Sunrise Market Commentary
- Rates: Sell-on-upticks in Bund and US Note future
Today’s eco calendar heats up with EMU PMI’s, US retail sales and the ECB meeting. We expect data to remain strong, while upward GDP/CPI projections by the ECB could draw investors’ attention. Those factors are negative for core bonds. Especially when taking into account yesterday’s Fed message. The Fed is willing to continue its tightening cycle unabatedly. - Currencies: Dollar declines even as Fed continues policy normalization
A soft US core CPI and a Fed decision in line with expectations caused a reposition (decline) in US yields and weighed on the dollar. Positive Fed forecasts and decent US retail sales shouldn’t be that bad for the dollar, but the ECB forecasts are a wild card.
The Sunrise Headlines
- US stock markets lost some (Nasdaq) to all (S&P) intraday gains going into the close. Asian risk sentiment is mixed overnight with China and Japan underperforming. China’s central bank nudged up money market rates.
- The Fed showed continued optimism about the US economy in voting to raise short-term interest rates for the third time this year (to 1.25%-1.5%), and signalling it would stay on a similar path next year amid a leadership transition.
- Theresa May suffered her first major legislative defeat, after pro-European Conservatives backed a move insisting that parliament has a full vote on any Brexit deal before ministers begin implementing it.
- The highest-earning Americans will get a lower tax rate and corporations will pay slightly more than in previous plans under a deal House and Senate Republicans reached on the party’s competing tax-overhaul bills.
- Banks are pushing for an eleventh-hour reprieve for a key part of new European markets rules (Mifid II) because about a fifth of their clients do not have the vital tag they will need to continue trading.
- China’s retail sales (10.2% Y/Y) and investment growth (7.2% Y/Y) held basically steady in November as a slight uptick in state-led spending continued to help prop up overall investment heading into the close of 2017.
- Today’s eco calendar contains the preliminary reading of the EMU December PMI’s, the US retails sales, import prices and jobless claims. The UK retail sales are also scheduled for release. Several central Banks will decide on Monetary policy including the ECB, the Bank of England, the Norges Bank and the Swiss National Bank
Currencies: Dollar Declines Even As Fed Continues Policy Normalization
Fed holds course, but dollar declines
USD sentiment deteriorated in US dealings yesterday. Core CPI came out slightly softer than expected and US yields declined, wrong-footing USD longs. The Fed as expected raised its policy rate by 25 bps. Yellen and Co turned more optimistic on the economy. The inflation forecast and median dots on the expected rate path were little changed, but the Fed acknowledged that inflation stays low currently. US yields declined another 4/5 bps after the Fed decision, causing additional intraday USD losses. EUR/USD finished the day at 1.1826 (from 1.1742). USD/JPY closed the session at 112.54 (from 113.55).
Asian equities opened mixed overnight, but gradually ceded ground. Chinese retail sales (10.2% Y/Y), fixed assets sales (7.2%) and industrial production (6.1% Y/Y) all printed very close to expectations. The PBOC raised the rate for some reverserepurchases, confirming its intention to curb (excessive) leverage. The dollar stabilizes after yesterday’s setback. EUR/USD trades in the 1.1825 area. USD/JPY is changing hands in the 112.60 area. It is too early to call a USD bottoming, but the US currency isn’t losing any further ground. Australian November labour market data were strong. AUD/USD jumped to the mid 0.76 area, reaching the highest level in more than a month.
Today’s eco calendar is well filled. Preliminary EMU PMI’s are expected to have eased slightly, but will indicate ongoing strong growth. The ECB will leave its policy unchanged. The updated growth and inflation forecasts will dominate the market reaction. Growth forecasts will probably be revised higher. Markets will also keep a close eye at the inflation forecast at the end of the forecasting period. How close will the inflation forecast come to the 2.0% target? If the target is seen within reach, it might cause a repositioning on EMU interest rate markets and support the euro. US data are interesting too. Headline retail sales are expected at 0.3% M/M, the control group sales are forecast at 0.4 % M/M. We don’t have much reason to take a different view from consensus. Yesterday, the dollar made a step backward on slightly softer US core CPI. The Fed maintaining its normalisation path was not enough to support the dollar. We assume that the decline in US yields and in the dollar was mostly profit-taking/a squeeze in a market that was positioned short US bonds and that raised USD longs in the run-up to the Fed. Given yesterday’s Fed forecasts, we don’t see a big case for a significant further USD decline from here
However, the ECB forecasts are a wildcard for euro trading. An upward revision of the growth forecast and inflation nearing the 2% target at the end of the forecast period could propel EMU rates and the euro. So, the EUR/USD rebound might still go a bit further. For now, we assume that the pair will not return to the recent high (1.1961 area). We will reconsider to add EUR/USD shorts once the ECB meeting is out of the way.
Technical picture. EUR/USD set a post-ECB low mid-November, but the USD’s momentum wasn’t strong enough. EUR/USD settled in a directionless consolidation pattern in the 1.17/19 area. A return below 1.1713 would signal an improvement in the ST USD momentum. Next support comes in at 1.1554 (November low). USD/JPY’s momentum deteriorated early November, dropping below the 111.65 neckline. No aggressive follow-through selling occurred though. Over the previous two weeks, the pair rebounded, calling off the downside alert and returning to the 110.84/114.73 range. We amended our ST bias from negative to neutral. We maintain the view that a sustained break north of 115 won’t be easy
EUR/USD: USD declines on soft CPI. Fed doesn’t help
EUR/GBP
EUR/GBP holds sideways consolidation pattern
EUR/GBP initially hovered in the 0.8810/20 area. The EU Parliament finally approved a Brexit resolution. Sterling gained a few ticks during the morning session. The UK labour data were mixed. UK employment dropped a bigger than expected 56k in the 3 months to October. At the same time, UK wage growth was marginally higher than expected (2.3% ex bonuses). Sterling hardly reacted as the report contained little news for the BoE to change its assessment. Further sterling gains were blocked as UK PM faced more headwinds in the parliamentary vote of the UK Brexit bill. Finally, the UK PM had to concede a bigger role of Parliament in the Brexit process. However, the approval of the amendment had only a limited impact on sterling. EUR/GBP closed the session little changed at 0.8812. Cable rebounded north of 1.3420 on USD weakness.
Today, the UK retail sales are expected to rise a modest 0.4% M/M and 0.3% Y/Y. The BoE will announce its policy decision. We expect them to keep its policy unchanged. Markets will look out whether Carney and Co will strike a slightly more hawkish tone after the recent rise in inflation. We see little room for the BoE to tighten policy as long as real wages remain low/negative. We don’t expect the BoE’s announcement to provide a lasting support for sterling. Brexit headlines remain a wildcard, but we don’t expect any high profile negative news short-term
Recent developments pushed EUR/GBP lower in the 0.8690/0.9033 consolidation pattern. EUR/GBP tested 0.8693 support (62% retracement) on Friday, but the test was rejected. Next support comes in at 0.8653. We assume that the 0.8653/90 area won’t be easy to break short-term. We hold a neutral bias on EUR/GBP short-term. We consider a return to the bottom of this range as an opportunity to reduce sterling long exposure against the euro.
EUR/GBP rebounds in the established trading range despite Brexit deal
