Sunrise Market Commentary
- Rates: Technical resistance nearby, but no breaks expected
Today’s eco calendar is uninspiring. We have no strong view on trading and expect sentiment-driven action. Core bonds could be lured towards nearby resistance levels, but we don’t anticipate breaks higher. Italian BTP’s might underperform following regional elections (Sicily) which are a first real barometer for a national vote early next year. - Currencies: Dollar holds near the recent highs against the euro and the yen
On Friday, the payrolls where not strong enough to trigger sustained USD gains, but the USD price action remained constructive. USD/EUR and USD/JPY remain near recent highs. Today, technical traded will probably prevail. The big positive interest rate differential should continue to protect the downside in the major USD cross rates.
The Sunrise Headlines
- US equities eked out modest (S&P) to moderate (NASDAQ) gains on Friday with Apple results and guidance an important driver. New all-time highs for S&P and NASDAQ. Asian equities start the week mixed.
- Saudi Arabia Crown Prince Mohammed bin Salman ordered Saturday night an anti-corruption crackdown. Security forces arrested princes, billionaires, ministers and former top officials including the well-known Alwaleed bin Talal.
- Ousted Catalan president Puigdemont and 4 former government members were released in Brussels pending a court ruling on an international arrest warrant issued by Spain. The tension between Madrid and Barcelona remains.
- US Commerce Secretary Wilbur Ross has investments in a shipping firm with ties to Putin’s circle, according to the Paradise Papers reports. Also Trump’s son-in-law and confident Kushner is apparently named.
- A fresh round of Brexit talks kicks off this week, which should be the focus of the UK government. However, PM May’s big announcement was a new code of conduct for Conservative politicians in the wake of a sexual harassment scandal that’s forced the resignation of her defence secretary.
- BOJ governor Kuroda confirmed that the BOJ will persistently continue powerful easing and that there is still a long way to getting to 2% inflation.
- Today’s eco calendar is unattractive, but political issues might impact trading. US President Trump’s Asian tour will be extended by one day
Currencies: Dollar Holds Near The Recent Highs Against The Euro And The Yen
Dollar holding near recent highs
On Friday, the US payrolls were a mixed bag and failed to give clear guidance for USD trading. Later in the session, a strong US non-manufacturing ISM and upbeat US equity performance supported the dollar slightly. EUR/USD finished the session at 1.1608 (from 1.1658). USD/JPY closed to session almost unchanged at (114.07).
Overnight, Asian equities are trading mixed. The PBOC warned on the risks of too high leverage. BOJ’s Kuroda said that the BOJ wants inflation the overshoot the 2% target, suggesting the ultra-loose BOJ policy won’t be scaled back anytime soon. USD/JPY spiked temporary north of the 114.45 resistance, but trades currently again near 114.30. Markets keep an eye on the topics that are handled during the Asian trip of US President Trump. EUR/USD is holding stable in the low 1.16 area.
Today, the final October EMU services PMI’s will be released, but they are usually close to the preliminary results. The event calendar is also thin with only speeches of NY Fed Potter and NY Fed president Dudley. They speak about policy & balance sheet and lessons from the financial crisis. From ECB side, governor Praet, Visco, Hansson, Villeroy and Mersch will speak but we don’t expect new info shortly after the ECB meeting. Politics will also get a lot of attention with Brexit talks and UK May’s precarious position, the increased tensions between Spain & Catalonia, the Asia trip of Trump and the negotiations on the US tax plan the main features.
Last week, EUR/USD held close to the post-ECB low, but there were no followthrough losses of the euro. The nomination of Powell as next Fed-Chairman, new proposals to change the US tax code and Friday’s payrolls were not able to break this stalemate. For now, the dollar fails to really profit from high interest rate differentials (especially at the short end of the curve). This is slightly disappointing for USD bulls. That said, EUR/USD currently trades more than 400 ticks below the cycle top. The wide positive interest rate differential should give the dollar downside protection unless there is high profile US negative news. However, additional rate support for the dollar will probably be modest near term. So, further EUR/USD decline might develop gradually. We maintain a cautious sell-on-upticks bias.
From a technical point of view, EUR/USD dropped below 1.1670/62 support, but no convincing follow-through dollar gains occurred. If the break is confirmed, it would confirm that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY’s momentum was positive in past months. The pair regained 110.67/95 resistance and now tests the 114.49 correction top. A sustained break would further improved the technicals. We remain cautious to preposition for further USD/JPY gains.
EUR/USD broke below 1.1662 support, but non follow-through price action yet
EUR/GBP
Post-BoE sterling decline slows
On Friday, sterling reversed a (small) part of the losses it suffered on Thursday when the BoE indicated that the future rate hike path will be extremely gradual. The sterling rebound was reinforced by a strong UK services PMI. The (modest) intraday decline of EUR/USD also weighed slightly on EUR/GBP. EUR/GBP closed the session at 0.8877 (from 0.8927). The gain in cable was more modest as the dollar captured a better momentum later in the session. The pair finished the session at 1.3077 (from 1.3059).
Today, markets look out for a meeting of UK PM May at the Confederation of British industry. UK business are eager to hear whether the UK will be able to obtain a transition period in the Brexit negotiations with the EU. At the same time, there are still plenty of headlines on scandals that members of the UK government might be involved in. We start the week with a neutral bias on sterling. However, sterling faces plenty of political event risk. (Brexit negotiations restart this week).
In September, sterling rebounded as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at last week’s BoE policy meeting. EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected last week. We maintain the view that the 0.8733 -0.8652 support area will be though to break in a sustainable way. A EUR/GBP buy-on-dips approach is favoured. 0.9023/33 is the first important resistance for the EUR/GBP cross rate
EUR/GBP: rebounds off 0.8733/43 support on soft BoE policy assessment
