Sunrise Market Commentary
- Rates: Red alert in German and US 10-yr yield
The German and US 10-yr yields reached key support levels around 0.17% and 2.3% respectively. From a technical point of view, these levels are necklines of a triple top formation. US President Trump’s speech on Tuesday night will need to fiscally dovish to prevent a break lower in the US. In Germany, collateral scarcity might be interfering with reality. - Currencies: Dollar mixed ahead of Trump. USD/JPY nearing key support
On Friday, USD traders received mixed signals from other markets. USD/JPY is drifting toward the range bottom as markets await clear signal from Trump on fiscal policy. EUR/GBP rebounded again north of the 0.8450 reference. Sterling (Cable and EUR/GBP) still shows no clear trend.
The Sunrise Headlines
- US equities erased losses thanks to a last hour surge which left the three main indices with marginal gains and new all-time closing highs (S&P/Dow). Asian equities trade modestly down with Japan underperforming (-0.9%).
- US Treasury Secretary Mnuchin said Trump’s upcoming budget won’t touch entitlements, and will focus on ways to produce LT growth by reducing taxes. The tax-reform plan and regulatory relief will lead to a sharp increase in GDP.
- Moody’s confirmed Germany’s Aaa rating (stable). DBRS confirmed the Irish rating at A (high, stable trend) and the Belgian rating at AA (high, stable trend). S&P affirmed Hungary’s BBB- rating (stable) after a Sept.16 upgrade.
- Fitch confirmed Greece’s rating at CCC. The government’s compliance with the ESM programme conditions is one reason why Fitch believes Greece’s European creditors would be prepared to proceed and disburse funds without IMF involvement. Another reason is the desire to avoid a Greek political crisis during an already congested European election year
- Two polls gave Macron 25% support of the French electorate in the first round of the presidential election, 2%-points behind Le Pen and 5%-points more than Fillon. Both surveys show Le Pen losing to either man in the second round.
- Sterling fell against all its major peers this morning after a report said UK Prime Minister May’s team was preparing for Scotland to potentially call for an independence referendum in March.
- Today, US durables and EMU confidence data are the main eco releases, together with an Italian BTP auction. Further out this week, Trump’s speech on Tuesday night and Yellen’s speech on Friday are the focal points for trading
Currencies: Dollar Mixed Ahead Of Trump. USD/JPY Nearing Key Support
Dollar soft ahead of Trump testimony
On Friday, European markets shifted to risk-off modus. Soft comments of US Treasury Secretary Mnuchin on Thursday caused investor caution ahead of Trumps declaration on Tuesday night. European equities and core bond yields declined. The dollar traded also with a slightly negative bias, but the losses were modest. Equities rebounded in the US, but dollar regained hardly any ground. Especially USD/JPY didn’t profited, probably as US bond yields held near the ST lows. USD/JPY ended the day at 112.13 (from 112.61). EUR/USD finished at 1.0563 (from 1.0582).
Overnight, Asian equities don’t join the rebound in the US on Friday, but the losses are contained. Investors stay in wait-and-see modus ahead of key speech of US president Donald Trump and Fed’s chairwoman Yellen later this week. The yen is holding near its short-term highs. USD/JPY is changing hands in the low 112 area, with the 111.60 range bottom within reach. EUR/JPY hovers just north of the correction low (118.25 area). EUR/USD shows no clear trend and is changing hands in the 1.0565 area.
Today, the EMU economic confidence (EC) is expected to rise for a sixth straight month (108.1 from 107.9). January US durable orders might rebound strongly, but it should be largely due to very strong (but volatile) aircraft orders. Core orders excluding transportation are expected up 0.5% M/M. They improved steadily in H2 of 2016, but can they maintain that pace? The impact on USD trading should be of intraday relevance, at best. Early last week, French election worries weighed on the euro, but these eased mid week. Even so, they were the clear driver for USD trading as other markets showed a diffuse, incoherent picture. Core bond yields continue to decline, despite strong eco data. The global equity rally slowed, but US equities are holding at record highs. For EUR/USD, euro softness prevails even as uncertainty on Europe eased last week. The focus of global investors now turns to the speech of US president Trump (Tuesday) and of Fed’s Yellen ( late on Friday). We start the week with a neutral bias on EUR/USD. We expect USD/JPY to hold north of the 111.60 range bottom ahead of Trump’s speech. However, the US president has to deliver on fiscal stimulus to support the dollar.
Global context. The dollar corrected lower since the start of January as the Trump reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump’s tax promise. However, underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY was rejected. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains a key support. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had no lasting impact on yields. We keep a USD positive bias longer term, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD looking for clear guidance as markets await Trump and Yellen.
EUR/GBP
EUR/GBP and cable don’t find a clear trend
Friday’s risk-off correction was slightly negative for sterling. However, both EUR/GBP and cable held in well-known territory. UK loans for home purchases unexpectedly recovered further (44657 vs 42600 expected), but were ignored as was the case for the Brexit-story. In the afternoon, EUR/USD slightly outperformed cable, providing a cautious support for EUR/GBP. The pair finished at 0.8477 (from 0.8427). Cable finished the session at 1.2462 (from 1.2556).
During the weekend, The Times reported that the UK was preparing for a new Scottish independence vote which might coincide with the triggering of Article 50. Sterling trades slightly softer in Asia this morning. There are no important eco data in the UK today. The House of Lords starts a detailed review of the Article 50 bill. Markets will keep an eye on any headwinds for the PM May’s Brexit strategy. For now, we assume that the impact on sterling should be limited. Earlier last week, the (temporary) acceleration of the euro sell-off pushed EUR/GBP to the 0.84 area. However, a sustained break lower didn’t occur. As is the case for EUR/USD (and for several other markets), there is currently no clear driver for sterling trading. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy. However, this is no issue at this stage. A sustained break below 0.8450 opens the way for a return to the 0.8304 correction low. We maintain a neutral bias on sterling short-term.
EUR/GBP: attack of the 0.8450 support continue. NO sustained break yet.
