Sunrise Market Commentary
- Rates: Calendar back loaded, range bound action today?
Atlanta Fed Bostic called for 2 or 3 rate hikes this year. He is a dovish leaning centrist and doesn’t change our/the market’s call of a March rate hike. Today’s eco calendar is thin and probably won’t impact trading. We expect range bound action, but heavy bond supply could be negative. Later this week, attentions turns to German wage negotiations and US inflation data. - Currencies: EUR/USD drifting south. Yen rebounds as markets ponder BOJ action
EUR/USD declined yesterday after Friday’s rejected test of 1.2092 resistance. The yen rebounds overnight as investors try to assess the meaning of the BOJ reducing purchases of longer-dated JGB’s. Is this a first step to gradual policy normalization. Eco data probably won’t guide USD trading today. Swings in USD/JPY might set the tone for global USD trading
The Sunrise Headlines
- US stock markets gained slightly ground with Dow Jones underperforming (flat). Most Asian stock markets are positively oriented overnight with Korea underperforming as Samsung’s profit guidance missed expectations.
- The Federal Reserve may only need to raise interest rates two times in 2018 given weak price pressures and possible loss of public confidence in the central bank’s ability to hit a 2 percent inflation target, Atlanta Fed Bostic said.
- The yen climbed after the BoJ reduced its purchases of super-long bonds, adding to speculation that the central bank may be looking to wind back its ultra-loose monetary policy.
- Special counsel Mueller has informed lawyers for President Trump that he may seek an interview with the president early this year, prompting concerns within the Trump legal team over terms of the questioning, according to sources.
- May’s Cabinet shuffle failed to consolidate her power. Health Secretary Hunt successfully resisted being given another post and Education Secretary Greening quit after the PM offered her the work and pensions portfolio. Johnson kept his foreign minister job, while Hammond and Davis also stayed on.
- Inflation-squeezed British shoppers cut back on almost everything other than food in the last three months of 2017, leading to the biggest fall in non-grocery spending since 2009, industry figures (BRC) showed.
- Today’s eco calendar is rather thin with only EMU unemployment rate and US NFIB small business optimism. Supply heats up with Austria, the Netherlands, Germany and the US tapping the market
Currencies: EUR/USD Drifting South. Yen Rebounds As Markets Ponder BOJ Action
USD/JPY declines as BOJ amends JGB buying
The dollar gained against the euro yesterday, but struggled against the yen. EC economic confidence hit the highest level since end 2000, but didn’t help the euro. Bunds even outperformed US Treasuries, slightly widening the USD-EUR interest rate differential. Friday’s rejected test of EUR/USD 1.2092 caused a further repositioning out of EUR/USD longs. The pair dropped below 1.20 and finished at 1.1967. USD/JPY failed to keep up with the USD rebound. EUR/JPY profit taking after last week’s rally and a slowing of the equity rally weighed on USD/JPY later in the session. The pair closed the day little changed at 113.09.
The yen jumped higher overnight as the BoJ reduced longer-dated JGB purchases. Investors ponder whether this could be a first small step to policy normalisation. USD/JPY dropped half a yen (currently 112.65). EUR/USD is little changed (1.1970). The Aussie dollar (AUD/USD 0.7860) profits slightly from strong building approvals. The eco calendar is thin today. EMU Unemployment is expected to decline from 8.8% to 8.7%. US NFIB small business confidence might near the historic top. Both series are no market movers. Technical factors will probably prevail. We keep a close eye on USD/JPY’s decline. For now, it had few spill-over effects on other USD cross rates. The jury is still out, but a subsequent, further decline of EUR/JPY might also (temporary) weigh on EUR/USD, or at least prevent a rebound. In a broader perspective, slightly disappointing payrolls didn’t cause USD damage. EUR/USD 1.2092 resistance survived. This week’s US price data are a next reference for USD trading. Recently, the greenback suffered as the global recovery might force other major CB’s (including ECB) to join policy normalisation. We keep the hypothesis that enough good news on the euro/’bad news’ on the USD is discounted and that a sustained break beyond 1.2092 is not evident.
Sterling profited from the government reshuffle yesterday as it could be an indication that the UK PM is regaining some grip on UK politics. The decline of EUR/USD also weighed on EUR/GBP. The pair closed the session at 0.8821. Overnight, BRC like-for-like sales rose 0.6% Y/Y, but this was due to higher food prices. The underlying picture was less brilliant. It is also far from sure that the government reshuffle will make things easier for PM May. A further technical decline of EUR/USD might weigh on EUR/GBP ST. However, we don’t see a strong case for a sustained sterling rebound. EUR/GBP 0.8700/60 support looks solid. We keep a EUR/GBP buy-on-dips in case of return action to 0.87.
USD/JPY: yen rebounds as ‘BOJ action’ sparks speculation on policy normalization. Break below 112 would hurt ST picture
