Sunrise Market Commentary
- Rates: US 10y real interest rate reaches 5-yr high
US yields reached new cycle highs in the wake of FOMC Minutes which shifted market bets more towards a hawkish Fed this year. The US 30-yr yield tests first resistance around 3.21%. Interestingly, the latest increase in US yields is spurred by a rising real interest rate rather than by higher inflation expectations. - Currencies: USD nearing first significant resistance area
The dollar extended gains yesterday as the FOMC minutes were perceived as being on the hawkish side. The dollar is nearing first intermediate resistance. The calendar is rather thin today. In this context, the USD rally might slow. Brexit noise could block the recent (albeit modest) comeback of sterling.
The Sunrise Headlines
- US markets at first shrugged off FOMC Minutes, but faced selling pressure into the close (-0.5%) as the sell-off in core bonds continued. Asian indices lose ground as well with China outperforming (catch-up after Lunar NY holidays).
- Federal Reserve officials signalled growing confidence in the US economy when they met in January, bolstering their plans to continue raising short-term interest rates as soon as next month.
- One of the Federal Reserve’s newest policymakers, Quarles, added his voice to the majority at the US central bank calling for interest rate hikes amid rising business optimism and faster growth in the world’s biggest economy.
- The BoJ should consider buying foreign bonds as part of efforts to reflate the economy during Governor Kuroda’s second term at the central bank helm, an economic adviser to PM Abe said.
- The UK’s cabinet didn’t agree to Theresa May’s negotiating strategy for the Brexit transition period before it was sent to EU nations, the Telegraph reported, citing senior ministers.
- The BoE could end up needing to raise interest rates faster than investors expect, chief economist Haldane told lawmakers, striking a slightly more hawkish tone than his central bank colleagues.
- Today’s eco calendar contains German IFO business sentiment, US weekly jobless claims and details of Q4 UK GDP. Minutes of the previous ECB meeting will be published and Fed Dudley, Bostic and Kaplan speak.
Currencies: USD Nearing First Significant Resistance Area
USD nearing first resistance
The dollar gained further ground yesterday, but initially it occurred only at a snail’s pace. EMU PMI’s disappointed, but had hardly any negative impact on the euro. The EUR/USD decline even stalled early in US dealings. Markets hesitated which way to go after the release of the Fed Minutes. Finally the coin fell to the hawkish side. US bond yields rose further and so did the dollar. EUR/USD dropped below the 1.23 mark and closed the session at 1.2284. USD/JPY closed at 107.78, within reach of the intraday top even as US equities came under pressure at the end of the session. The trade-weighted dollar closed the day exactly at 90.00 (compared to last week’s low of 88.25).
The calendar is moderately interesting today. The German IFO Business climate is expected to ease from 117.6 to 117. Yesterday, the PMI’s declined more than expected and this might also be the case for the IFO. The PMI release triggered a modest intraday decline in EMU yields, but hardly affected the euro. There are plenty of Fed speakers, the ECB publishes the account of the January meeting and the US Treasury sells 7-yr bonds. We don’t see any of these factor containing a trigger for a big USD move. LT US yields are nearing (10y)/testing (30y) key resistance levels. It probably needs high profile news to go for a test/break. In this context, the recent USD rebound might also slow. 90.57 is first resistance for the trade-weighted dollar. First support in EUR/USD (1.2206/1.2165) is coming on the radar. In a day-today perspective, we think it might be a bit too early for a test/break.
The gradual rebound of sterling ran into resistance yesterday. The UK currency returned part of Tuesday’s gain after mediocre UK labour data. Brexit noise remained a negative, too. BoE governors, including Carney, indicated that further rate hikes are on the cards in a hearing before parliament. However they deliberately remained vague on the timing. EUR/GBP returned south to the low 0.8815 area, but a test of the 0.88 big figure didn’t occur. Details of the UK Q4 GDP and the CBI retail data will be published today. PM May and 11 top Ministers meet to clarify the Brexit strategy. Consensus still looks far away. We see little upside for sterling (against the euro) as long as Brexit uncertainty remains as high as it is.
EUR/USD: drifting back south in the 1.2206/1.2555 ST range
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