Sunrise Market Commentary
- Rates: Looking for EMU bond markets and risk sentiment for guidance
Today’s eco calendar is empty apart from heavy supply (Germany, Portugal, Finland, US). Investors’ focus will remain on EMU bond markets. Yesterday tensions eased, but we don’t take that for granted. The short term technical picture of the Bund improved and the US Note future is near key resistance (125-09/16).
- Currencies: Sterling rebounds on hawkish BoE comments and ‘Brexit compromise’
Yesterday, the dollar gained modestly against the euro and the yen as risk sentiment improved. Today, the eco calendar is very thin. Sterling profits from hawkish comments from BoE’s Forbes and as the UK government agreed on the Parliamentary approval of the final Brexit deal
The Sunrise Headlines
- US equities ended around 0.2% higher with the S&P 500 underperforming (flat). Asian stock markets trade mixed with Japan outperforming on the back of yesterday’s yen weakness.
- Japan attained its second-biggest current account surplus on record in 2016, just days before the US and Japanese leaders meet for talks with trade surpluses and currency valuations expected to be high on the agenda.
- Britain will not seek further talks with the EU if parliament rejects the exit deal it reaches, the government said, as ministers defeated attempts to give lawmakers more say on the terms of the final agreement.
- The RBNZ will undertake a cost-benefit analysis of imposing debt-to-income limits aimed at cooling down a red-hot housing market, NZ’s FM said, though it is unlikely DTI measures will be used this year.
- Bundesbank President Weidmann said that Germans mustn’t forget that they benefit from low interest rates that make jobs safer and boost government tax revenue. The ECB is not yet at a point where it can end its expansionary policy.
- The IMF warned that Greece once again risks a eurozone exit amid stalled bailout talks, sending the clearest signal yet the emergency lender isn’t likely to soon rejoin Europe’s failed efforts to fix the debt-weary nation.
- Crude oil prices dropped $1.5/b yesterday after a private report (API) showed that oil inventories spiked last week and as Norwegian energy group Statoil booked a $2.3B impairment due to reduced LT expectations for oil prices.
- Today’s eco calendar is empty apart from auctions in Portugal, Germany, Finland and the US..
Currencies: Sterling Rebounds On Hawkish BoE Comments And ‘Brexit Compromise’
Dollar looking for a bottom
On Tuesday, the European risk-off trade that dominated Monday’s session faded. In a session devoid of important data, this was enough to put a short term floor undere the dollar. USD/JPY rebounded from a correction low in the 111.60 area and settled in 112 big figure during the European hours. However, the pair lost again ground in US dealings as equities couldn’t maintain the opening gains. USD/JPY closed the session at 112.39. EUR/USD extended its decline. Contrary to Monday, USD strength rather than euro weakness prevailed. The dollar also lost momentum against the euro later on and finished the session at 1.0683.
Overnight, Asian equities trade mixed. The rise of the dollar is positive for Japan. Chinese equity markets probably also still react to the Chinese forex reserve statistics showed a decline of reserves below $3 trillion. China weakened the yuan reference rate to USD/CNY 6.8849 and the PBOC again tightened monetary conditions as it skipped its reverse rate operations. The CNH and the CNY are losing marginal ground. The dollar shows no clear trend. USD/JPY stands at 112.25. EUR/USD at 1.0675.
Today, US and EMU eco calendars are devoid of market moving data. We are also not aware of any important events. So technical considerations and global risk sentiment will guide currency trading. Sentiment on risk is a bit fragile in Asia this morning, but nog enough to draw conclusion for European and US trading. So we expect a calm start for trading in the major USD cross. The USD price action over the previous days showed a mixed picture. The topside in EUR/USD looks rather well protected as sentiment on the euro is fragile due to political risks in the region. At the same time, USD/JPY struggles to hold above the 112/111.16 support area. The jury is still out whether this area will hold. A retest/break is possible if risk sentiment would worsen again. Yen traders also look to the meeting between PM Abe and President Trump later this week, as the yen will likely debated. This might be slightly yen-supportive
Global context. The dollar is in a corrective downtrend against most majors since the start of January. The USD rally on the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump politics/communication became a sources of uncertainty, also for the dollar. A break above EUR/USD 1.0874 (next resistance) would question the short-term USD positive outlook. At some point, absolute interest rate support should provide a USD floor, especially as the Fed is expected to continue its policy normalisation. Price action earlier this week showed that that euro weakness might still be a factor too. As we see the 1.0874 resistance is solid, a sell EUR/USD on upticks might be considered. USD/JPY is trading well off the post- Trump highs (118.60/66) and dropped (temporary?) 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. Dollar tries to build a bottom after recent correction
Sterling gain on BoE comments and Brexit compromise
Yesterday, sterling initially traded with a negative bias on soft BRC retail sales, below consensus Halifax house prices and lingering uncertainty on the Brexit debate in Parliament. EUR/GBP returned to the 0.8640 area even as EUR/USD traded with a negative bias. In the afternoon, sentiment on sterling improved for the better. BoE’s Forbes said that “If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate.” Sterling rebounded further on Brexit headlines. Cable finished the session at 1.2501. EUR/GBP tumbled below 0.86 and finished the session at 0.8538.
Overnight, a survey of the Recruitment and Employment Confederation and IHS Markit indicated rising wage pressures. Sterling is holding near yesterday’s highs against the dollar and the euro. No eco releases are scheduled. Yesterday, sterling rebounded as the UK Parliament was allowed to vote on the final Brexit agreement, but there will be no renegotiation if the proposed deal is rejected. At this stage, we don’t see this ‘agreement’ as a reason for further sterling strength. Last week’s balanced approach of the BoE capped the topside of sterling and helped a cautious bottoming out process for EUR/GBP. Yesterday’s comments from Forbes supported sterling, but we don’t think they change the broader picture on the BoE policy approach. The EUR/GBP 0.8450 support looks again a bit better protected. The sterling momentum is waning a bit, but euro weakness might still be an issue. A cautious buy-on-dips approach is preferred. The cable price action suggests that further cable gains are difficult too
EUR/GBP still struggles to rebound off the 0.8450 support area