Sunrise Market Commentary
- Rates: Eyes on EMU bond markets; technical picture Bund improves
The short term technical picture of the Bund improved as yesterday’s safe haven bid pushed the contract above resistance, suggesting further gains towards 164.90. Worries about Italy/France/Greece caused spread widening on EMU bond markets and generated the risk aversion. Today’s eco calendar is empty, suggesting eyes will remain on EMU bond markets..
- Currencies: Euro weakness to prevail?
Yesterday, European political uncertainty weighed on the euro and this process continues this morning. The dollar shows a mixed picture. USD/JPY dropped below a first line of defensive. A break below 111.16 support would be USD negative. Sterling is trading soft as the Brexit debate in the UK parliament continues.
The Sunrise Headlines
- US equities ended flat to marginally lower (S&P), withstanding European risk aversion. Overnight, most Asian stock markets marginally lose ground.
- German industrial production unexpectedly fell in December, signalling that Europe’s largest economy isn’t immune to heightened global uncertainty. Production declined 3% M/M, while consensus expected a 0.3% M/M increase.
- Australia’s central bank held rates steady at its first policy meeting of the year, playing down a recent soft patch in economic growth as a temporary hiccup that would not prevent a pick up to a healthy 3-percent pace over time.
- A stand-off with European authorities over the terms and future of Greece’s bailout has led to a rare public split on the International Monetary Fund’s board, amid growing questions over the fund’s participation.
- French conservative presidential candidate Fillon, moved to stabilize his faltering campaign by apologizing to the country for having employed his wife and children as parliamentary aides rejecting accusations the jobs were phony.
- Philly Fed president Harker, who votes on policy this year, said he could support raising short-term interest rates at the central bank’s next meeting in March. He also reiterated that he supports around three rate hikes this year.
- British lawmakers rejected the first set of proposed amendments to legislation that would give Prime Minister Theresa May the right to notify the European Union of Britain’s intention to leave the bloc.
- Japan will stick to a G7/G20 agreement against competitive currency devaluation and continue to use monetary policy to achieve its inflation goal, without targeting currencies, Finance Minister Taro Aso said.
- Today’s eco calendar only contains US trade balance. Supply is heavy with Austria, the Netherlands, Germany (inflation), the US and Belgium (probably syndication 7-yr & 40-yr OLO) tapping the market. ECB Weidmann speaks
Currencies: Euro Weakness To Prevail?
Euro weakness prevails
On Monday, sentiment turned risk-off as markets focused on political uncertainty in Europe, in particular in France. Intra-EMU spreads widened and EUR/USD declined to finish the day at 1.0750 (from 1.0783). At the same time, risk-off sentiment and declining core yields support the yen. USD/JPY tested again the 112 area and finally dropped below this area to close the session at 111.74 (from 112.61). EUR/JPY also dropped below the mid-January correction low/support at 120.55.
Overnight, Asian equity markets trade in line with US yesterday evening (minor losses). The dollar is in the defensive against the yen. USD/JPY touched an intraday low in the 111.60 area and trades currently in the 111.80 area. At the same time, the dollar is rebounding against most regional currency (KRW, TWD, CNY …). EUR/USD is trading in the 1.0710 area, within reach of the post-payrolls low. The Reserve bank of Australia left its policy rate unchanged at 1.5%. The Bank remains positive on growth, but the return of inflation north of 2% will continue at a gradual pace. The rise in commodity prices is a positive, but a rise in the Aussie dollar could complicate the transition process in the economy. The Aussie dollar jumped from the 0.7640 area to the 0.7680 area.
Today, the German industrial production is the only important event during the European session. It was weak, but after strong orders yesterday, it had FX impact. In the US, the trade balance is expected to show a deficit of $ 45 bln in December. A bigger than expected deficit might get some more attention as president Trump tries to bring back production to the US and attacks countries with currencies he considers too weak. A negative surprise might be slightly USD negative. Yesterday, euro weakness and a global risk-off sentiment dominated currency trading. Markets keep an eye on the French political scene. Will presidential candidate Fillon be able to change fortunes after yesterday’s speech? Euro uncertainty might persist even as the pace of the euro decline may slow. The price action in USD/JPY is also interesting. The pair dropped below the 112 support. Risk sentiment and interest rate differentials are an important driver, but yen traders also look forward to the meeting between PM Abe and President Trump later this week. The weak yen might be a point of debate at this meeting.
Global context. The dollar is in a (presumed) corrective downtrend against most majors since the start of January. The USD rally due to the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump politics/communication has become a sources of global uncertainty for the dollar. EUR/USD broke a minor resistance at 1.0775. Next resistance is at 1.0874. A return above EUR/USD 1.0874 would question the short-term USD positive outlook. At some point, the absolute interest rate support should provide a USD floor, especially as the Fed is still expected to continue its monetary policy normalisation. Yesterday’s price action illustrated that euro weakness might still be a factor too. The 1.0874 resistance looks solid. A cautious sell EUR/USD on upticks can be considered. USD/JPY is trading well off the post-Trump highs (118.60/66) and dropped below the112 support. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is the next key support. A break below this area is clearly USD negative.
EUR/USD: Topside test rejected. Euro weakness dominates
Sterling caution as Brexit debate continues
On Monday, sterling trading was driven by global sentiment on risk and by the Brexit debate in the Lower House. Cable extended the decline that started after the BoE policy assessment last week. The pair finished the session at 1.2439. The euro was in the defensive across the board due to political uncertainty in continental Europa. This euro weakness was also a bit visible in EUR/GBP. The pair closed the session at 0.8622. However, the decline of EUR/GBP remains modest given the losses in other euro cross rate. This suggests some Brexit driven caution, too.
This morning, UK BRC like for like sales disappointed at (-0.6% Y/Y). Is this another signal that the positive domestic momentum is waning? Later today on the Halifax house prices will be published. The focus will remain on the Brexit debate in Parliament. Until now a series of amendments were rejected, but the process might go a bit less smooth today. The debate in Parliament might be neutral to slightly negative for sterling in a day-to-day perspective. Last week’s balanced approach of the BoE capped the topside of sterling and helped to start a cautious bottoming out process for EUR/GBP. EUR/GBP 0.8450 support looks again a bit better protected. The sterling momentum is waning, but euro weakness is becoming on issue, too. Even so, yesterday’s loss of EUR/GBP remained modest. A cautious buy-on-dips approach is preferred. The price action in cable also suggests that further sterling gains against the dollar won’t be easy.
EUR/GBP: 0.8450 support better protected after soft BoE policy assessment