Sunrise Market Commentary
- Rates: Sensitive to progress on US tax reforms?
Today’s eco calendar heats up in the US. Risks are tilted to the downside of consensus, but we don’t expect them to impact trading with this week’s back loaded calendar in mind. Progress on Thursday’s potential vote on the tax reform plan in US Senate will probably trigger most intraday volatility. Good news is negative for the US Note future and vice versa. - Currencies: Dollar decline slows, but no sign of a trend reversal yet
The dollar set now correction lows against the euro and the yen yesterday, but closed off the lows. Eco data probably won’t change fortunes for the US currency today. Powell confirming Yellen’s approach on monetary policy might be slightly supportive for the dollar. The tax reform bill remains a wildcard for USD trading
The Sunrise Headlines
- US stock markets ended near opening levels yesterday. Asian equity indices trade with small losses overnight with China underperforming.
- A US Senate Republican tax bill strongly backed by President Trump faced potential opposition from two Republican lawmakers who could prevent the sweeping legislation from reaching the Senate floor.
- The ECB has received another setback in its bid to get tough on EMU banks’ problem loans, after a EC opinion found that its plans to require banks to hold more cash against their non-performing exposures overstepped the bank’s mandate.
- Japan received radio signals suggesting that North Korea may be preparing for a missile launch test, Kyodo News reported, citing multiple government officials.
- Powell will set the stage for further increases in interest rates while stressing the need to respond flexibly to unexpected events when Trump’s nominee to take over the chairmanship of the Fed faces his confirmation hearing.
- NY Fed Dudley said he still expects that a very strong employment sector will help push inflation up over time. Dallas Fed Kaplan believes it will likely be appropriate to hike rates in the near future.
- Today’s eco calendar contains US trade balance, S&P house prices, consumer confidence and Richmond Fed manufacturing index. The OECD publishes its economic outlook, Fed Harker speaks, the US Treasury sells 7-yr Notes and the Senate Banking Committee holds a hearing on Fed chair nominee Powell
Currencies: Dollar Decline Slows, But No Sign Of A Trend Reversal Yet
USD decline slows?
Yesterday, a softer equity sentiment initially kept the dollar in the defensive. USD/JPY dropped below 111. EUR/USD set a minor new correction top north of 1.1950. During the US session, the dollar regained ground on headlines that the odds for a Senate tax proposal were rising. EUR/USD closed the session at 1.1898 (from 1.1933). USD/JPY finished the day at 111.09 (from 111.53).
Overnight, the correction on Asian equity markets that started last week slowed. The correction remains very orderly, but, there are tentative signs of fall-out on other markets (e.g. some commodities). There are rumours that North Korea could prepare a new missile launch. The headlines on the US Senate tax plan were less constructive than yesterday evening. USD/JPY trades stable in the low 111 area. EUR/USD trades in the 1.19 area.
Today, the EMU calendar only contains second tier releases, which shouldn’t question the current buoyant economic expansion. In the US, the trade deficit is expected slightly wider in October (65B from $64.1B). Consumer confidence is expected to have eased to 124 from 125.9, which was the highest since the end of 2000. We see a slight downward risk. Fed chair nominee Powell will appear for the Senate Banking Committee. His written statement is already published. He confirms the Yellen approach on gradual easing (see Fixed Income part). The focus remains on the eco data and events later this week. If anything, the data might be neutral for the euro and slightly negative for dollar. Powell comments might be a marginally dollar supportive. The fate of the Senate tax bill remains a wildcard and so is the global equity performance. Yesterday, we advocated not to row against the USD correction as long as there was no clear trigger to change fortunes in favour of the US currency. The dollar is in the defensive as markets question the Fed’s rate hike intentions beyond December. We still see a good chance that the Fed will realize its 2018 intentions, but data or other events (tax cuts) are needed for markets to reconsider a more USD positive scenario. Yesterday’s, price action was a bit more USD constructive, but not good enough to qualify it as a U-turn. We want more convincing signs that the USD correction has run its course
From a technical point of view, EUR/USD set a post-ECB low mid-November, but regained on Friday the 1.1880 MT correction top. This break opens the way for a full retracement to the 1.2092 top. A return below 1.1713 would signal that the rebound in EUR/USD is aborted. The USD/JPY momentum was positive in October, but deteriorated this month. Last week, USD/JPY dropped below the 111.65 neckline. There was no aggressive follow-through selling, but the break makes the picture outright USD negative
EUR/USD: no follow-through gains, but holds above 1.1880 range top
EUR/GBP
Sterling awaits more concrete news on Brexit
In technical trade, sterling (re)gained yesterday a few ticks against the euro and the dollar. EUR/GBP closed the session at 0.8935. Cable broke temporary above the 1.3348 intermediate resistance but finished the session at 1.3318 as the dollar rebounded later in the session. There were no UK data ad no new info on the Brexit negotiations.
There are again no eco data in the UK today. BoE’s Carney gives a press conference after the publication of the Financial stability report. We don’t expect him to bring high profile news on monetary policy. The Brexit countdown continues, but we don’t expect a break-through right now. A further escalation of the Irish political crisis complicates further progress on Brexit. However, there is no one-to-one link with the performance of sterling. More erratic, technical sterling trading might be on the cards as long as this issue is pending.
MT view/technical picture. A BoE driven sterling rebound ran into resistance early this month. Sterling declined again as markets anticipated that the rate cycle would be very gradual and limited. Brexit headlines cause day-to-day gyrations. EUR/GBP trades in a 0.8733/0.9033 consolidation range. We changed our ST bias on EUR/GBP from positive to neutral two weeks ago. The 0.9015/33 area might be tough to break short-term
EUR/GBP: moving higher in the consolidation pattern
