Sunrise Market Commentary
- Rates: Developments on balance negative for core bonds
German inflation data have market moving potential especially in case of higher than expected readings. Progress on US tax reforms, Brexit and North Korea will highjack a lot of headlines today. On balance, we think that developments are positive for risk sentiment and negative for core bonds, even if yesterday’s impact on (bond) trading remained limited. - Currencies: Dollar and sterling rebound
The dollar captured a better momentum on positive eco data and progress in the Senate tax bill. Sterling also jumped sharply higher on headlines that a solution on the Brexit divorce bill was almost reached. Today, the focus for USD trading will be on Yellen’s testimony before the JEC. Will she be ‘hawkish’ enough to sustain further USD gains?
The Sunrise Headlines
- US stock markets ended strong (+1%) as progress on US tax reforms outweighed a North Korean threat. Asian stock markets gain ground as well this morning with China underperforming.
- Britain has bowed to EU demands and agreed to fully honour its financial commitments as identified by Brussels, removing one of the biggest obstacles to a Brexit divorce settlement.
- Republican efforts to overhaul the US tax code gained momentum when two key Senate Republicans expressed optimism about supporting the bill and a congressional committee advanced the measure for a vote later this week.
- North Korea said it had successfully tested a powerful new intercontinental ballistic missile (ICBM) that put all of the US mainland within range, declaring it had achieved its long-held goal of becoming a nuclear power.
- Fed Powell, next chairman, has signaled an end to the era of ratcheting up regulation on US banks, saying the existing rules were “tough enough” to ensure a stable system and that there were ways to tailor the regime.
- New Zealand’s central bank said it would unwind some restrictions on home loans to partly offset the impact of planned government curbs on the country’s housing market, which has cooled in recent months.
- Today’s eco calendar contains German inflation, EC confidence indicators and US pending home sales. Fed Yellen, Dudley, Williams and ECB Weidmann are scheduled to speak. The Fed releases its Beige Book.
Currencies: Dollar And Sterling Rebound
USD gains modestly ground
Yesterday, EUR/USD and USD/JPY trading was initially confined to tight ranges, but USD momentum improved throughout the US session. US confidence data were strong, Fed nominee Powell in a hearing before the Senate advocated continuity and the Republican tax bill will be sent to the Senate. A new North Korea missile test couldn’t spoil the game. US equities set new records and the dollar rebounded, albeit modestly. EUR/USD closed the session at 1.1840 (from 1.1898). USD/JPY finished at 111.48
Overnight, Asian equities are mainly trading in positive territory. China again underperforms as Chinese authorities try to reduce leverage, but reversed earlier losses. Japanese retail data were again soft. USD/JPY touched an intraday top at the time of the publication of the data, but the impact was limited. The dollar eased slightly as the Asian trading evolved. USD/JPY trades currently in the 111.50 area. EUR/USD trades around 1.1855.The kiwi dollar is drifting south as the RBNZ contemplates easing restrictions on home loans. NZD/USD trades near 0.69.
In Europe, the EC economic confidence survey and the German November inflation data will be published. Economic confidence is expected to confirm recent good news from other surveys. German inflation is expected to have risen by 0.3% M/M and 1.7% Y/Y following a surprisingly soft outcome in October. We have no reasons to distance us from consensus. US data, revision of Q3 GDP and pending home sales, are less important. Later in the session, we expect the Fed’s Beige Book to paint an optimistic picture of the economy. Last but not least, Fed’s Yellen will testify before the JEC. She will likely ‘confirm’ that a Dec rate hike is in the pipeline, but recently she spoke cautious on inflation Earlier this week, we advocated not to row against the USD correction as long unless there was a clear positive trigger. Yesterday’s US news was positive, but the USD rebound not convincing. Today’s data are no game-changers, but might be slightly in favour of the euro. The testimony of Yellen and the progress on the tax bill are wild cards. Will she be ‘hawkish ‘enough to raise US yields and the dollar? We’re not convinced. Markets question the Fed’s rate hike intentions beyond December and it is unlikely that Yellen will change this market assessment. Stronger (price) data or other positive events (tax cuts) are needed for markets to reconsider a more USD positive scenario. Over the previous two days price action was a bit more USD constructive, but not good enough to qualify it as a U-turn. We stay dollar neutral.
From a technical point of view, EUR/USD set a post-ECB low mid-November, but on Friday regained the 1.1880 MT correction top. This break opened 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: rally aborted, but no clear correction signal
EUR/GBP
Sterling profits from positive Brexit headlines
There was no high profile news to guide sterling trading yesterday until late in the session. The BoE’s financial stability review indicated that UK banks will be able to cope with the consequences of a disorderly Brexit even if banks and the UK economy could suffer substantial costs in such a scenario. The Irish deputy Prime minister resigned, reducing chances for snap elections. Initially, this didn’t help sterling. After the European close, press sources indicated that the UK was prepared to go a long way in the direction of EU demands on the Brexit divorce bill. If so it would at least remove one of the key obstacles to start negotiations on the future trade relationship. EUR/GBP tumbled more than one big figure and closed the session at 0.8877. Cable finished the session at 1.3339. The rise was hampered by overall USD strength.
UK money supply and credit data will be published today. However, the focus for sterling trading will be on the Brexit story. An agreement in the divorce bill is an important step. The EU now expects the UK to come with a workable proposition on the issue of the Irish boarders. This won’t be easy, but markets will probably adapt positions for the December EU summit to give the green light for talks on the future relationship. Sterling might make some further progress.
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. EUR/GBP trades in a 0.8733/0.9033 consolidation range. Brexit headlines cause day-to-day gyrations. 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. In case of more positive news on Brexit, return action to the 0.8733 (or below) level is possible ST.
EUR/GBP: returning south in the consolidation pattern on positive Brexit headlines
