Sunrise Market Commentary
- Rates: More consolidation ahead?
In a data-poor session, US Treasuries rallied, confirmed recent positive sentiment. We suspect that technicals are at play since the FOMC cleared the way with a rate hike. Today, the calendar is nearly empty. So, we expect more consolidation of core bonds. Macron’s good performance in the election debate may result in an outperformance French bonds.
- Currencies: Dollar still looking for a solid bottom
Yesterday, the post-Fed decline of the dollar slowed, but there was sustained rebound yet. This morning, the picture of the dollar remains mixed as the euro rebounds on a good performance of Macron in the French election debate. More USD consolidation might be on the cards. Sterling traders will keep an eye on the UK price data
The Sunrise Headlines
- US equities ended yesterday’s listless session narrowly mixed. The NASDAQ tried to break all-time highs but this attempt failed. Asian equities trade constructive.
- RBA, Australia’s central bank, is becoming more concerned with the state of the national property market, amid a leap in investment borrowing and strong price growth in the nation’s most populous cities (Minutes). Aussie dollar lost marginal ground.
- Greek bailout talks made progress in Brussels. Discussion will continue to resolve outstanding issues, Mr. Dijsselbloem said. Greece’s FM Tsakalotos said negotiators will stay in Belgium for a few days to try and wrap up an agreement
- Emmanuel Macron fared best in the five-way French presidential debate, according to an early poll. The 39-year-old attacked anti-euro, anti-immigration candidate Marine Le Pen for her lack of ethics and lifelong presence in politics. The euro trades a bit stronger overnight.
- FBI Director Comey dealt Trump a stinging rebuke before the House Committee. He confirmed that Russia’s interference in the presidential election is being investigated and said there is no evidence to back the president’s charge his predecessor had wiretapped him. Markets shrugged off these comments.
- Metals led declines in commodities, with copper falling for a second day and gold retreating from a two-week high, amid ‘dollar strength’.
- Today, the eco calendar only contains UK data: CPI, PPI, public finance figures and CBI orders. Fed governors Dudley, Mester and George speak. The Ecofin will meet in Brussels.
Currencies: Dollar Still Looking For A Solid Bottom
USD still looking for a solid bottom
On Monday, in technical trading deprived of any important news, the post-Fed decline of US yields continued. Interest rate differentials between the dollar and the euro narrowed further. However, these moves had only a limited impact on USD trading. The setback of the dollar petered out. EUR/USD closed the session at 1.0739 hardly changed from Friday. USD/JPY finished day at 112.55 (from 112.70). .
Overnight, Asian equities (ex Japan) are trading constructively. The moderate global reaction to last week’s Fed decision (including a soft dollar) is supporting regional markets (ex Japan). The dollar continues to trade mixed. Comments from Fed members didn’t change investor perception that the Fed normalisation will be gradual. USD/JPY reversed an early session dip, trading in the 112.80 area. The pattern of EUR/USD is slightly different. The euro regained ground as Macron solidified his lead over Le Pen after a first French election debate. The Minutes of the RBA warns on the rise of house prices in some regions and on rising household debt. At the same time, the RBA still sees spare capacity in the economy. AUD/USD is drifting lower to the 0.77 area.
Today, eco calendar in EMU and the US are empty, but several Fed members are scheduled to speak (NY Fed Dudley, Cleveland Fed Mester and Kansas city Fed George). However, we expect them to defend their ‘usual positions’ (cf. FI part of this report) and don’t expect them to change the picture for USD trading. Last week, USD yields and the dollar drifted south even as the Fed raised rates. At the same time, the euro was well bid as markets pondered the chances of an early change in the ECB policy after hawkish comments from ECB’s Nowotny. In a longer term perspective, policy divergence between the Fed and the ECB will probably remain big enough to support further USD gains. Yellen suggested that, considering the eco developments, the Fed policy might follow closely to the ‘dotpath’ (still 2 rate hikes in 2017). In a day-to-day perspective, the dollar shows no clear trend. The USD/JPY decline looks slowing down. At the same time, EUR/USD is holding near the recent top, partially on relative euro strength. We want more convincing signs that the USD has found a bottom before adding USD long exposure.
Global context. EUR/USD 1.0874 resistance remains the line in the sand with intermediate resistance at 1.0829. We maintain the view that a sustained break of EUR/USD above this area will be difficult. The US/German (EMU) interest rate differential remains at an absolute high level. Especially at the short end of the curve, the differential might even re-widen. The fundamentals/ interest rate differentials are also supportive for USD/JPY, but of late the momentum/technical picture is not really convincing. We maintain the working hypothesis that the 111.60 range bottom should hold.
EUR/USD holding near ST top on dollar softness and euro rebound
EUR/GBP to resume rebound?
On Monday, sterling trading was driven by technical considerations. Early in European dealings, sterling gained a few ticks but trading was confined to tight ranges. Around noon, a spokesman of PM May announced that the UK will trigger article 50 of the Lisbon treaty on March 29. The move was no surprise, but sterling reversed the intraday gains against the euro and the dollar as investors realize that a period of heightened political uncertainty is on the horizon. EUR/GBP closed the session at 0.8690 (from 0.8662). Cable finished the session at 1.2358 (from 1.2396).
This morning, cable gains a few ticks, but so does EUR/GBP on a broad-based bid in the euro (Macron). Today, the UK price data (CPI &PPI), the monthly public finance data and the CBI trends orders will be published. Last week, the BoE sounded a bit more attentive to a potential overshoot of inflation. Kristin Forbes voted for a rate hike and some other members are inclined to do so if growth and inflation were to surprise on the upside. We are not convinced that the majority of the BoE is already close to a rate hike. Sterling might get some support from higher rate hike expectations in case of an upward surprise of the inflation data. However, this might be counterbalanced by investor caution on sterling going into the start of the Brexit procedure. We assume that a big deviation from consensus is needed to unlock clear directional move of sterling.
Last week, the sterling decline took a breather. Some time ago, EUR/GBP cleared the 0.8592 resistance, improving the MT technical EUR/GBP picture. We don’t expect a sustained EUR/USD rebound, but a combination of temporary euro consolidation and ongoing sterling softness as the Brexit negotiations are nearing, might trigger some more ST EUR/GBP gains. The 0.8854 correction top is the next key resistance. The nervous swings over the previous days suggest that a clear break beyond 0.8854 will be difficult without important (UK negative) news.
EUR/GBP: post-BoE sterling rebound to slow as political uncertainty grows? Euro is also better bid