week’s rebound north of 115. The rise of the dollar against the yen remains more modest. EUR/USD hovers in the 1.0665 area.
Today, the market expects US growth of 2.2% in Q4, following a 3.5% growth pace in Q3. The growth contribution of personal consumption is expected solid, but smaller than in Q3. We expect positive contributions from construction, business investment and inventories. Net export will be a main drag on growth. We side with consensus but are aware of some downside risks. December durables should rebound from November’s 4.5% M/M decline, but the more important measure excluding transportation will be quite similar as in November at 0.5% M/M. Michigan consumer sentiment (final) should confirm the preliminary reading of 98.1. So, the US data might be fairly neutral for the dollar. Aside from the data, the looming trade war between the US and Mexico and meeting of Trump and UK PM May might produce plenty of headlines. We look out whether/to what extent the tensions with Mexico will become an issue for global sentiment on risk. If so, it might slow the incumbent rebound of the dollar. That said, yesterday’s and this morning’s USD price action suggests some bottoming out on the recent USD correction. The recent low (USD/JPY 112.5)/ top (EUR/USD 1.0775) have become a more solid bottom for the dollar. A cautious buy USD on dips approach can be reconsidered
Global context: EUR/USD touched a multi-year low (1.0341) early this month. After the Trump rally, plenty of good USD news was discounted while US/EMU rate differentials narrowed (correction), causing a dollar correction. Longerterm, the absolute interest rate support should provide a USD floor, if US data remain good and as long as there are no profound doubts on Trump’s progrowth policy. The day-to-day USD momentum is improving. Still, a return above 1.0874 would question the USD positive outlook. On the downside, EUR/USD 1.0341 is the first key support. USD/JPY is trading well off the post- Trump highs (118.60/66). The rebound off the 112.57/53 reaction low is gathering pace. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is a tough support
EUR/USD: dollar rebounds
Focus on the May – Trump talks
Yesterday, UK Q4 GDP growth was higher than expected at 0.6% Q/Q and 2.1% Y/Y (0.5% Q/Q expected). Sterling set an intraday top around the publication of the data. EUR/GBP touched the 0.8470 area, but there were no follow-through gains. EUR/GBP even returned to the 0.85 area. So, the recent sterling rebound looked like losing momentum. The UK Parliament will debate the legislation to trigger Article 50 of the Lisbon treaty on Jan 31/Feb1. In the afternoon, the moves in the USD changed the picture in the sterling cross rates. The decline of EUR/USD pushed EUR/GBP below 0.85. The pair closed the session at 0.8480 (from 0.8507). Cable set an intraday top around 1.2675 at the time of the GDP release. Sterling softness and a better USD momentum later in the session sent the pair south to close the session at 1.2597 (from 1.2624).
Today, the focus of UK trading will be on the meeting between the UK PM May and US president Donald Trump. Trade relations between the two countries will be high on the agenda. Yesterday, there were ‘nervous’ comments from EU officials stressing that EU members can only discuss trade deals as part of the bloc, illustrating the tensions between the UK and the EU on the issue as they prepare for the Brexit-negotiations. The US and UK laying the groundwork for some kind of a trade agreement could put pressure on the EU-Brexit talks. The immediate consequences for sterling are not that easy to see. If markets conclude that the UK might get more leverage in its negotiations with the EU, it might be slightly/temporary supportive for sterling. Longer term, we still look to sell sterling as long as there is no clear indication that the BoE prepares to tighten policy to fight rising inflation. The Brexit divorce remains a complicated process. Given the strong day-to-day momentum of sterling, there is no reason to row against the tide right now. EUR/GBP 0.8579 50% retracement and 62% retracement (0.8515) of the 0.8304/0.8854 rebound is broken. The correction low comes in at 0.8451 and should provide a strong support. A break would be significant from a technical point of view.
EUR/GBP nears 0.8450 support