Sunrise Market Commentary
- Rates: ADP employment more important than usual?
US yield resistances remain under severe test (2y: 1.3%, 5y: 2%; 10y 2.55%; 30y 3.13%), with even small breaks at the front end of the curve, suggesting that today’s ADP employment report could have more market-moving potential than is generally the case. If it’s strong enough, it could trigger breaks even with payrolls and Fed ahead. - Currencies: USD in consolidation modus ahead of ECB and Payrolls
The dollar remains will bid even as risk sentiment eased slightly this week. Interest rate differentials continue to support the US currency. Today, the ADP labour market report is the only eco data series with potential to move the dollar. More consolidation ahead of the ECB and the payrolls might be on the cards.
The Sunrise Headlines
- US equities lost marginally ground yesterday as the waiting game for new impetus (payrolls, Fed) continues. Overnight, most Asian stock markets lose up to 0.5%.
- Japan’s economy grew more than earlier estimated in Q4 2016 (0.3% Q/Q) as capital expenditure (2% Q/Q) grew at its fastest in almost three years. Private consumption was flat in the final three months of last year.
- A huge miss for China exports saw the nation plunge to a 60B yuan trade deficit in February (172.5B yuan surplus expected). Imports surged 45% while exports rose a mere 4.2%. The Lunar New Year holidays helped distort the figures.
- The House of Lords inflicted a 2nd Brexit-bill defeat on PM May. They mandated Parliament get a "meaningful vote" on the outcome of exit talks, potentially vetoing any deal. She’ll now seek to have it overturned by the Commons.
- The G20 may no longer explicitly reject protectionism or competitive currency devaluations, a draft communique of their meeting next week showed, promising only to keep an "open and fair international trading system".
- German industrial production increased by 2.8% M/M in January, to be flat Y/Y, which is near December’s -0.1% Y/Y (upward revised from -0.7% Y/Y. The market expected a -0.6% Y/Y. All in all, it looks close to expectations.
- Today’s eco calendar contains the US ADP employment report. UK FM Hammond presents the Spring Budget and Germany & the US tap the market
Currencies: USD In Consolidation Modus Ahead Of ECB And Payrolls
USD consolidation ahead of ECB and payrolls
On Tuesday, the dollar traded with a slight positive bias. Interest rate differentials weighed on EUR/USD as short-term German yields declined. Later in the session, the decline of core bond yields bottomed out, causing a cautious bid in USD/JPY. The US trade deficit was big ($48.5 bln), but with no negative dollar consequences. EUR/USD finished at 1.0566 (from 1.0582). USD/JPY closed the day at 113.98 (from 113.89).
Overnight, most Asian equities show modest losses in low volume trading. The February China trade data showed an unexpected deficit of CNY 60.36 bln (see headlines) but Chinese New Year likely distorted the figure. Japan Q4 GDP growth was revised up to a still soft 0.3% Q/Q, but with limited market impact. The yen (USD/JPY 113.75 area) trades slightly stronger as Japanese equities are softer. EUR/USD holds near yesterday’s closing levels (1.0565). The Aussie dollar lost slightly ground after the publication of the China trade data, even as Chinese imports of commodities rose strongly. AUD/USD is changing hands near 0.76.
The EMU calendar is empty today, after the German production data have been released this morning (see headlines). In the US, only the February ADP Employment report is of importance. In January, the ADP surprised on the upside with a net private job growth of 246K. For February a more trend-like 185K job growth is expected. On a monthly basis, there are often substantial deviations between ADP and payrolls. So, a big surprise is probably needed for the ADP to affect USD trading. In a daily perspective, the odds for USD trading are mixed/indecisive. Last week’s USD profit taking looks finished. Sentiment on risk is turning cautious, but for now it doesn’t hurt the dollar. We expect more technical trading going into tomorrow’s ECB meeting and Friday’s US payrolls. Declining (ST) German yields weighed on the euro yesterday. Even so, we see no trigger for the dollar to clear significant technical levels now. (EUR/USD (1.0494) or in USD/JPY (114.95)).
Global context: Last week, the focus shifted from US fiscal policy to the Fed’s monetary policy, as the Fed prepared markets for a March rate hike. However, the dollar rally petered out as a March rate hike is now discounted. EUR/USD 1.0494 and USD/JPY 114.95 were tested, but no break occurred. Some ST USD consolidation might be on the cards. The payrolls are the next key issue for USD trading. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains a key and solid support. Last week’s correction suggests that it is too early for a break higher in the absence of important USD supportive news. In EUR/USD 1.0829/74 is the short-term line in the sand with intermediate resistance at 1.0679. A sell EUR/USD on upticks remains favoured.
EUR/USD: upside(USD correction) blocked. USD waiting for a trigger to resume uptrend?
EUR/GBP
Sterling drifts south; Budget in focus today
On Tuesday, sterling traded again with a negative bias. Eco data (BRC sales; Halifax housing prices) suggested that the UK economy’s positive momentum post-Brexit is easing. Sterling declined further against the dollar. EUR/GBP returned to the 0.8680 area, but declined slightly later in the session. The UK government faced another defeat in the Brexit-debate in the Upper House. The House of Lords changed the Brexit-bill draft and asked a meaningful vote on the outcome of the Brexit-negotiation. EUR/GBP finished the session at 0.8566 (from 0.8648). Cable closed the session at 1.2200.
Today, UK Chancellor of the Exchequer, Phillip Hammond, will present the Spring UK Budget. The Budget is expected to support specific categories of citizens as the impact of Brexit might hurt spending. There will also be selective investment plans. In a broader perspective, the budget will probably be rather restrictive as the government still wants to further reduce the budget deficit. If anything, ongoing budgetary austerity could be a slightly negative for sterling. Regarding Brexit, UK PM May will try to convince conservatives in the House of Commons to rejected the amendments from the Lords. This debate probably won’t support sterling even as more involvement of Parliament was in the past considered as reducing the chances on a hard Brexit. Sterling sentiment softened of late. The euro was in better shape at the end of last week, helping EUR/GBP to break the 0.8592 resistance, which improved the short-term EUR/GBP picture. We don’t expect a sustained EUR/USD rebound , but a combination of temporary euro consolidation and ongoing sterling softness might trigger some further ST EUR/GBP gains. A sustained break north of 0.8645 might reinforce the ST positive momentum. Longer term, we keep a sterling negative view, as the Brexit will negatively impact the UK
EUR/GBP: clears first resistance at 0.8592. 0.8645 resistance under test
