Sunrise Market Commentary
- Rates: US yields hit important resistance levels
The US Note future’s underperformance against the German Bund continued yesterday. The move was mainly an extension of Wednesday’s sell off. US 5-yr and 10-yr yields tested key resistance, respectively at 2.42% (2011 top) and 2.63%/2.64% (2016/2017 top), but a break didn’t occur. The US Senate’s vote on a stopgap funding bill could be key. - Currencies: US Government shutdown and consumer confidence to drive the dollar
The price action of the dollar remained unconvincing yesterday. The US currency reversed part of Wednesdays rebound as uncertainty on a US government shutdown weighed. The US Senate votes on a spending bill today. If approved, the dollar might receive additional interest rate support. However, of late this was no guarantee for sustained USD gains
The Sunrise Headlines
- US stock markets ended slightly lower yesterday with the Dow underperforming (-0.4%). Most Asian equity indices eke out gains overnight with Korea underperforming.
- The threat of a partial US government shutdown intensified as senators signaled opposition to a short-term spending bill that the House passed yesterday evening.
- The White House is considering SF Fed governor Williams as a candidate to serve as the vice chairman of the Federal Reserve Board in Washington, according to people familiar with the matter.
- The Fed should review its inflation target as part of an assessment of its tools for fighting the next recession NY Fed Dudley said, adding new impetus to an issue that is among the most important questions facing monetary policy.
- Leaders Silvio Berlusconi of Forza Italia, Matteo Salvini of Northern League and Giorgia Meloni of Brothers of Italy signed a joint election program ahead of Italy’s March 4 general elections.
- The expected reduction of the ECB’s monetary stimulus programme this year is unlikely to have a major adverse impact on Portugal, whose public debt should keep declining, a senior Fitch Ratings analyst said.
- Today’s eco calendar contains University of Michigan consumer confidence and UK retail sales. Fed Bostic and Quarles are scheduled to speak, respectively on the economy and on bank regulation
Currencies: US Government Shutdown And Consumer Confidence To Drive The Dollar
Senate vote spending bill key for USD short-term ?
The dollar couldn’t sustain early-day gains yesterday. Especially USD/EUR showed signs of weakness. The interest rate differentials widened again slightly in favor of the dollar. It was not enough to help the US currency, as was often the case of late. US data were mixed. Uncertainty on a US government shutdown capped further US equity gains and weighed on the dollar. USD/JPY finished the day at 111.11. EUR/USD closed the session at 1.2238.
Asian equities remain in good shape, but the positive risk sentiment doesn’t help the dollar. The trade-weighted dollar (DXY) trades at 90.38 (near the cycle low). USD/JPY dropped back below 111 and AUD/USD surpassed the 0.80 mark. EUR/USD also regained a few more ticks even as US yields are at recent highs/key resistance levels.
The debate on the US spending bill and US consumer confidence (University of Michigan) are the main topics today with potential to move FX markets. Consumer confidence is expected to rebound after a setback in the previous two months. Recent US business sentiment indicators didn’t profit much from the tax reform. So we are a bit cautious. A US government shutdown would weigh on the dollar. If a shutdown is avoided, US yields might break key resistances (see fixed income part). Will this be enough to improve USD sentiment? This weekend’s SPD decision whether or not to start formal talks to form a German government are also important for European markets.
Global Picture: The dollar remains in the defensive as markets prepare for a change in policy from central banks outside the US. This propelled EUR/USD despite a huge interest rate differential in favour of the dollar. The USD decline slowed this week, but the ‘rebound’ remained unconvincing from now. A return below previous resistance at 1.2092 is needed to call off the ST alert for the dollar. EUR/USD 1.2598 (62% Retracement) is next important resistance on the charts.
The December UK retail sales are expected to decline 1.0% M/M after a strong November figure. A positive surprise (smaller decline) is possible. Activity data are not the most important issue for (FX) trading. Even so, sterling showed some underlying resilience recently. A break of EUR/GBP below 0.8810 would open the way to the 0.87 range bottom, which we consider solid support. Some further correction within the established range is possible.
DXY (USD trade-weighted): USD fails to rebound off recent lows
