Sunrise Market Commentary
- Rates: A tough task for ECB Draghi
Protectionist US comments caused new tests of key US yield resistance levels. Trump’s speech, trade balance data and Q4 GDP might decide over a break tomorrow. Attention turn to EMU today with the ECB meeting. Draghi will try to downplay all early ECB exit speculation, but we think that markets won’t buy it. The normalization genie is out the bottle. - Currencies: USD hammered. Markets fear more US protectionism
The USD decline accelerated yesterday. Comments from US officials in Davos suggest that the US might take further protectionist action and that the US is happy with a weak dollar. ECB’s Draghi will receive plenty of questions on the rise of the euro today. Has he enough ammunition to ease FX swings as EUR/USD’s rise is mainly USD weakness
The Sunrise Headlines
- US stock markets ended mixed yesterday with Nasdaq underperforming (-0.6%). Asian stock markets trade mixed overnight with Japan the exception to the rule, losing more than 1% on yen strength.
- The dollar got a tremendous blow yesterday following protectionist comments by Treasury Secretary Mnuchin and Commerce Secretary Ross. The worse seems over in overnight trading, though USD remains under modest pressure.
- President Trump said he was willing to testify under oath in special counsel Mueller’s investigation into Russia’s interference in the 2016 election, the latest twist in a probe that he has repeatedly denounced as a “witch hunt.”
- Saudi Arabia’s energy minister took a rare sideways swipe at the IEA, accusing the body of overhyping the impact of US shale growth on the oil market. Brent crude moved to $71/b, mainly buoyed by the weaker dollar though.
- New Zealand’s consumer prices rose at a slower-than-expected pace in the Q4 2017 (0.1% Q/Q & 1.6% Y/Y), weighed by the falling costs of cars and food and hosing down expectations that the central bank will raise interest rates this year.
- South Korea’s GDP saw a quarterly contraction in the final three months of 2017 (-0.2% Q/Q) after expanding at the fastest pace in seven years during the third quarter (1.5% Q/Q).
- Main attention turns to the ECB meeting today. Eco data include German IFO, US weekly jobless claims and new home sales. The trade balance release is delayed to tomorrow because of the brief government shutdown
Currencies: USD Hammered. Markets Fear More US Protectionism
Fear of US protectionism hammers the dollar
The USD sell-off accelerated yesterday. Comments from US officials raised fears that the US would take an ever more protectionist approach. US Treasury Secretary Mnuchin said that the USD decline is good for US trade short-term, unsettling markets. EUR/USD rose a full big figure to close at 1.2408. USD/JPY selling accelerated. The pair finished the day at 109.22. EMU January PMI’s were again strong, but no big issue for EUR/USD trading. USD weakness prevailed.
The debate on US protectionism dominates Asian markets overnight. The tradeweighted dollar (DXY) declines below 0.89, the lowest level since December 2014. USD/JPY is testing the 109 big figure. EUR/USD extends gains north of 1.24. Japanese equities lose about 1%. The loss on other markets is modest. The calendar heats up today with German Ifo confidence, the ECB meeting and series of US data. It is probably too early for the ECB to change forward guidance, even as the latest Minutes showed that the internal debate has started. Draghi will receive questions on the rise of the euro. The ECB isn’t happy with the pace of the rise. Question is whether Draghi has ammunition to ease the trend as EUR/USD’s rise is mainly USD weakness. In this respect, comments of US officials in Davos including tomorrow’s speech of President Trump, are probably more important for the next directional move in global FX rather than Draghi’s press conference today. The USD decline is out of line with the eco fundamentals and the developments on the interest rate markets, but politics dominate for now. This remains a binary risk. The dollar is a falling knife. For now, it remains dangerous to try to catch it. From a technical point of view, 1.2596 (62% retracement) is the next important resistance. A return below 1.2165 would be a first indication of that the USD decline is easing.
Sterling rose sharply against the dollar yesterday, but also against the euro, supported by good UK labour data and hope on a constructive outcome of the Brexit talks. EUR/GBP dropped to the low 0.87 area. Today the January CBI reported sales balance is expected to decline slightly. The EC holds a seminar to discuss future Brexit ties. EUR/GBP is nearing key 0.8690 support. A break would be technically relevant. For now we don’t preposition for a sustained break as the euro is also trading strong. However, more positive news from Brexit could reinforce GBP momentum
EUR/USD: USD sell-off continues on fears for protectionism. Has Draghi ammunition to ease the pain?
