- Rates: Bar for payrolls too high after the intense sell-off?
The sell-off in US Treasuries accelerated this week and the bar for today’s payrolls is high (200k consensus, decline in unemployment rate and pick-up in wages). Therefore, we think that there is room for profit taking ahead of the weekend with afterwards consolidation into Wednesday’s Fed meeting. We hold our sell-on-upticks approach. - Currencies: Payrolls to decide on next directional move of the dollar
The dollar recently showed a mixed picture with EUR/USD drifting sideways, but USD/JPY clearing first resistance on higher core bond yields. Today, markets already expect a strong payrolls report. Will the report contain enough positive news to trigger further broad-based USD gains?
The Sunrise Headlines
- US stock markets ended the pre-payrolls session unchanged yesterday. Overnight, Asian equity markets trade mostly positive with Japan outperforming on the back of a weaker yen (+1.5%).
- Poland’s Tusk has been re-elected president of the EC in the face of bitter opposition from his own country’s government. His re-election heads off the prospect of a EU leadership crisis as it prepares for the Brexit negotiation
- China’s corporate debt levels are excessively high, the head of its central bank said, as policymakers grow increasingly concerned about the risks from a rapid build-up in debt and an overheating housing market.
- South Korea’s president was ejected from office by the country’s Constitutional Court, following her impeachment and suspension over accusations that she helped a friend win bribes from several South Korean conglomerates.
- Senior Saudi energy officials told top independent US oil firms in a closed-door meeting this week that they should not assume OPEC would extend output curbs to offset rising production from US shale fields, two sources told Reuters.
- EU and IMF negotiators said that they will continue talks next week with Greece in a bid to broker a deal on reforms that Athens must undertake to unlock the next stages of its international bailout programme.
- Today’s eco calendar contains UK industrial production data, but all attention turns to the US payrolls report. Consensus expects a strong report (200k) with a decline of the unemployment rate (4.7%) and a pick-up in wages (to 2.8% Y/Y)
Currencies: Payrolls To Decide On Next Directional Move Of The Dollar
Payrolls to decide on next directional USD move
The ECB’s press conference directed trading in the major euro and dollar cross rates on Thursday. ECB’s Draghi reiterated that ample policy stimulation is needed, but also said that there was no urgency anymore to take further action. TLTRO’s won’t be prolonged. European yields and the euro rebounded on these headlines. EUR/USD jumped temporary north of 1.06 and closed the day at 1.0577 (from 1.0541 on Wednesday). USD/JPY was also supported by the rise in core (USD/European) yields and an ongoing constructive equity sentiment. The pair finished the session at 114.95. So, the test of the 115 resistance continued.
Overnight, there are plenty of headlines on a Korean Court decision to remove the Korean President from power, but the direct impact on global markets is limited. The global reflation trade continues. Especially core bond yields maintain their uptrend . Asian equities mostly show modest losses. Japan is again the exception as equities profit from a further, broad-based decline of the yen. USD/JPY finally cleared the 114.96/115 resistance and trades currently in the 115.35 area. EUR/JPY also succeeded a nice break higher (122.26). EUR/USD hovers in the 1.06 area. PBOC governor Zhou indicated that the yuan exchange rate could remain relatively stable this year. Zhou also said that the a decline in the high amount of China FX reserves is ‘not bad’.
Today, the focus for global trading is on the US payrolls. With US interest markets at key technical levels, the report might decide on a new upleg in rates (cf fixed income part of this report) and in the dollar. Almost all recently published US data, including Wednesday’s ADP report, point to a strong payrolls report. With 200 000, the consensus already assumes quite some good news. Aside from job growth, we also keep a close eye at the wage growth data (AHE expected to rise from 2.5% Y/Y to 2.8% Y/Y). An upward surprise in this measure might be at least as important for markets (and for the Fed) than strong payrolls growth. Even as the consensus is already quite high, we see chances for strong report. If so, the dollar might resume its uptrend. Of late USD/JPY profited most from higher core/US bond yields. 115.62 is the next short-term resistance (range top). Recent gains of the dollar against the euro were less convincing. Even so, in case of strong payrolls, broad-based USD strength will prevail. EUR/USD 1.0494 remains the first important support. A soft payrolls report might trigger some further USD consolidation. However, with the Fed already stepping up its normalisation process, any USD correction still should be modest and shouldn’t question the MT USD uptrend yet. The 1.0679 correction top might come under test. We still assume EUR/USD 1.0829/74 will be difficult to regain. A sell EUR/USD on upticks remains favoured.
EUR/USD: USD fails to extend gains against the euro. Will the payrolls be storng enough for a new USD up-leg
EUR/GBP
EUR/GBP clearing the 0.87 big figure
On Thursday, sterling trading was driven by global factors and technical considerations. Especially the intraday swings of EUR/USD were important. A first new test of the 0.87 area was rejected, but a broad-based euro rebound during the ECB’s press conference caused EUR/GBP to fill offers just north of 0.87. However, a sustained break didn’t occur. EUR/GBP closed the session at 0.8695 (from 0.86663). Cable showed no clear trend as the dollar remain also rather well bid. The pair closed the session at 1.2165 (from 1.2168).
Today, the UK production data, construction output, the trade balance and the monthly NIESR GDP estimate will be published. January production is expected to fall back on the monthly basis after strong growth in December. The trade deficit is expected to stabilise at a high level. Of late, sterling became a bit more sensitive to signs of a deceleration of the ‘post-Brexit boom’. A big deviation from consensus in the trade balance probably has most potential to move sterling. Even so, we don’t expect today’s data to change the broader picture. There will also be plenty of headlines on the Brexit strategy of both the EU and the UK from the EU summit in Brussels. Last but not least, the global market reaction to the payrolls will also affect sterling. In the past, a decline of EUR/USD often also triggered losses in EUR/GBP. We have the impression that this effect is becoming less pronounced short-term.
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. The break north of 0.8645 reinforced the ST positive momentum. The 0.8854 correction top is the next key resistance.
EUR/GBP uptrend continues. 0.8854 Jan top is next key resistance
