Sunrise Market Commentary
- Rates: US Treasuries sell-off in US trading; today’s calendar uninspiring
US Treasuries sold off during US trading yesterday following a batch of strong eco data. Recovering stock markets and a rising oil price weighted as well. Fed vice-chair Fischer dealt the final blow by confirming that the Fed intends to hike rates 2 more times this year, which isn’t completely discounted yet. Today’s uninspiring calendar suggests sentiment driven trading. - Currencies: Dollar rebounds after exceptionally strong US consumer confidence
Yesterday, the dollar initially didn’t go anywhere. However, the reflation trade restarted and the dollar rebounded after an exceptionally strong US consumer confidence. Fed’s Fisher confirming the scenario of two additional rate hikes was also USD supportive. Sterling is facing headwinds as UK PM May will trigger article 50 today, formally starting the Brexit procedure
The Sunrise Headlines
- The Dow Jones joined other US stock barometers in the black yesterday, snapping its longest losing streak since 2011. Indices ended around 0.75% higher. Overnight, Asian risk sentiment is more mixed.
- Fed Vice Chair Fischer said the FOMC’s median estimate for two more rate hikes this year “seems about right.” He added the failure of the health-care bill on Friday may have changed his “internal calculus,” but not the overall outlook.
- BoE interest rate-setter McCafferty highlighted a weak outlook for the economy and said he did not know if he would vote to increase borrowing costs at the next meeting of the BoE’s policymakers in May.
- The faltering campaign of French presidential candidate Francois Fillon suffered another setback when magistrates placed his wife under formal investigation over allegations that he paid her for a fake parliamentary job.
- The Scottish parliament has voted to demand a second independence referendum, raising the stakes in the constitutional impasse with a UK government that has already rejected such a vote.
- The official Article 50 exit process will begin today at just after 1.30pm in Brussels when Sir Tim Barrow, Britain’s ambassador to the EU, presents Mrs May’s letter of withdrawal to Donald Tusk, the European Council president.
- Today’s eco calendar is thin with only US pending home sales and national EMU consumer confidence data. Central bank speakers are Fed Evans, Rosengren, Williams and ECB Praet. Finland and the US tap the market
Currencies: Dollar Rebounds After Exceptionally Strong US Consumer Confidence
Dollar shows tentative signs bottoming out
Yesterday, USD traders initially didn’t find clear guide in the wake of the debacle of the US healthcare vote on Friday. Uncertainty and a further (modest) slide in core yields weighed on the dollar, especially on USD/JPY. However, market sentiment improved after a very strong US consumer confidence. Later in the session, Vice Fed Chair Fischer reiterated the mainstream Fed view for two more rate hikes this year. US bond yields turned north again and the dollar rebounded. USD/JPY finished the session at 111.15 (from 110.66). EUR/USD declined to the 1.08 area and finished the session at 1.0814 (from 1.0864).
Overnight, Asian equities show only most gains despite yesterday’s rebound in the US. Oil trades off the recent lows and so does the dollar. The trade-weighted dollar (99.75 area) holds within reach of the yesterday’s recovery top, but there are no follow-through gains. USD/JPY tries to extend gains north of 111, but still fails to regain the previous range bottom (111.36/60 area). Poor Japanese retail sales data hardly affected yen trading. EUR/USD hovers in a tight sideways range in the low 1.08 area. The resumption of the reflation trade is also slightly supportive for the likes of the Aussie dollar (AUD/USD 0.7640 area) despite the overall USD rebound.
Today, there again no important eco data in EMU and in the US. Fed members Evans, Rosengren and Williams are scheduled to speak. Recent appearances suggest they will confirm the mainstream Fed’s scenario of two additional rate hikes this year. So, global risk sentiment will probably set the tone for USD trading today
Yesterday, the dollar made a U-turn as exceptionally strong US consumer confidence removed investors’ disappointment on last Friday’s US healthcare vote. Yesterday, we advocated that a good US consumer confidence could help to reverse doubts on the reflation trade, but that more positive (US) news was needed to restore confidence in the dollar. The dollar yesterday made a lofty attempt to put a short-term bottom in place. However, except in a scenario of further equity gains, there is probably too little on the agenda today to trigger more USD gains. So, we look out whether the dollar stays away from this week’s correction lows. If the US currency succeeds to do so in a session devoid of important news, it would be a first indication that the downside of the dollar becomes better protected. For now, we are in no hurry to aggressively add USD long exposure. Especially the technical picture of USD/JPY still looks fragile. For EUR/USD we look out where the USD/EMU (German) interest rate differential halts its narrowing trend of the recent past.
From a technical point of view, the picture of USD/JPY remains fragile as it dropped below the 111.60/36 support. Next support kicks in at 108.84 (50% retracement of the MT up-move). EUR/USD is extensively testing 1.0829/1.0874resistance. A break beyond this level would deteriorate the MT picture for the dollar. Chances on a break of this level have grown, but we don’t expect a real protracted rally of the euro against the dollar. The interest rate differential between the US and Germany/Europe makes EUR/USD longs costly. At the same time, we also don’t see the euro as the perfect safe haven currency
EUR/USD: test of 1.0874 resistance is rejected, at least for now
EUR/GBP
Sterling in the defensive going into formal start of Brexit
There were no eco data in UK yesterday. Sterling trading was driven by technical considerations. Investors were looking forward to today’s formal start of the Brexit procedure. Sterling traded with a positive bias early in the session, but returned (modest) gains against the dollar and the euro later. Scotland’s demand for a second independence vote was a slight additional negative for sterling. Later in the session, cable dropped quite sharply, but this move in the first place mirrored the overall comeback of the dollar. Cable finished the session at 1.2450 (from 1.2559 on Monday evening). EUR/GBP close the day at 0.8684 (from 0.8650).
This morning, the sterling remains under pressure in Asia as markets look out for the UK triggering article 50 of the Lisbon treaty around noon today. EUR/GBP regained the 0.87 barrier. Cable is trending further below 1.24. Later today, the UK money supply and lending data will be published, but the focus will be on the letter of UK PM May to EU president Tusk. Markets will look for clues that might give any indication of the start of the Brexit procedure. (e.g. will the EU insist on starting with the penalty for the UK?). We expect sterling to stay in the defensive going into the start of a complicated process.
Two weeks ago, sterling found a better bid after the early March decline. Some time ago, EUR/GBP cleared 0.8592 resistance, improving the MT technical picture. However, (substantially) higher than expected UK inflation probably put a decent floor for sterling short-term. We changed our short-term bias on EUR/GBP from positive to neutral. Further consolidation in the 0.85/0.88 area might be on the cards. Longer term, Brexit-complications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after this months’ higher inflation data.
EUR/GBP: sterling rebound shows tentative signs of slowing going into the startof BRexit
