Sunrise Market Commentary
- Rates: How strong is market’s faith in reflation trade?
Asian risk sentiment deteriorated after the initial tepid reaction to the Republican health care downfall. This failure could signal problems ahead for Trump’s economic agenda and might falter markets’ faith in the reflation trade. That could underpin US Treasuries. In yield terms, the US 10-yr yield could be up for a test of 2.3% support this week.
- Currencies: Dollar correction continues after failed Trumpcare vote
The dollar is fighting an uphill battle in Asia this morning after Friday’s failure of the Republicans to repeal Obamacare in a House vote. USD/JPY dropped below support. EUR/USD is challenging the important 1.0829/74 resistance. The day-to-day momentum is clearly dollar negative. However, we expect any further gains of EUR/USD to be modest and gradual
The Sunrise Headlines
- US stock markets closed mixed and didn’t suffer a late setback as the vote on a new Republican health care bill was pulled just before the close. Overnight, Asian stock markets lose up to 0.5% as risk aversion takes the upper hand.
- House Republicans stumbled in their first major attempt to reshape the US government under President Trump, as their long-promised health-care bill failed despite days of personal lobbying by the president and Speaker Paul Ryan.
- With the corpse of Republican’s failed efforts to pass healthcare legislation still warm, President Trump says he is already preparing to move on to the next item on his policy to-do list: tax reform.
- German Chancellor Merkel’s CDU scored a clear victory in the small state of Saarland, dashing hopes among her contenders that the election would signal a change of political sentiment ahead of a national vote in September.
- China will substantially cut the number of sectors closed to foreign investment, PBOC governor Zhou Xiochuan said. He added though that as his country opens wider, "we want China to get fair treatment overseas".
- A joint committee of ministers from OPEC and non-OPEC oil producers has agreed to review whether a global pact to limit supplies should be extended by six months. Brent crude hovers just above the psychological $50/barrel mark.
- Today’s eco calendar is thin with German Ifo business sentiment and EMU M3 money supply data. ECB Praet and Fed Evans are scheduled to speak. The US Treasury starts its refinancing operation with a $26B 2-yr Note auction
Currencies: Dollar Correction Continues After Failed Trumpcare Vote
USD selling persists after failed Trumpcare vote
On Friday, trading in major USD cross rates remained in wait-and-see modus, ahead of the vote on the US healthcare bill. EUR/USD gained slightly ground on strong EMU PMI’s. The House not voting on the bill to replace Obamacare initially had only a modest impact. Markets apparently concluded/hoped that tax reform would become a priority for the Trump administration. EUR/USD finished the session at 1.0798 (from 1.0783). USD/JPY even closed the session off the intraday lows at 111.34 (from110.94).
Overnight, Asian markets don’t share the relative resilience of the US markets late on Friday evening. US Treasury yields and the dollar are declining. Regional equities ex Japan trade with modest losses. The weaker dollar is a mixed factor for regional equities. USD/JPY is taking the lead in the USD decline. The pair trades currently in the 110.30 area. So, the 111.60/39 range bottom is really broken. The loss of the dollar against the euro is more moderate. The pair trades in the 1.0845 area.
Today, the market calendar is light, but German IFO business sentiment is worth mentioning. The market expects a stabilization of the headline composite index at 111.1. Following Friday’s stronger than expected PMI, we put the risks on the upside of consensus. If correct, it would bring the index to the tops registered in 2007 and 2010. We will also scrutinize quotes from ECB’s Peter Praet, whether he will push back on rising market expectations that the stronger eco data might accelerate the exit policy.
In a day-to-day perspective, a good Ifo confidence might a be slightly euro supportive (as was the case for the PMI’s on Friday). However, the focus will be on the political impact of the failure to replace Obamacare. The dollar will probably stay under pressure in early Europe as investors adapt positions further after the failed Trumpcare vote. US equity futures also show substantial losses, indicating a further correction on the reflation trade. Will this correction accelerate in the US? The daily momentum on US equities and on the dollar is clearly negative, but maybe the correction shouldn’t go that far. US bond yields are nearing important support levels that probably won’t give away that easily. At the same time, the Trump administration might step up its efforts to cling a victory on other key policy topics like taxes. So, the USD momentum is negative and we don’t row against the tide at this stage. However, we don’t expect an aggressive USD sell-off.
From a technical point of view, the picture of USD/JPY is worrisome as it clearly dropped below the 111.60/36 support. Next support is coming in at 108.84 (50% retracement of the MT up-move). EUR/USD jumped above the 1.0829 level (2017 top) with the next key reference coming in at 1.0874. A break beyond this level would deteriorate the MT picture for the dollar. Chances on a break of this level are growing. However, we don’t expect a real protracted rally of the euro and the dollar already at this stage. The absolute interest rate differential between the US and Germany/European makes EUR/USD long costly. At the same time, we also don’t see the euro as the perfect safe haven yet.
EUR/USD: topside test of 1.0829/74 resistance after failed ‘Trumpcare’ vote
Sterling rebound to slow?
On Friday, dovish comments from BoE’s Vlieghe caused some profit taking on the recent sterling rally. Admittedly most of the correction occurred in (thin) Asian trading. Cable settled in a tight range close to, mostly slightly below the 1.25 barrier. The rebound of EUR/GBP continued during the morning session due to broader euro gains after the strong EMU PMI’s. EUR/GBP returned to mid-0.86 area and closed the session at 0.8657 (from 0.8612).
Overnight, EUR/GBP opened stronger in Europe, as a cautious risk sentiment and a broader bid for EUR/USD supported the pair. However, for now there are no follow-through gains. There are no important eco data in the UK today. So, sterling will probably be driven by global factors (risk-off). Markets will also look forward to the next steps in the Brexit-procedure. Two weeks ago, sterling found a better bid after the early March decline. Some time ago, EUR/GBP cleared 0.8592 resistance, improving the MT technical picture. However, a (substantially) higher than expected UK inflation probably put a decent floor for sterling short-term. We changed our short-term bias on EUR/GBP from positive to neutral. Some further consolidation in the 0.85/0.88 area might be on the cards. Longer term, Brexitcomplications remain a potential negative for sterling, but this issue isn’t in the spotlights right now. We are not convinced that the BoE will raise rates anytime soon, even not after this months’ higher inflation data
EUR/GBP: sterling rebound to show tentative signs of slowing?