Sunrise Market Commentary
- Rates: US Note future tests key resistance, but no break higher
The US Note future ran into key resistance yesterday (125-09/16), but a disappointing 10-yr Note auction averted a break higher. Today’s eco calendar remains uninspiring, suggesting more technical and sentiment-driven trading. Speeches by Fed governors Bullard and Evans are wildcards for trading. - Currencies: Dollar hovering sideways. Keep an eye on core bond yields
Yesterday, the dollar showed no clear trend. Over the previous days, the dollar showed tentative signs of bottoming after the recent correction. However, the ongoing decline in core yields is a risk. Sterling stabilizes after the Brexit debate in House of Commons
The Sunrise Headlines
- US equities ended an uneventful session narrowly mixed. Overnight, most Asian stock markets manage to eke out some gains with Japan underperforming.
- US President Trump has broken the ice with Chinese President Xi Jinping in a letter that said he looked forward to working with him to develop constructive relations, although the pair haven’t spoken directly since Trump took office.
- Japan’s core machinery orders (excl. ships and utilities orders), a sometimes volatile proxy for the corporate sector’s willingness to invest, returned to growth in December (6.7% M/M vs. 3% M/M expected).
- Members of the British Parliament’s lower house overwhelmingly gave PM May a green light to begin the country’s formal withdrawal from the EU, leaving the government on course to begin Brexit as planned by the end of March.
- The north-eastern US is bracing for a powerful, fast-moving snow storm. Forecasters say the Thursday snowstorm likely will snarl workday commutes across the densely populated region.
- Oil prices turned intra-day positive yesterday, as investors took their cue from an unexpected drop in gasoline stocks and ignored the headline number in the latest US crude stockpile report. Brent closed though virtually unchanged.
- Far-right leader Marine Le Pen looks set to win the first round of France’s presidential election in April, according to a new survey issued, with other polls indicating she will lose the runoff to centrist Emmanuel Macron.
- Today’s eco calendar remains thin with only US weekly jobless claims. Ireland and the US supply the market while Fed governors Bullard and Evans are scheduled to speak
Currencies: Dollar Hovering Sideways. Keep An Eye On Core Bond Yields
Dollar still looking for a clear driver
On Wednesday, technical considerations dominated various markets. The dollar initially advanced further against the euro, but it couldn’t gain ground versus the yen. In US trading, the fortunes of the dollar turned. The dollar ceded ground against the euro and the yen. The decline in core bond yields was partially responsible for USD softness. EUR/USD finished the session at 1.0698 (from 1.0683 on Tuesday). USD/JPY closed the session at 111.93 (from 112.39). The broader picture for both cross rates didn’t change.
Overnight, there is no high profile story to guide Asian trading. Equities trade narrowly mixed with Japanese equities underperforming even as USD/JPY (112.15 area) stabilizes. BOJ Deputy Governor Nakaso stressed that maintaining monetary stimulus is of utmost importance. So, no yield rise in the near future. The Reserve Bank of New Zealand as expected left its policy rate unchanged. The Bank warns that the Kiwi dollar remains higher than is sustainable for balanced growth and wants a weaker currency. NZD/USD lost about a full big figure and trades in the 0.72 area. EUR/USD shows no clear directional bias and hovers in the high 1.06 area.
Today, eco calendar is again thin. US initial jobless are expected sliglty higher in the most recent week to 249K from 246K. Regarding events, we get speeched of Fed’s Bullard and Chicago Fed’s Evans. The latter has recently spoken and thus should bring no new info. The Bank of Italy monthly report on money and banks might get some attention too, given the problems in the banking sector. So technical considerations and global risk sentiment will continue to guide FX trading. We keep a close eye at the developments in the bond markets as core yields have declined substantially of late. Over the previous days, the correction of the dollar against the euro and the yen halted. USD bulls even migh see tentative signs of a bottoming out proces. Especially, the topside in EUR/USD looks well protected. However, the dollar might again come under pressure (especially USD/JPY) if core bond yields would extend their decline. The meeting between PM Abe and President Trump on Friday remains a wildcard for USD/JPY trading.
Global context. The dollar is in a corrective downtrend against most majors since the start of January. The USD rally on the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump politics/communication became a sources of uncertainty, also for the dollar. A break above EUR/USD 1.0874 (next resistance) would question the short-term USD positive outlook. At some point, absolute interest rate support should provide a USD floor, especially as the Fed is expected to continue its policy normalisation. Price action earlier this week showed that that euro weakness might still be a factor too. As we see the 1.0874 level as solid resistance, a sell EUR/USD on upticks might be considered. USD/JPY is trading well off the post-Trump highs (118.60/66). The test of the 112 area continues. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is the next key support. A break below this area is clearly USD negative.
EUR/USD: Topside test rejected. Dollar tries to build a bottom after recent correction
EUR/GBP
Sterling stabilizes after Brexit debate
Yesterday, EUR/GBP followed the intraday pattern of EUR/USD in a session without history. EUR/GBP slid slightly in the morning in sympathy with EUR/USD, but the amplitude was smaller. In the afternoon EUR/USD rand cable rebounded. BoE Cunliffe brought no new info, while Therese PM received approval from the House of Commons on the Brexit law. She conceded that parliament would get a vote on the final pact. EUR/GBP closed the session at 0.8531 (from 0.8538). Cable ended the day at 1.2541 (from 1.2509).
Overnight, the RICS house price balance improved slightly from 24% to 25% (22 was expected). No further UK data today. BoE governor Carney speaks in London, but we don’t expected him to bring a different view from last week’s policy assessment. After the debate in the House of Commons, Brexit might temporary become less important for GBP trading. We see no strong new driver for sterling trading. On Tuesday, sterling rebounded as the UK Parliament was allowed to vote on the final Brexit agreement. We don’t see this ‘agreement’ as a reason for further sterling strength. Last week’s balanced BoE approach capped the topside of sterling and helped a cautious bottoming out process for EUR/GBP. The EUR/GBP 0.8450 support looks again better protected. The sterling momentum is waning a bit, but euro weakness might still be an issue. A cautious EUR/GBP buy-on-dips approach is preferred.
EUR/GBP still struggles to rebound off the 0.8450 support area
