Sunrise Market Commentary
- Rates: Risk aversion erases payrolls
Two days of risk aversion – Monday in Europe on Mélenchon’s rise in French presidential election polls and Tuesday in the US on the administration tough stance against North Korea & Syria –erased all of Friday’s payrolls-induced losses on US Treasuries. The US 5- and 10-yr yields are testing key support levels again. Will risk sentiment improve and avoid a ST break? - Currencies: USD/JPY drops below 110 psychological support
Geopolitical tensions dominated yesterday’s FX trading with the yen the mighty winner. USD/JPY dropped below 110 support. EUR/USD remained nearly unchanged as narrowing rate differentials were no help for the euro. Lingering geopolitical concerns still affect Asian trading overnight, but FX moves peter out. Sentiment-driven trading today?
The Sunrise Headlines
- US equities limited its losses to 0.14% (S&P) after a weak opening dominated by geopolitical concerns. Asian equities are modestly down with Japan underperforming (-1.25%) on yen strength.
- ‘We are not going into Syria,’ President Trump said. His comments may dilute Rex Tillerson’s message in Moscow for Russia to drop its support for Assad. However, he kept up his jawboning against North Korea, saying the US is sending a ‘very powerful’ armada to deliver a message to Kim Jong Un’s regime.
- The yen, gold and Treasuries rose as haven assets extended gains amid lingering concern about the geopolitical tensions. US equity- futures slipped along with Asian equities. Moves are small though and won’t necessarily be followed in Europe and US later today
- Saudi Arabia will probably support extending supply cuts for 6 months when OPEC meets. The decision depends on the stance of Iraq, Iran and Russia. In the US, API data showed a decline in inventories. Brent moves up to $56.45/barrel.
- Global reflation got a status check. Chinese PPI slowed to a 7.6% Y/Y advance in March from 7.8% Y/Y in February. Japan’s PPI increase accelerated to 1.4% Y/Y in March, from a revised 1.1% Y/Y in February.
- Italy has moved to avoid punishment from Brussels over its public finances as the centre-left government led by Paolo Gentiloni approved €3.4B in extra budget deficit cuts in an effort to meet EU demands.
- Today’s market calendar remains very light with only the UK labour data, auctions in US, Germany, Ireland and Italy and a Bank of Canada policy meeting
Currencies: USD/JPY Drops Below 110 Psychological Support
Dollar loses ground, especially versus yen
On Tuesday, the dollar traded with a marginal negative bias going into the US session, but geopolitical tensions (Tough US comments addressed to Russia/Syria & N-Korea) flared up, pushing US yields and equities down. The yen played its traditional safe haven role. USD/JPY approached the psychological 110 level for the third time. Without hesitation, traders pushed the pair this time through the level which accelerated the downfall of the pair, but a pause intervened shortly afterwards simultaneous with US Treasuries peaking and equities bottoming. USD/JPY hovered sideways with a negative bias towards a 109.62 close, ignoring the intraday recovery of US equities.
The price action in EUR/USD was far less spectacular. The euro struggled higher from about 1.0580 to 1.0620 at European noon and stabilized at that level during early US dealings. It only slightly followed later on the steep rise of US Treasuries (narrowing yield spreads), the fall of equities/yen, reaching an 1.0630 intraday high when these other markets peaked/bottomed. It could not even hold on to these slim gains and dropped back to about 1.0605 where it closed. Barely up from the previous 1.0596 finish. So, the euro couldn’t profit from dollar weakness and a sharp narrowing of the yield differentials. It was one of the weakest G-10 currencies versus the dollar. We suspect that political risks inside the euro area (France/Italy?) keep the euro weak which matched dollar weakness. The EUR/USD decline in the previous week was stopped this week, but there is no signal yet that the euro could really fight back and conquer the lost ground. Overnight: Dollar stabilizes in calm trading
The overall dollar stabilized near yesterday’s lows. There is still a lingering safe haven bid on geopolitical concerns as US Treasuries, gold and yen are, albeit insignificantly, lower (see headline for latest geopolitical news). Oil continues to rise. Chinese PPI slowed in March to a still high 7.6% Y/Y, while Japanese PPI rose to 1.4% Y/Y from 1.1% Y/Y in February. EUR/USD is near yesterday’s 1.0605 close having traded in a 1.0595 to 1.0615 range overnight. USD/JPY set a new MT low at 1.0935, but trades currently at 109.55 on lingering geopolitical concerns.
Calendar uneventful, FX trading too?
The market calendar is uneventful (see rates). FX trading will be dominated by risk sentiment and technicals. Will the break in USD/JPY below 110 be confirmed? For EUR/USD we are in no-man’s land. The dollar rally petered out, but there are no signs yet of a euro counterattack. The eco calendar heats up tomorrow and the US earnings season starts for real. That may bring more animus, but market closures on Good Friday and thinly staffed desk tomorrow may keep the dollar in a bind till after Easter.
Technicals: USD/JPY picture deteriorates
From a technical point of view, USD/JPY broke through the 110 key support, extending its decline to 109.35, after having failed to regain the 111.36/60 previous range bottom. We downgrade our USD/JPY assessment to bearish, as long as the pair does not break and sustain above 112.20 (neckline ST double bottom). It becomes tactically a sell on upticks environment. USD/JPY has intermediate support at 109.38 (reached today, 50% retracement 100.09/118.66) and 107.18, 62% retracement). 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 for a test of the downside of the range, but the dollar’s advance stopped in past two days, suggesting the dollar rally is a bit tired.
EUR/USD: Dollar cannot prolong its rally and stabilizes ahead of obvious 1.05 support. Too difficult or simply a pause?
EUR/GBP
Sterling: Strong performance versus EUR and USD
At their previous policy meeting, the BoE (MPC) showed they saw little room to let inflation move much higher without tightening policy. However, their concerns proved premature as inflation behaved well in March. There was a knee-jerk reaction pushing sterling stronger versus euro and dollar. However, the absence of follow through sterling buying caught the eye and gains were in no time erased. It looked like it would become a session to forget fast. However, all changed in late European trading. Sterling started to climb against both euro and dollar. It did coincide with the risk-off move in US treasuries, yen and gold. Sterling yields fell less than US ones, which might be an explanation for the cable gains, but that wasn’t the case versus German yields. Admittedly, the FTSE 100 outperformed European and US indices. Nevertheless, the advance is difficult to explainan by the fundamentals. There is Brexit and a current account in deficit, which is not the environment to receive safe haven inflows. Whatever, EUR/GBP dropped from about 0.8530 without interruption to a 0.8490 close, which is technically not yet significant with 0.8484 intermediate support before the 0.8409/00 key support. Overnight sterling traded volatile but in a narrow range.
The UK labour market data will be key today. February’s labour market figures should highlight that while the jobs market remains tight, wage growth is still subdued. A strong report would help sterling eke out more gains, but did the market front-run yesterday? We have a neutral short-term bias on EUR/GBP. The EUR/GBP 0.88/0.84 range should guide trading for now. Last week, the sterling rally/short-squeeze ran into resistance, but yesterday there was again some fire in sterling. We see no trigger though for a real change in sentiment yet. Longer term, Brexit-complications remain a potential negative for sterling. The BoE won’t raise rates anytime soon.
EUR/GBP sterling gained ground yesterday, but without an obvious driver. Anticipation on today’s labour market report?
