Sunrise Market Commentary

  • Rates: Thin eco calendar suggests directionless action
    Confident comments by heavyweight central bankers on inflation and higher oil prices hang in the balance with election outcomes and the approaching Catalan deadline for the Bund this morning. We still shun Spanish assets because of the binary risk while the October 26 ECB meeting and a thin calendar could keep investors side-lines this week.
  • Currencies: Dollar ‘survives’ mixed US data
    A soft USD CPI weighed temporary on the dollar on Friday, but part of the loss was reversed later indicating some USD resilience. The eco calendar will probably only be of second tier importance for USD trading. Yellen keeping the door open for a December rate hike helps to prevent further USD losses. Uncertainty on Catalonia might be slightly euro negative.

The Sunrise Headlines

  • US stocks started strong on Friday, supported by strong US retail sales, but gains evaporated into the close. Nasdaq outperformed with a new record close. Asian bourses gais more than 0.5% overnight with China lagging.
  • Austria’s far-right nationalist Freedom party has scored its best result in a national election for two decades (26%) and is likely to join the country’s next government with the mainstream conservative People’s party (31.6%)
  • Germany’s Social Democrats have won a surprise victory in regional elections in Lower Saxony, in a blow to Angela Merkel’s conservatives days before they launch delicate talks in Berlin on forming a three-way coalition government.
  • Fed Chair Yellen kept the door open for another increase in short-term interest rates this year, but sounded a note of caution on still weak inflation in the US and abroad.
  • China’s factory prices jumped more than estimated in September (6.9% Y/Y), as domestic demand remained resilient and the government continued to reduce excess industrial capacity. Consumer price gains matched projections (1.6% Y/Y).
  • Oil markets jumped this morning on concerns over potential renewed US sanctions against Iran as well as conflict in Iraq, while an explosion at a US oil rig and reduced exploration activity supported prices there.
  • Today’s eco calendar is very thin with only EMU trade balance and US empire manufacturing. Catalan President Puigdemont has a Madrid-imposed deadline to clarify the region’s independence stance

Currencies: Dollar ‘Survives’ Mixed US Data

USD ‘survives’ soft US CPI

US data dominated global FX markets on Friday. Retail sales were strong, but inflation was slightly softer than expected. The latter initially was the more important factor, weighing on the dollar. EUR/USD jumped to the 1.1875 area. However, the dollar this time showed quite some resilience, especially against the euro. A very strong Michigan consumer confidence supported an intraday USD rebound. EUR/USD finished the session at 1.1820, even marginally lower from Thursday. USD/JPY finished the day at 111.82 (compared to 112.28 on Thursday).

The risk rally continues overnight as most Asian equity indices show solid gains. Major central bankers met in Washington this weekend. They saw a further improvement in the global economy. Yellen reiterated that she expects soft inflation readings not to persist. Also ECB top-policy makers expect inflation to pick up. The BoJ still indicates to pursue aggressive monetary easing, but BoJ Kuroda warned that markets might be too complacent when pricing geopolitical risks. USD/JPY profits only modestly from CB signals of ongoing policy divergence between the US/EMU and Japan or from the risk rally. USD/JPY trades near 112. The dollar is better bid against the euro. EUR/USD trades in the low 1.18 area.

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The October NY Fed Empire State manufacturing survey is the only important eco release today. The headline index stood at a very high 24.4 in September. Consensus expects a modest decline to 20.5. We expect the October business surveys to remain strong, but have no good arguments to distance us from consensus. Later this week, the US eco calendar is rather light. Housing data recently showed signs of peaking. Will this be confirmed? Few Fed governors are scheduled to speak. The Eurozone eco calendar contains only second tier releases this week. The ECB black-out period before the October 26 meeting kicks in on Thursday, but ECB Constancio (Tuesday), Draghi, Praet and Coeuré (Wednesday) still appear in public. Political developments are plentiful. Catalonia has to respond to Madrid’s ultimatum and the EU Summit (Thursday-Friday) will discuss the Brexit negotiations. In the US, the tax reform processes will be closely followed, as well as the Nafta re-negotiation.

The eco data will probably only be of second tier importance today. The dollar showed quite some resilience after an initial negative reaction to Friday’s US CPI. The ST picture of EUR/USD remains neutral, but Friday’s price action might give EUR/USD bears some confidence

The reaction could have been more negative for the dollar. There is plenty of event risk. Catalonia is the first in row and could be slightly negative for the euro. We start the week with a neutral-to-tentatively negative bias for EUR/USD. The day-to-day picture of USD/JPY is less convincing.

From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern last week, but no real test of the 1.1662 support occurred. Last week, the pair even returned (temporary?) above the 1.1823 previous range bottom, which was disappointing for EUR/USD bears. Friday’s US data were unable to give clear guidance. We maintain a cautious sell-on upticks bias. However, the pair needs to drop below the 1.1670/62 support to really give comfort to EUR/USD bears. The USD/JPY momentum was constructive in September. The pair regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. The rally clearly lost momentum last week. A break beyond 114.49 looks ever more difficult.

EUR/USD: Friday’s US data give no clear guidance. Dollar shows tentative signs of resilience.

EUR/GBP

EUR/GBP drifting back south, below 0.89

Thursday’s roller-coaster ride of sterling finally turned out in favour of the UK currency. (FX) markets still saw the glass half full rather than half empty on Friday on headlines that the EU considers a transition period, something the UK is aiming for. Enthusiasm eased later in the session on comments from Germany and EU Juncker who highlighted that the Brexit process remains extremely difficult. EUR/GBP rebounded (temporary?) back above 0.89, but sterling maintained most of Thursday’s rebound. EUR/GBP finished the session at 0.8898. Cable spiked north of 1.33, partially due to USD weakness after the ‘soft’ US inflation, but closed the session at 1.3285.

There are no important UK eco data today. Global factors and headlines/rumours on Brexit might dominate sterling trading. A series of key eco data later this week might decide on the viability of a BoE rate hike in the near future. In a day-to-day perspective, euro softness due to Catalan uncertainty might weigh on EUR/GBP.

EUR/GBP staged a strong uptrend since April to set a top at 0.9307 late August. UK price data and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. The prospect of (limited) withdrawal of BoE stimulus triggered a good sterling countermove, but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 are difficult to break. We look to buy EUR/GBP on dips. The recent rebound above 0.89 improved the ST technical picture of EUR/GBP, but for now there were no convincing follow-through gains. EUR/GBP 0.9026 is the 50% retracement of the recent countermove.

EUR/GBP rebound loses momentum

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