Sunrise Market Commentary
- Rates: Side-lined ahead of French elections?
EMU and US PMI’s colour today’s trading, but risk ending up being irrelevant ahead of Sunday’s first French presidential election round which probably keep most investors sidelined. The outcome will determine the start of next week’s trading. If the tail risk (Mélenchon vs Le Pen or Fillon) manifests, markets will start discounting the “Frexit” possibility. - Currencies: EUR/USD fails to extend gains going into the French election
Yesterday, the euro gained temporary ground on hopes for a market-friendly outcome of the French election. However, the momentum couldn’t be maintained. The dollar was in better shape later in the session. Today, trading in the major USD cross rates might shift in wait-and-see modus. We don’t expect yesterday’s pro-euro repositioning to continue.
The Sunrise Headlines
- US equities ended strong, gaining between 0.75% and 1% as US Treasury secretary Mnuchin promised details of tax reforms very soon. Overnight, Asian stock markets record similar gains with China underperforming (flat).
- The Trump administration will unveil a tax reform plan very soon and expects it will be approved by Congress this year whether a healthcare overhaul happens or not, Treasury Secretary Steven Mnuchin said.
- The US has set the stage for a global showdown over steel, launching a national security investigation that could lead to sweeping tariffs on steel imports in what would be the first significant act of economic protectionism by Trump.
- The Japanese manufacturing PMI rose to 52.8 from 52.4 in March. Sub-indices measuring output, new export orders, employment, input and output prices all increased at a faster rate than the previous month.
- It would not be a bad idea for the ECB and other central banks to follow the US Federal Reserve’s example and change course away from an ultra-accommodative monetary policy, German Finance Minister Schaeuble said.
- France’s presidential candidates embark on their last day of campaigning on Friday before this weekend’s tight first-round election, marked by the collapse of the mainstream political parties and rise of the far left and far right.
- Today’s eco calendar contains EMU manufacturing and services PMI’s, UK retail sales, US PMI’s and US existing home sales. Fed Kashkari is scheduled to speak
Currencies: EUR/USD Fails To Extend Gains Going Into The French Election
EUR/USD rebound slows ahead of French election
On Thursday, the euro initially rebounded as euro area yields recovered from recent lows and interest rate differentials narrowed in favour of the euro. However, the rally petered out later in the session. A good equity performance and US Treasury secretary Mnuchin confirming that the government will propose tax reform plans soon, helped the return the dollar. The headlines on the terrorist attack in Paris had little impact. At that time, EUR/USD had already reversed the intraday gains. The pair closed the session at 1.0717. USD/JPY finished the day at 109.32 (from 108.86 on Wednesday ). Even so, the gain remained modest given the rise in core yields and the positive equity sentiment.
Overnight, Asian equities are also trading with modest to moderate gains. Japanese equities are supported by comments from BOJ’s Kuroda that the bank intends to keep monetary policy very accommodative. The BOJ governor acknowledged that the Japanese economy is doing better but inflation remains low. Kuroda also mentioned that a rise in the yen could delay Japan reaching the 2% inflation target. USD/JPY hovers in in the 109.20 area this morning, maintaining most of yesterday’s gain. EUR/USD stabilizes in the low 1.07 area as investors ponder the impact of the terrorist attack in France yesterday evening, just days before the first round of the presidential election.
Today the April business sentiment in the US and the EMU will be released . In March, EMU composite PMI climbed to 56.4 from 56. The omens are good for yet another (slight) increase of the headline index in April, which would bring the index to a 6-yr high. The consensus expect a stabilization, but we see risks on the upside.US Markit PMI is expected to have risen slightly for both manufacturing and services. Regional surveys (Philly Fed and NY) fell sharply in April, suggesting that risks for the US PMI might be on the downside of consensus. So, the data might be slightly supportive for EUR/USD. The French election will remain an important factor for FX trading. Yesterday, markets adapted positions for a market friendly outcome of the first round on Sunday. This temporary supported the euro. Today, we assume a more neutral market bias after yesterday’s attack in Paris. The euro probably won’t get additional interest rate support. We expect the euro to return to wait-and-see modus. However, the downside of EUR/USD might be well protected as a market friendly outcome of the election is still a likely.
Of late, by default dollar softness dominated FX trading. This week, the dollar (trade-weighted) showed cautious signs of bottoming out. We look out whether this process is confirmed. For the overall USD performance we continue to keep a close eye on the US bond markets. We maintain the view that the correction higher on the US bond markets has gone far enough. However, for now there is no trigger for a U-turn and the French election remains a factor of uncertainty. A constructive outcome of the French election might be supportive for both EUR/USD and USD/JPY.
From a technical point of view, USD/JPY broke through the 110 key support. We downgraded our USD/JPY assessment to bearish, as long as the pair doesn’t regain 112.20 (neckline ST double bottom). Next key support (62% retracement) comes in at 107.18. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March, but the test was rejected. EUR/USD returned lower in the 1.0875/1.05. The move met support in the 1.06 area. The picture turned more neutral as the pair returnsedto the middle of the ST range. We slightly prefer to sell EUR/USD on upticks in case of a return higher in the range as we see room for a broader USD comeback.
EUR/USD: pre-French election has nog strong legs
EUR/GBP
Sterling holds near the recent highs
Sterling trading was mostly driven by global moves and technical considerations yesterday. EUR/GBP was supported by the overall euro rebound. EUR/GBP temporary moved to the 0.84 area, but the gains were reversed as the euro returned intraday gains later in the session. EUR/GBP closed the session at 0.8364 (from 0.8383). EUR/GBP 0.83 support holds for now. Cable basically drifted sideways in the 1.28 area
The UK retail sales data might bring some animus for sterling trading today. March sales are expected to decline 0.5% M/M after a strong performance in February. We don’t have strong reasons to take a different view from the consensus. A substantial negative surprise is probably needed to trigger a meaningful sterling correction given current momentum. If the EUR/USD rally slows, it will probably be difficult for EUR/GBP to break north of the 0.83/0.84 corridor. In a longer term perspective, the sterling rally is probably overdone. However, short-term we still see no obvious trigger for a sustained sterling correction.
We had a neutral short-term bias on EUR/GBP. On Tuesday, sterling dropped below the bottom of the EUR/GBP 0.84 support, improving the picture for sterling. The pair came with reach of the key 0.8305 support (Dec low). We look whether this level holds. A break below would be highly significant from a technical point of view. Longer term, Brexit-complications remain a potential negative for sterling. However, this is not the focus of sterling trading at this stage.
EUR/GBP: key 0.83 support still within reach, but no real test occurred
