Sunrise Market Commentary

  • Rates: Core bond consolidate higher; more gains after US CPI?
    Core bonds continue consolidating higher in a fragile risk sentiment. Today’s eco calendar heats up with US CPI and retail sales. A below or at consensus inflation figure argues in favour of a continuation of the short term correction higher. As long as risk sentiment remains vulnerable, it’s even doubtful that core bond sellers will already return on higher CPI readings.
  • Currencies: USD/JPY drops below 107.32 neckline
    A sharp decline of USD/JPY kept the dollar under pressure yesterday across the board. This trend continues this morning. USD/JPY dropped below the key 107.32 support. Later today, the focus of FX trading turns the US January inflation data. The dollar probably needs a figure above consensus to change sentiment for the better.

The Sunrise Headlines

  • US equities managed to recover some more ground despite the worrying rise of the Japanese yen. USD/JPY hits the lowest level since end 2016 this morning. Asian bourses are mixed with China outperforming ahead of Lunar NY.
  • Cleveland Mester is being considered for the central bank’s vice chair post, sources said. Mester is known for her mildly hawkish views on monetary policy. SF Fed Williams and Mohamed El-Erian have also been considered.
  • The Japanese economy grew less than forecast in Q4 (0.1% Q/Q vs 0.2% Q/Q)., but both consumption (0.5% Q/Q) and investments (0.7% Q/Q) contributed positively. The current Japanese expansion is the longest since the 80s boom.
  • German SPD leader Schulz resigned, hoping to end turbulence that has rocked the centre-left party since it agreed a coalition deal with Chancellor Merkel’s conservatives.
  • NZD/USD hit a one-week high this morning above 0.73 after a quarterly central bank survey showed that 2-yr inflation expectations rebounded from 2.02% to 2.11%.
  • Israeli police recommended charging PM Netanyahu with bribery, fraud and breach of trust in two separate cases, a decision that could spark the biggest fight of his political life.
  • Today’s eco calendar contains US CPI inflation and retail sales. The Swedish Rikskbank is expected to keep its interest rate unchanged at -0.5%. EMU industrial production and the second reading of Q4 GDP will also be released.

Currencies: USD/JPY Drops Below Key 107.32 Support!

USD/JPY drops below key 107.32 support!

USD weakness prevailed yesterday, driven by a sharp USD/JPY decline. The pair dropped from the 108.75 area to fill bids below 107.50 before European noon. The USD/JPY decline weighed also on other USD cross rates. EUR/USD trended higher in the 1.23 figure. We didn’t see a clear trigger for this yendriven repositioning, but it created uncertainty on European equity markets. The USD decline slowed after a strong US NFIB confidence and ‘hawkish’ comments from Fed’s Mester (no impact yet from recent turmoil), but USD sentiment remained weak. EUR/USD closed at 1.2352. USD/JPY finished at 107.82.

Overnight, most Asian equities indices are in positive territory in line with WS. Several markets are heading for a holiday period (Lunar New Year) starting tomorrow. Japan underperforms as the rise of the yen continues. USD/JPY dropped below the 107.32 support, reaching the lowest level since November 2016. Japan Q1 GDP was soft (0.5% Q/Qa), but domestic spending OK. For now, there are few comments from Japanese officials on the rise of the yen. The USD/JPY slide still weighs on other USD cross rates. EUR/USD trades in the 1.2375 area. EUR/JPY is nearing the key 132/131 support area.

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Today, Q1 GDP releases in Germany, Italy and EMU are interesting, but the focus for global trading will be on the US CPI, and to a lesser extent US retail sales. Headline CPI is expected to ease from 2.1% Y/Y to 1.9% (core from 1.8% to 1.7%). The dollar probably needs above consensus inflation to change fortunes for the better. We also keep an eye at the strange combination of yen-strength and at the same time relative equity resilience (in Asia ex-Japan and in the US). How long will this pattern persist? Technically, EUR/USD consolidates between 1.2165 and 1.2537. The pair dropped below 1.2323/35 support but followthrough price action was modest. Next support at 1.2165 looks far away for now. We assume that current USD weakness won’t push EUR/USD beyond the 1.2537 top yet.

UK CPI printed slightly above consensus yesterday (headline 3.0%), but didn’t help sterling. The report won’t change the BoE’s rate hike path. After a brief dip, EUR/GBP returned to the 0.89 area. Today, there are no UK eco data. EUR/GBP is trending higher in the 0.8690/0.9033 range, with intermediate resistance at 0.8930. We hold our view that the 0.8690 support won’t be easy to break without big progress on Brexit.

USD/JPY drops below107.32 neckline, a warning signal

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