Sunrise Market Commentary
- Rates: Consolidation after past week’s sell-off?
Risk sentiment on stock markets and technical considerations will probably be today’s main trading elements with US markets closed for Martin Luther King Day and amid an empty eco calendar. German yields are near key resistance levels, but a break won’t be easy given this week’s dull eco/event calendar. Consolidation on core bond markets can be expected. - Currencies: Dollar continues fighting an uphill battle
On Friday, the dollar extended its decline despite solid US data. Investors adapted positions as they anticipate that other major central banks, including the ECB and the BOJ, are coming closer to a less easy policy. EUR/USD cleared important technical resistance. For now, there is no trigger to stop the USD decline even as US fundamentals remains solid, too.
The Sunrise Headlines
- US stock markets closed last week’s final session 0.7% higher with Dow Jones outperforming (+0.9%). Asian risk sentiment remains ebullient overnight.
- ECB Weidmann said that the immediate risk of a change in rates is currently low. It would be particularly stressful for the banks if the long period of low interest rates were to be ended by a rapid, sharp increase in interest rates.
- BoJ Governor Kuroda reiterated the central bank’s resolve to maintain quantitative easing, but his positive comments on inflation and the economy sent the yen to a four-month high versus the dollar.
- Boston Fed Rosengren thinks that US inflation could pick up faster than expected. He also believes that the flatter US yield curve is a consequence of larger central bank balance sheets, rather than a signs of a coming recession.
- Germany’s central bank said it will include the renminbi in its currency reserves, giving the Chinese currency’s international stature a boost after 2017 saw its role in global payments diminished.
- Chancellor Merkel’s preliminary coalition deal with SPD ran into opposition in Saxony-Anhalt, showing the magnitude of the task for SPD leaders to win over their reluctant party members at the January 21 party convention.
- Today’s eco calendar is empty. US markets are closed for Martin Luther King Day. BoE Tenreyro is scheduled to speak
Currencies: Dollar Continues Fighting An Uphill Battle
Dollar continues fighting an uphill battle
The euro traded strong after Thursday’s ECB Minutes and this trend continued on Friday. EUR/USD jumped beyond the 1.2092 cycle top after headlines on Government agreement in Germany. The US CPI and retail sales were good but didn’t help the dollar. The rise of the euro/decline of the dollar resumed soon. EUR/USD cleared the 1.2167 resistance (50 % Retracement 2014 top to bottom). Soft comments from ECB’s Weidemann didn’t stop the rise of the euro. EUR/USD closed the session at 1.2202. The dollar remained also in the defensive against the yen, despite the continuation of record race of US equities.
Friday’s trends continue overnight. Most Asian equities trade in positive territory. The yen extends gains as BOJ’s Kuroda said that Japan could reach 2.0% inflation. At the same time, USD weakness persists. USD/JPY trades in the 110.75 area. EUR/USD is holding north of 1.22. Later today, the calendar is thin. US markets are closed for Martin Luther King Day and there are few data in Europe. Also later this week, the calendar contains few really important data from Europe or the US. Central bank speeches/comments, both from Fed and ECB members will be closely monitored and the earnings’ season gains traction.
Euro strength prevailed last week even as US data suggest strong Q4 growth. Markets in the first place adjust positions anticipating a change in policy from major central banks outside the US, including the ECB and even the BOJ. Especially the ECB is preparing a gradual turn. Looking at the fundamentals/interest rate differentials (2-y US/German spread at +250 bps), the euro rise/dollar decline has gone quite far. However, for now there is no trigger for a change in sentiment. The technical picture turned USD negative as EUR/USD cleared 1.2090/1.2167 resistance. The dollar is a failing knife and there is no technical sign of a reversal. 1.2598 (62% Retracement) is the important resistance on the charts.
Sterling traded strong on Friday and resisted the overall euro rally. Spanish and Dutch officials advocating a soft Brexit might have been sterling supportive. EUR/GBP even closed the week at below 0.89. Cable rallied north of 1.37. Overnight, Right move house prices showed a monthly rise of 0.7%, but prices in London stay under pressure. Later this week, the UK CPI (tomorrow) and retail sales (Friday) are interesting. The day-to-day momentum might stay GBP constructive, but we expect the EUR/GBP 0.8700/60 to give solid support.
EUR/USD breaks above 1.2092/1.2167 resistance, improving the MT picture in the cross rate
