Sunrise Market Commentary
Rates: Will FOMC Minutes give more info on the Fed’s balance sheet run-off?
FOMC Minutes could give more insight on ending the Fed’s reinvestment policy, resulting in a steeper US yield curve. Last week’s market reaction (bull steepening) showed that the front end of the curve is also sensitive to the debate as running off the BS is an alternative for hiking rates, according to NY Fed Dudley. We expect 2.3% yield support (US 10y) to hold.
Currencies: USD still looking for a driver. US yields remain key
The dollar still shows a mixed picture. USD/JPY came close to the recent low but no real test occurred as US yields held above key support levels. EUR/USD hovers sideways in the 1.06 big figure. Today, the focus is on the US ADP report and the services ISM. The dollar probably needs really strong data to succeed any sustained gains ahead of the payrolls
The Sunrise Headlines
- US equities managed to overcome initial weakness and eventually closed nearly unchanged in an uneventful trading session. Overnight, Asian stock markets trade mixed with China outperforming after a 2-day holiday.
- Activity in Japan’s services sector expanded at the fastest pace in 19 months in March as outstanding business improved, allowing companies to charge more for their goods. The services PMI increased from 51.3 to 52.
- The cost of coal used in steel-making in China has shot up nearly 9% on expectations supply will be crimped in the wake of a cyclone that struck Australia’s north-east coast last week.
- Marine Le Pen repeatedly lost her cool during a heated French presidential debate. She was rated the fourth-most-convincing candidate in two snap polls, , while communist-backed Jean-Luc Melenchon came out on top.
- Richmond Fed Lacker unexpectedly stepped down after revealing his involvement in a 2012 leak of confidential information that sparked a criminal investigation, prompted outrage on Capitol Hill and embarrassed the Fed.
- North Korea launched a medium-range ballistic missile off the east coast of the Korean Peninsula this morning, a day before US President Trump meets with Chinese President Xi for the first time.
- Today’s eco calendar is interesting with services PMI/ISM’s in EMU (final), the UK and the US. Additionally, the US ADP employment report and FOMC Minutes of the March meeting will be released
Currencies: USD Still Looking For A Driver. US Yields Remain Key
USD still looking for a driver. US yields remain key
On Tuesday, a cautious risk sentiment initially weighed on USD/JPY. The pair declined to the 110.30 area, but a real test of the recent low didn’t occur. European yields declined while US ones rose weighing slightly on the euro. EUR/JPY touched a new correction low. However, there is no strong enough driver to give the USD clear direction. Markets await the key US eco data later this week. USD/JPY closed the session at 110.74 (from 110.90 on Monday). EUR/USD hovered around the pivot 1.0650 and closed the session at 1.0674, near the topside of the intraday range.
Overnight, Chinese markets reopen in positive territory after regional holiday’s. Other regional markets show no clear trend. Japanese equities are struggling not fall in negative territory as the yen is holding strong (USD/JPY in the 110.65 area). Yesterday evening, the debate between the French presidential candidates was no success for Marine Le Pen. The euro gained slightly ground overnight, but we don’t expect the theme to have a lasting impact on EUR/USD. The pair is trading in the 1.0675 area. The Aussie dollar stabilizes (AUD/USD 0.7665) after a setback yesterday. The RBA is growing ever more worried on consumer debt and stability.
Today, the EMU calendar contains only the final services PMI. In the US, March ADP employment growth is expected to return to a trend-like 185 000 following an outsized 298 000 gain. Some payback may occur. The March Nonmanufacturing ISM is expected to have eased slightly to 57 from 57.6. As the correlation with the manufacturing ISM is rather strong, we might indeed see some easing, but the level still points to a good growth. Finally, the Fed will publish the Minutes of its March meeting. We look closely to the (unfinished) discussions on future balance sheet tapering. Last week, the dollar correction slowed on decent US eco data and as Fed speakers confirmed further policy normalization in 2017. At the same time, the euro lost momentum as speculation on an early ECB policy normalization eased. However, the dollar rebound has no strong legs as US yields are holding near key support levels. Of late, we advocated that the dollar needs very strong data to regain more ground short term. This assessment remains valid and especially applies to USD/JPY. The pair struggles near the recent lows in the 110 area.
We keep a close eye on US yields nearing key support levels. For EUR/USD, the repositioning away from early ECB normalization has been worked out. We maintain a cautious EUR/USD negative bias, but the decline is slowing. Big EUR/USD gains are unlikely if sentiment would become risk-off. From a technical point of view, USD/JPY last week failed to regain the 111.36/60 previous range bottom. A decline below 110 would signal more trouble ahead. EUR/USD extensively tested the topside of the MT range, but the test was rejected last week. The 1.0874/1.0906 area now looks a solid resistance. EUR/USD might return lower in the previous 1.0875/1.05 trading range.
EUR/USD: correction slows as USD rebound fails to gain traction
Sterling corrects off the recent highs
Yesterday, sterling faced heavy selling at the onset of European trading which is a indication that the recent short squeeze has probably run its course. After the early morning repositioning sterling didn’t go anywhere. Cable hovered in the mid 1.24 big figure and closed the session at 1.2440. EUR/GBP traded close to, mostly slightly north of 0.8550 for most of the session. A late session up-tick of EUR/USD pushed EUR/GBP to close the session at 0.8580 (from 0.8545 on Monday evening).
Overnight, BRC shop prices declined -0.8% M/M (from -1.0%), in line with expectations. Sterling is holding near yesterday’s lows against the euro and the dollar. Later today, the UK services PMI is expected little changed at 53.4. In the past, this indicator had big market moving potential as services are the main driver for UK growth. This remains the case, but of late sterling was more sensitive to price data and, to a lesser extent, to Brexit headlines, rather than to activity data. Even so, we watch whether Brexit is having more impact on services activity. Mid-March, sterling found a better bid after higher than expected UK inflation and a more hawkish tone from the BoE. We changed our short-term bias on EUR/GBP from positive to neutral. The EUR/GBP 0.88/0.84 range should guide EUR/GBP trading medium term. Since late last week, the sterling rally/shortsqueeze shows tentative signs of running into resistance, but we see no trigger for a real change in sentiment yet. Longer term, Brexit-complications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after recent higher inflation data.
EUR/GBP rebounds as sterling short-squeeze is easing