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Currencies: Dollar Rebound Remains Unconvincing


Sunrise Market Commentary

  • Rates: Sentiment-driven trading, but Draghi’s speech wildcard
    Today’s eco calendar contains EMU PMI’s and consumer confidence. We don’t expect large deviations from consensus. A speech by ECB President Draghi is the wildcard. Will he revive speculation on an APP tapering announcement or keep his cards close to his chest? We forecast trading to remain sentiment-driven ahead of speeches in Jackson Hole on Friday.
  • Currencies: Dollar rebound remains unconvincing
    Yesterday, the dollar was in better shape supported by higher US yields and a positive risk sentiment. Overnight, Trump comments on NAFTA broke the positive USD momentum. Today’s US eco data might be ok, but USD traders remain in waitand- see modus ahead of the CB speeches at Jackson Hole.

The Sunrise Headlines

  • US equities put last week’s political troubles behind and rallied to a 1% gain. Asian equity markets are less enthused this morning, trading mixed. Hong Kong is closed, bracing for Typhoon Hato. Iron ore takes a hit, weighing on AUD.
  • US trade officials are putting together a proposal to let the US withdraw from a corporate arbitration system at the heart of NAFTA, upsetting big American companies that say the system protects their investments overseas.
  • EU law will influence the UK long after Brexit, Theresa May conceded. It’s a marked change of tone from seven months ago when she vowed to end the ECJ’s jurisdiction. The compromise is an attempt to speed up divorce talks.
  • German FM Schaeuble is working on a proposal that would allow southern euro zone countries to tap into the single currency bloc’s bailout fund (ESM) to boost investments during recessions, according to Bild.
  • The Nikkei-Markit Japan flash manufacturing PMI came in at 52.8 in August, up from 52.1 in July. Growth in output, new orders and employment all accelerated in the first three weeks of the month. NZD/USD loses some ground.
  • New Zealand’s government trimmed economic growth and budget surplus forecasts a month before a general election, limiting the ability of political parties to ramp up spending promises. NZD/USD loses some ground.
  • Today’s EMU eco calendar heats up with August Manufacturing & Services PMI’s, consumer confidence and a speech by ECB president Draghi. Germany holds this week’s only scheduled bond auction (2027).

Currencies: Dollar Rebound Remains Unconvincing

Dollar rebound remains unconvincing

Yesterday, the dollar profited from a modest rise in US yields and a positive equity sentiment. Still, EUR/USD and USD/JPY held within the established ranges. Currency investors are looking forward to the CB speeches at Jackson Hole later this week. EUR/USD finished the session at 1.1762 (from 1.1815). USD/JPY was propelled by a nice US equity rebound end finished the day at 109.57 (from 108.98)

Overnight, Asian equities opened strong after the WS rally. USD/JPY filled offers in the 109.83 area but risk sentiment deteriorated after Donald Trump said he may end NAFTA at some point. He also threatened to shut down the US government if he wouldn’t get the funding to build a wall along the Mexican border. Equities ceded part of the early gains. USD/JPY (currently 109.45) is off the intraday top (109.83). The Kiwi dollar (USD/NZD 0.7235) declined after the government cut its growth forecasts. A setback in Iron ore weighed on the Aussie dollar. AUD/USD dropped below 0.79. EUR/USD was little affected by the Trump comments.

This morning ECB-s Draghi will give a speech in Germany before leaving for Jackson Hole. Will he give any hints/details on the exit of the APP bond buying programme or will he abstain from doing so due to fear about a further strengthening of the euro. Most likely he won’t dwell on these questions today but it’s a wildcard. Regarding the data, ,the focus is on the EMU PMI’s. The indices are slightly off the May highs, but stay on levels that suggest ongoing strong growth. Similarly, August consumer confidence is expected marginally lower(-1.8 from -1.7). US August PMI confidence is expected to have risen marginally to 53.5 (manufacturing) and 54.9 (services). We see a risk for an above consensus outcome, based on weaker dollar and signs retail sales are improving. The EMU data should be neutral for the euro. US data might in theory be USD supportive. However, this positive impact might be counterbalanced by the fall-out of the Trump comments on ending NAFTA. So, we expect yesterday’s USD rebound to halt. A modest USD setback going into the Jackson Hole speeches is possible. However, we expect the established ranges to remain in place.

Broader context and technical picture. Late June, EUR/USD started a new upleg as investors anticipated a reduction of ECB bond buying to be announced in autumn. The Fed was expected to remove policy stimulation only in a very gradual way as US inflation remained soft. Uncertainty on the policy of the Trump administration was an secondary negative factor for the dollar. EUR/USD set a new correction top north of 1.19 before consolidating in a narrow 1.1662/1.1910 trading range. We expect this range will hold going into the Jackson Hole symposium. If US data remain ok (as most were this month) and if Draghi gives little information on next ECB steps, there might be room for a modest USD comeback. A return of EUR/USD to the 1.15/16 area is possible. Pockets of US political risk are a (negative) wildcard for the dollar. A downward correction in core (US and European) yields supported the yen in August. USD/JPY declined from the mid 114 area mid-July to 108.60. The April correction low (108.13) remains the line in the sand. For now, this level won’t be easy to break as quite some USD bad news is discounted after the recent protracted setback. A cautious buy-on-dips approach (with stop-loss protection below 108) may be considered.

EUR/US: awaiting clearer CB guidance

EUR/GBP

EUR/GBP sets new highs

Sterling continued trading with a negative bias yesterday. Cable drifted from the high 1.28 area early in Europe to close the session at 1.2824. Most of this move was due to a rebound of the dollar, but sterling also set a minor new low against the euro. The UK data were not to blame. The UK August public budget showed an unexpected surplus and the CBI orders were better than expected. However, good eco/activity data don’t help sterling these days as long as inflation remain modest and as there is little progress in the EU-UK Brexit talks. EUR/GBP closed the session at 0.9172.

Today, without UK eco data, the global risk sentiment and the headlines on the Brexit negotiations will set the tone for sterling trading. A cautious sentiment on risk is sterling negative. We also don’t expect high profile positive Brexit news. So, despite the extensive sterling correction (especially against the euro) and the overbought EUR/GBP conditions, we don’t see a trigger for a change in sentiment

From a technical point of view, EUR/GBP cleared the 0.8854/80 resistance (top end June), opening the way for further gains The move was the result of euro strength (ongoing strong EMU growth and expectations of the ECB reducing policy stimulus later this year). At the same time, UK price data remain soft enough for the BoE to keep a wait-and-see modus as the Brexit negotiations continue. MT, we maintain a buy EUR/GBP on dips approach as we expect the constellation of relative euro strength and sterling softness to continue. The 0.9415 flash-crash spike is the next MT target on the charts. However, we don’t jump on the trend anymore after recent protracted EUR/GBP rally and wait for a correction, e.g to the technical support in the 0.88/89 area.

EUR/GBP: uptrend continues unabatedly

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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