Sunrise Market Commentary
- Rates: Test of 164.90 resistance on the back of EMU worries?
US markets are closed today which means that traded volume will be low. The EMU eco calendar only contains EMU consumer confidence which is often ignored. Sentiment-driven trading will be name of the game. EMU worries (Italy, France, Greece) could push the Bund for a new test of 164.90 resistance, but we don’t expect a break higher. - Currencies: Dollar better bid. Euro trading soft on political uncertainty
On Friday , political uncertainty in Europe weighed temporary on EUR/USD and USD/JPY. Today, US markets are closed and as there are few eco data. Risk sentiment is apparently again improving, supporting USD/JPY. EUR/USD will probably hold near the recent lows as European issues continue to weigh.
The Sunrise Headlines
- US equities finished the week 1.5% higher (S&P), the biggest weekly gain in 6 weeks, led by financials, buoyed by expectations of higher interest rates and hopes of lighter regulation. Today, most Asian stock markets record small gains.
- Moody’s became the latest ratings agency to lift its outlook on Russia’s Ba1 rating, upgrading it from ‘negative’ to ‘stable’, citing both a fiscal strategy -lowering the dependence on energy and replenish its savings -and the recovery.
- Fitch confirmed Finland’s AA+ rating (stable outlook) and affirmed Malta’s A rating (positive outlook). The Maltese debt/GDP ratio is on a downward trajectory, deficit amounted 0.5% of 2017 GDP and the economy outperforms.
- Former Italian PM Renzi quit as leader of Italy’s ruling PD party, triggering a re-election battle against minority dissidents that threatens the stability of the centre-left government. Leadership elections are expected in April/May.
- French presidential candidate Francois Fillon, marred by disclosures he put his wife and children on the parliament payroll, will remain in the race even if prosecutors open a formal investigation, reversing his earlier statement.
- Cleveland Fed Loretta Mester said she would be “comfortable” with the central bank raising interest rates now as inflation pressures pick up. Delaying policy tightening will create risks, she added.
- China stops coal imports from N-Korea in a sign it might accept international sanctions against the country.
- Today, US markets are closed, the eco calendar contains only the February euro area consumer confidence and the Eurogroup discusses Greece. Tomorrow, attention goes to euro area PMI business confidence and Fed speakers.
Currencies: Dollar Better Bid. Euro Trading Soft On Political Uncertainty
EUR/USD near recent low as political issues weigh
On Friday, European markets were spooked by the prospect that the final vote in the French presidential election might be between far right and far left. Sentiment turned temporary risk-off, which weighed especially on USD/JPY. US equities maintained a cautiously positive momentum, but with little impact on the dollar. USD/JPY finished the session at 112.84 (from 113.24 on Thursday). EUR/USD closed the day at 1.0605 (from 1.0674). So, both pairs traded with a soft bias.
Overnight, Asian equities show modest gains as US equities held Friday near record high levels. The Japanese trade deficit widened more than expected in January as imports (+8.5%) rose much more than exports (1.3% vs 5.0% expected). However, the data didn’t prevent an intraday rebound of Japanese equities. The yen is trading slightly softer with USD/JPY changing hands around 113.15. EUR/USD hovers in the 1.0610 area, still within reach of the recent lows. The political debate in France this weekend showed that Presidential election remains highly divisive and diffuse.
Today, the eco calendar is thin. US markets are closed in observance of Presidents’ Day. In the Europe, the consumer confidence is expected to stabilize at -4.9. Consumer sentiment is near the highest levels in 15 years. However, (currency ) markets usually hardly react to the report. The Eurogroup meets on Greece and will evaluate its progress in complying with the terms of the third bailout. The review is 1 year behind schedule and no final conclusion will be reached yet. On Friday, political uncertainty in France caused a modest risk-off trade. This investor cautious supported core bonds and weighed both on USD/JPY and EUR/USD. Comments during the weekend suggest that a single left candidate in French presidential elections is no done thing, but we doubt this will remove investor uncertainty on Europe/France. Issues on Greece and Italy stay on the radar too. We have EUR/USD negative bias at the start of the week. The gradual EUR/USD decline might continue. USD/JPY might be better supported in a daily perspective as global equities remain well bid. Even so, we don’t expected the USD/JPY rebound to go far as core yields stay low.
Global context. The dollar corrected downward since the start of January as the Trump reflation trade slowed down. Two weeks ago , the dollar showed tentative signs of a bottoming out, supported by the ‘Trump tax promise’. Underlying euro weakness due to political uncertainty in the area is a factor too. We see the 1.0874 as solid resistance and thus still favour a sell EUR/USD on upticks approach. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields and/or on the dollar. We keep cautious USD positive bias, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD: Euro softness dominates
EUR/GBP
EUR/GBP: euro and sterling trading soft
On Friday, EUR/GBP weakened a few ticks early in Europe as EUR/USD declined on the uncertainty related to the French Presidential election. However UK January retail sales disappointed again (-0.3% M/M). Of late, sterling didn’t react much to activity data, but this negative data surprise was too big to ignore. Sterling was sold and EUR/GBP spiked to the 0.859 area. Cable also fell off a cliff and dropped temporary below 1.24. Selling pressure on sterling eased in the afternoon and a further declined of EUR/USD reversed part of the EUR/GBP gains. EUR/GBP closed the session at 0.8561 (from 0.8546). Cable closed the day in the red at 1.2412 (from 1.2489).
Overnight, Rightmove House prices rose 2.0% M/M and 2.3% Y/Y. There is no noticeable impact on sterling trading. Later today, the CBI trends orders are scheduled for release. A limited decline (4 from 5) at a decent level is expected. Usually sterling doesn’t react much to this data series. Even so, in the wake of Friday’s poor retail sales, another really negative surprise might be a slightly negative for sterling.
EUR/GBP recently hovered in a tight range north of the 0.8450 support, but a break didn’t occur. Sentiment on sterling softened slightly of late as the market feels that a BoE rate hike is still very far away. Euro softness due to political uncertainty is a risk for all euro cross rates, including for EUR/GBP. Longer term, we have a sterling negative view as the negative impact from Brexit still has to impact the UK economy. However, this is no issue at this stage. The test of the 0.8540 support is rejected, but the upside momentum isn’t convincing either
EUR/GBP: new test of the 0.8450 support is avoided, but rebound fails to convince
