Sunrise Market Commentary
- Rates: Risk aversion dominates thin agenda at start trading week
Overnight, risk sentiment deteriorated on most Asian stock markets. A stronger opening of the Bund will result in an immediate test of 0.2% support for the German 10-yr yield. We don’t anticipate a sustained break lower even if risk aversion provides some short term safe haven flows. - Currencies: Dollar cannot build on Friday’s positive price action
EUR/USD hovers listless close to 1.06, but USD/JPY is sliding back towards the key 110, helped by some risk-off sentiment in Asian session (lower equities and lower US yields). We nevertheless aren’t convinced the Asian trend should infect European and US markets too much. That should keep USD/JPY north of 110
The Sunrise Headlines
- US equities flat lined in the first trading session of the week. Overnight Asian risk sentiment deteriorated with China underperforming (-1%).
- The Federal Reserve’s plans to raise US interest rates gradually are aimed at sustaining full employment and near-2-% inflation without letting the economy overheat, Fed Chair Yellen said.
- ECB policy is "appropriate and a reassessment is not warranted at this stage," VP Constancio said. The risk of a regional (Portuguese) real estate bubble is limited, while advocating targeted measures to avoid potential problems.
- A Moody’s report titled ‘Credit Profiles Resilient to Rising Household Debt and Stretched Housing Affordability’ focused on Australia, Canada, New Zealand and Sweden – all AAA rated countries where home prices and household debt have soared in the last three years.
- BoJ Governor Kuroda said the central bank aims for a moderate acceleration of inflation driven by increases in wages and corporate earnings. At this stage, they haven’t increased as much as hoped for despite a tightening job market.
- South Africa’s central bank said the scope for interest-rate cuts is limited as current policy should be enough to bring inflation to within target range. Price-growth expectations remain "uncomfortably close to 6%", SARB said.
- Today’s eco calendar contains EMU industrial production, German ZEW, US NFIB small business optimism and UK inflation data. The Netherlands and the US tap the market ECB Visco and Fed Kashkari are scheduled to speak.
Currencies: Dollar Cannot Build On Friday’s Positive Price Action
USD: Uneventful trading yesterday with poor close
The dollar traded fairly uneventful in a news-poor Monday session. Some follow through USD/JPY buying during the Asian session and some minor French election-related risk-off spiced the sideways trading session that ended with some marginal dollar weakening against euro and yen. EUR/USD hovered between about 1.0570 and 1.0608, closing at 1.0596. USD/JPY made a trip to 111.60 from 111.10 in Asian trading, but gradually eased to opening levels before a final down-move pushed it just below 111 with a 1.1094 close. Concluding, an uneventful session, but with a bit of a nasty taste as USD/JPY couldn’t build on Friday’s gains, despite US equities closing unchanged.
Overnight: Yen higher on risk off and Yellen
Overnight, Yellen said the Fed is shifting from its post-crisis exercise of healing the economy to one aimed at holding on to the progress made (see above). While her comments are quite neutral according to us, US yields are 2 to 3 bps lower overnight. Asian equities are mostly down with some close to flat. The yen is gaining ground together with other safe havens like US Treasuries and gold. USD/JPY slid from 110.95 to an intraday low at 110.60 and trades now slightly higher at 110.67. EUR/USD trades with a slight dollar positive bias, but at 1.0584 from 1.0595 at the opening that doesn’t mean much. Calendar heats up, but most second tier data
EMU industrial production is expected to have risen 0.1% M/M and 1.9% Y/Y in February following a stronger 0.9% M/M (and 0.6% Y/Y in January. Risks remain on the downside of expectations. The German ZEW investors’ sentiment (expectations) is expected to have risen slightly to 14.8 in April from 12.8 previously, while current conditions remain strong at 77.3. Given the advance of equities and the rise in the Sentix survey, we nevertheless dare to put the risks slightly on the upside of expectations. Finally the US NIFB small business sentiment is expected to have slid marginally in March to 104.7 from 105.3 in February. There may be some early disappointment on Trump’s scorecard till now so, risks might be on the downside. The eco data are no strong market movers
No strong catalyst for today’s trading
Friday’s dollar price action was constructive, as was the rejection of key US yield supports (1.80% for the 5-yr and 2.30% for the 10-yr). This suggested that US yields and widening yield differentials may give the dollar again support. The proof of the pudding is in the eating though and yesterday’s price action didn’t really support the notion that the dollar is back on the winning side. EUR/USD stabilizes with election risk and geopolitical risk keeping the euro dollar balance intact. The dollar didn’t get rate support. On the contrary, yields are down at the onset of European trading. We don’t expect much of the eco data. So, sentiment and geopolitical issues will simmer at the background giving FX markets some intraday momentum. We don’t see a catalyst for EUR/USD or USD/JPY to take out significant technical barrier, even if EUR/JPY remains dangerously close to the 110 level.
Technicals: Danger USD/JPY not away yet
From a technical point of view, USD/JPY failed to regain the 111.36/60 previous range bottom and approached three times the key 110 support area, but rebounded each time. A decline below 110 would signal more trouble ahead. Friday’s price action is a slight positive for the dollar, but we remain cautious on USD/JPY as long as the pair doesn’t trade sustainably above 112.20 (neckline ST double bottom). EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) two weeks ago, but the test was rejected. EUR/USD returned lower in the 1.0875/1.05 trading range with the odds now for a test of the downside of the range.
EUR/USD: Nice dollar move on payrolls suggesting the pair may slide towards 1.05 support area or even the cycle lows at 1.0340, but yields should go up
EUR/GBP
Sterling doing somewhat better
Today, the UK eco calendar is busy and interesting from a market point of view. Overnight, the BRC like for like sales disappointed as they dropped 1% Y/Y while a 0.3% M/M drop was expected. A further sign that consumer spending is losing momentum. However, it didn’t impact sterling that remained fairly stable against euro and dollar. More important will be the CPI and PPI data for March. The market expects CPI at 0.3% M/M and 2.3% Y/Y unchanged from February, while the core CPI is expected to have eased slightly to 1.9% Y/Y from 2% previously. The weaker sterling is behind the trend increase in inflation, but that trend may pause in March due to some special factors like the late Easter and lower fuel prices. We side with consensus, but any stronger outcome may stimulate expectations on the timing of a rate hike and supports sterling. Similarly both input and output PPI are expected to have slowed in March, even as input prices remain at very high levels. Output price risks are on the upside. Sterling gradually gained ground versus the euro. If inflation surprises on the upside, some more gains are possible. However, EUR/GBP intermediate support looms at 0.8484, a level which won’t be easily broken. Mid-March, sterling found a better bid after higher than expected UK inflation and a more hawkish tone from the BoE. We changed our short-term bias on EUR/GBP from positive to neutral. The EUR/GBP 0.88/0.84 range should guide trading for now. Last week, sterling rally/shortsqueeze ran into resistance, but we see no trigger for a real change in sentiment.
EUR/GBP sterling short-squeeze is easing, but no sustained sterling correction yet
