Sunrise Market Commentary
- Rates: Frexit no longer discounted; neutral ahead of ECB?
Yesterday’s trading session suggests that the French presidential elections are no longer an issue for markets. In the run-up to Thursday’s ECB meeting, we think the Bund will find some support. The US Note future remains strong despite upcoming supply and despite hints on a near-term announcement of Trump’s tax reform plan. - Currencies: Dollar hardly profits as sentiment remains risk-on
EUR/USD and USD/JPY made a one-off rebound after the French election. However, especially the performance of USD/JPY was mediocre as the pair struggles to hold north of 110. Today, the focus turns to the US data and US politics. Will the Trump administration be able to cut taxes sufficiently to give the dollar interest rate support?
The Sunrise Headlines
- US equities managed to hold on to opening gains and closed more than 1% higher. Overnight, Asian risk sentiment remains positive with main bourses nearly 1% in the green.
- President Donald Trump has ordered White House aides to draft a tax plan that slashes the corporate tax rate to 15%, even if that means a loss of revenue, according to people familiar with the directive.
- The Trump administration will impose new tariffs on imports of Canadian softwood lumber after concluding that Canada subsidises the industry in a way that hurts the US. USD/CAD surged from 1.34 to 1.3550.
- US President Trump indicated an openness to delaying his push to secure funds for his promised border wall with Mexico, potentially eliminating a sticking point as lawmakers worked to avoid a looming government shutdown.
- Macron led Le Pen by at least 20 percentage points in three polls ahead of France’s May 7 election. Ifop’s daily survey showed him with a 60%-40% advantage, OpinionWay put it at 61%-39%, and Elabe put it at 64%-36%.
- The Home Office is trying to discourage EU nationals from applying for permanent residence in the UK to avoid being deluged by applications after the triggering of the Article 50 Brexit clause.
- Today’s eco calendar contains US consumer confidence and Richmond Fed Manufacturing index. Germany, the Netherlands and the US supply the bond market. The ECB publishes its bank lending survey.
Currencies: Dollar Hardly Profits As Sentiment Remains Risk-On
Dollar remains in the defensive despite risk rally
On Monday, a (one-off) repositioning on the outcome of the French presidential election initially triggered good gains in the EUR/USD and USD/JPY. However, both cross rates soon found a new ST equilibrium and held tight ranges for the remainder of the session. EUR/USD held close to the 1.0850 pivot. USD/JPY initially drifted sideways in the low 110 area, but closed the session on a weak footing as US bond yields failed to maintain an earlier rise, despite a strong equity performance.
Overnight, Asian equities make more gains. Global markets are pondering the impact of President Trump’s tax proposals and a spending bill that the needs to be approved soon to avoid a government shutdown. For now, it nurtures the global risk-on rally, but he rise in core bond yields remains modest. The yen weakens slightly after yesterday evening’s set back. USD/JPY is again trading in the 110 area. EUR/USD is holding near 1.0865. The Canadian dollar declined against the USD (see headlines). USD/CAD trades at 1.3550, nearing the key 1.36 technical resistance.
Today, EMU calendar only contains second tier data. The US calendar is more important. US New Home sales rose a strong 6.1% M/M in February. After February’s strong gains, we expect small additional gains for March. US Consumer confidence surged in March to a 16-year high and rose stronger than other measures of confidence. Consensus sees a slight drop to 122.5 from 125.6. Given the recent outperformance and the weak headline payrolls, we see some downside risks, but without compromising the strong underlying confidence. The Richmond Fed survey is expected to have dropped to 16 from 22. We have no reasons to distance ourselves from consensus.US consumer confidence has the most potential to move FX market. However, unless there is a sharp deviation from consensus, the reaction of the dollar should only be of intra-day significance. The USD reaction might be a bit more pronounced in case of a negative compared to a positive surprise.
Yesterday, the dollar hardly profited from the risk-on rebound as it was driven by a non-US event ( the French election result). The focus will now turn more to the US with markets keeping a close eye on the Trump tax proposals and on the approval of the spending bill in Congress. If a shutdown is avoided, it might support a risk rally and give the dollar some interest rate support. However, the dollar wasn’t in good shape of late. So, we assume more consolidation in both EUR/USD and USD/JPY till there is more clarity on the US tax proposals and/or on the budget bill. A new failure to implement a workable fiscal policy would weigh on the dollar.
From a technical point of view, USD/JPY broke below the 110 key support. We downgraded our USD/JPY assessment to bearish. Next key support (62% retracement) comes in at 107.18. Yesterday’s ‘rebound’ suggested that a bottoming out process might be in store. However, the pair needs to regain the 112.20 level (neckline ST double bottom) to really improve the technical picture. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March, but the test was rejected and EUR/USD returned lower in the 1.0875/1.05 range. The move met support in the 1.06 area and the pair again tested the range top after the French election. We look out how this test turns out, but we are not convinced of a sustained break higher. If EUR/USD would regain the 1.10 barrier, next resistance comes in in the 1.1145/1.13 area (US pre/post-election swings).
EUR/USD holding near the recent highs. USD remains in the defensive
EUR/GBP
Euro strength supports EUR/GBP
Sterling trading was driven by the impact of the French election result on global markets yesterday. The euro jumped higher across the board. EUR/GBP filled offers north of 0.85 early in Asia, but the EUR/GBP rally stalled, as was the case for EUR/USD. The pair settled in a relatively tight range in the upper half of the 0.84 big figure. The price swings in cable were limited. The pair hovered around the 1.28 pivot. The CBI total orders trends were slightly softer than expected at 4 (from 8 in March). The report suggests softer growth at the start of Q2, but the impact on sterling was limited. EUR/GBP closed the session at 0.8493. Cable finished the day at 1.2796.
Today, the eco calendar contains the monthly UK budget data. These data are usually only of second tier importance for sterling trading, at best. Of late sterling held strong. For now Brexit uncertainty is a bit off the radar for sterling trading as there will probably be few concrete developments before UK election on June 8. At the same time, the UK eco data were good enough for investors not to add to sterling shorts or even reduce stale short positions. Yesterday’s EUR/GBP rebound was a euro move. The price moves in cable suggested that sentiment on sterling remains rather constructive for now.
We had a neutral short-term bias on EUR/GBP. Early last week, EUR/GBP dropped below the bottom of the EUR/GBP 0.84 support, improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After yesterday’s rebound, the range bottom looks better protected. Longer term, Brexit-complications remain a potential negative for sterling. Of late, this was not the focus of sterling trading. Nevertheless on technical considerations, we are inclined to reconsider a cautious EUR/GBP buyon- dips approach.
EUR/GBP: jumps on French election. 0.83 range bottom looks safe for now
