Sunrise Market Commentary

  • Rates: Positive bias core bonds
    Overnight, risk aversion dominates Asian markets after US President Trump fired the acting Attorney General. Risk sentiment on stock markets (more correction?) and evolutions on peripheral bond markets (significant spread widening of late) could overshadow eco data today and be positive for core bonds in an intraday perspective.
  • Currencies: Global uncertainty dominates currency trading
    Yesterday, EUR/USD trading showed two faces. Finally, Trump-related uncertainty weighed more on the dollar than on the euro. Today, the eco data in Europe and in the US might come out strong, but global risk sentiment will continue to dominate USD trading. USD/JPY looks most vulnerable. The picture for EUR/USD is more balanced

The Sunrise Headlines

  • US stock markets closed near opening losses, correcting 0.5%-1% lower. Overnight, risk aversion dominates Asian markets following Trump’s move to fire the US’s top law officer for refusing to defend his immigration policy.
  • The White House fired acting Attorney General Yates for telling government lawyers not to defend an executive order signed by President Trump suspending immigration from 7 countries out of concerns that terrorists might enter the US.
  • The BoJ made no policy change, saying it would keep interest rates at -0.1%, cap 10-yr bond yields at roughly zero and buy government bonds at a pace of ¥80tn a year. The BoJ forecasts an era of surging economic growth (see FX).
  • Greece will only receive more loans from the EMU if the IMF joins its latest aid programme, the head of the bloc’s bailout fund said (ESM Regling), spelling out a condition thus far disregarded by Athens’s creditors.
  • A last-minute mega-deal from Microsoft ($17B) propelled what was already a record January for US investment-grade bond sales to one of the busiest months ever. Blue-chip companies have issued more than $170B of bonds so far.
  • Chairman of the EBA, Enria, has called on Brussels policymakers to create an EU “bad bank” to buy billions of euros of toxic loans from lenders to break the vicious circle of falling profits, squeezed lending and weak economic growth.
  • Republicans in Congress are moving this week to help President Trump roll back business regulations imposed by the Obama administration, with a focus on the oil, gas and mining industries.
  • Today’s EMU eco calendar contains EMU Q4 GDP, unemployment rate and CPI inflation. In the US, focus turns to the Chicago PMI and consumer confidence

Currencies: Global Uncertainty Dominates Currency Trading

Trump-related uncertainty weighs on the dollar

On Monday, the dollar initially remained well bid even as risk sentiment turned negative. Euro weakness prevailed. The rise in intra-EMU credit spreads weighed on the euro. Later, US equities tumbled as US investors were also uncertain on the impact of the US immigration measures. This deepening risk-off sentiment finally also triggered USD selling. EUR/USD reversed the earlier losses and closed the session little changed at 1.0695 (from 1.0699). USD/JPY initially held up quite well but finally dropped below 114 to close the session at 113.77 (from 115.10).

This morning, several Asian markets are still closed. Those open lose ground (risk off). The BOJ kept its policy unchanged The Bank raised its growth forecasts, but the inflation forecast was left unchanged. The weakening of the yen since the November forecast is a positive for growth and for inflation. However, how much room is left for a weaker yen as US president Trump warns on the (global) strength of the dollar? Interesting to see the assessment of BOJ’s Kuroda at the press briefing later this morning. USD/JPY changes hands in the 113.35 area. EUR/USD is holding a tight range near 1.07.

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Today, EMU Q4 GDP is expected to have increased by strong 0.5% Q/Q and a 1.7% Y/Y. we side with consensus. EMU headline inflation is expected to rise from 1.1% to 1.5% Y/Y. We see slight downside risks after yesterday’s German CPI release. The US, the Chicago PMI is expected to have increased to 55 from a 53.9. The trend is up, despite the fall in December. We put the risks on the upside of consensus. Consumer confidence is expected to have eased slightly from a 15- year high in December. We see few reasons why the index should decline and don’t exclude a further rise. So, he data in the US and Europe will probably be good. A combination of broad-based strong data a is often USD supportive. However, the market focus is shifting away from the eco data to the potential side-effects of the new Trump policy approach, which mean that core bond yield may decline in daily perspective. The jury is still out, but if confidence in the Trump reflation trade would fade, the environment might turn less USD supportive. USD/JPY is most vulnerable. The picture for EUR/USD is more balanced as several (political) issues are coming in the picture in EMU. In a day-today perspective, investors might turn more cautious on global risk and on the dollar. So, last week’s USD bottoming out process might stop. The EUR/USD 1.0775 resistance remains with reach and might come again under pressure

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 pro-growth policy. The day-to-day USD momentum has become a bit more fragile. A return above EUR/USD 1.0874 would question the USD positive outlook. USD/JPY is trading well off the post-Trump highs (118.60/66). The rebound off the 112.57/53 reaction low was quite constructive, but is losing momentum. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is a tough support

EUR/USD: no clear trend as both USD and euro face factors of uncertainty

EUR/GBP

Risk-off sentiment weighs on Sterling

On Monday, EUR/GBP showed several intraday gyrations as was the case of EUR/USD. Sterling was sold early in the session. EUR/GBP dropped to an intraday low around 0.8490 in line with EUR/USD, but was squeezed during the US session. End of month EUR/GBP buying and a deepening risk-off sentiment were to blame. EUR/GBP finished the day at 0.8566. Cable was also hit hard even as the dollar declined against most majors. The pair closed the session at 1.2486 (from 1.2555).

Overnight, the GFK consumer confidence was reported stronger than expected at -5 (from -7). Today, the UK Money supply and lending data will be published. Lending data were rather good of late, but currency traders don’t give much weight to the data. The global context (risk-off?) will probably again set the tone for sterling trading. Yesterday, sterling initially didn’t know which way to go, but in the end, the global risk-off sentiment proved even more negative for sterling than for the dollar. Markets will also look forward to Thursday’s BoE meeting. Despite recent good eco data, the BoE probably will maintain a wait-and-see stance and give no indication on a rate hike. Sterling momentum was strong of late, but eased a bit at the end of last week. EUR/GBP 0.8579 and 0.8515 supports (50% and 62% retracement of the 0.8304/0.8854 rebound) were broken. The correction low comes in at 0.8451 and should provide strong support. Yesterday’s price action confirms this view. We still look to buy EUR/GBP on dips

EUR/GBP: 0.8450 support remains intact for now

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