Sunrise Market Commentary
- Rates: European focus turns back to ECB
Investor’s focus returns to the ECB’s normalization process as the first round of the French presidential outcome nullified the Frexit risk. The German yield curve bear steepened as markets bet on another calibration of the ECB’s QE programme. We don’t expect any important communication at Thursday’s meeting, but see scope for action in Summer. - Currencies: EUR/JPY major beneficiary as risk-on trade continues
Yesterday, EUR/USD and USD/JPY both profited as investors adapted positions further as EMU political event risk is out of the way. Today, the focus will be on the Trump’s US tax plan. Will the plan be concrete enough to meet investor expectations on higher growth. A credible and realistic plan might again shift fortunes in favour of the dollar
The Sunrise Headlines
- US equities rallied 0.6% to 1.1% higher yesterday with Nasdaq closing above the 6000 mark for the first time ever. Overnight, Asian stock markets record similar gains with Japan outperforming on yen weakness.
- Three sources on and close to the ECB’s Governing Council told Reuters that with the threat of a run‐off between two eurosceptic candidates in France averted, and with the economy on its best run in years, many rate setters see scope for sending a small signal in June towards reducing monetary stimulus.
- Australian CPI tiptoed atop 2% last quarter for the first time since 2014. Yet, key measures of core inflation stayed stubbornly short of the RBA’s 2 to 3% target band. CPI outcomes slightly missed expectations.
- A federal judge ruled that President Trump’s executive order threatening to pull funding from so‐called sanctuary cities is likely unconstitutional, delivering a fresh legal blow to the administration’s immigration crackdown
- French presidential favourite Macron came under fire from both potential allies and his run‐off rival Le Pen for acting as if victory next month was already in the bag. Macron holds a 20 percentage points lead in opinion polls.
- BHP Billiton has cut production guidance for copper, iron ore and coking coal for the 2017 financial year due to industrial action at a copper mine Chile and bad weather in Australia, which affected its iron ore and coal mines.
- Today’s eco calendar is empty. Finland and the US tap the market
Currencies: EUR/JPY Major Beneficiary As Risk-On Trade Continues
EUR/JPY major beneficiary of risk-on rally
On Tuesday, investors adapted positions further as the outcome of the first round of the French parliamentary elections substantially reduced political event risk. Later in the US, the rally got further traction as the good US corporate earnings accelerated the equity rally. The risk‐rally supported USD/JPY, EUR/JPY and at the same time also EUR/USD. USD/JPY succeeded a protracted intraday rise and closed the session at 111.09 (from 109.77 on Monday). EUR/USD also regained the 1.09 barrier and finished the day at 1.0926 (from 1.0868). Understandably, the gains in EUR/JPY were quite impressive (121.37 from 119.39)
Overnight, Asian equities join the risk rally. Japan still outperforms due to yen weakness. USD/JPY (111.35/40) is trading marginally higher. The global picture for the dollar remains mixed as the rebound of EUR/USD continues with the pair trading just below 1.0950. The trade‐weighted dollar struggles to keep above the 99/110 support area (currently 98.75). So, for now the prospect of a US spending bill and the announced Trump tax proposals aren’t providing outright support for the dollar. The Q1 Australian CPI came out close to expectations at 0.5% Q/Q and 2.1% Y/Y. The weighed mean rose from 1.4% to 1.7%, but stays well below 2%. The Aussie dollar lost marginally ground upon the release and trades around AUD/USD 0.7520.
There are no important eco releases today, but the Trump administration will release the broad contours of its tax plan. Markets will try to get some insight whether the plan is a good starting point for negotiations with Congress. As the risks of a shutdown of the US government later have diminished, the assessment of the tax plan might be more positive. It also looks like the US government accepts a bigger deficit short‐term. Of course, markets will also keep an eye at the ECB policy meeting tomorrow. Earlier this week, trading in the major euro and dollar cross rates were driven by the global risk trade as (European) political event risk eased, rather than by US issues. This context supported USD/JPY but also EUR/USD and EUR/JPY. Market speculation that the decline in EMU political event risk could bring forward the ECB normalisation process supports the euro positive, too. ECB’s Draghi will probably downplay this speculation. Question is whether the (FX) market will believe it. At the same time, if the Trump tax plans have a good chance to raise US growth, it might tilt the balance again in the advantage of the dollar. This might a fortiori be the case when a higher budget deficit would suggest more decisive action from the Fed. This scenario still needs to be confirmed. For now, the risk on trade is in the first place supporting EUR/JPY. Most of the gains go the USD/JPY, but EUR/USD is also a good secondary beneficiary. For now we don’t row against this trend.
From a technical point of view, USD/JPY broke temporary below the 110 key support, making us downgraded our USD/JPY assessment to bearish. Next key support (62% retracement) comes in at 107.18. This week’s rebound suggests that a bottoming out process might be in store. However, the pair needs to regain the 112.20 level (neckline ST double bottom) to really improve the technical picture. The odds for such a scenario are growing. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March, but the test was rejected and EUR/USD returned to the 1.06 area. The pair returned to the range top after the French election and the pair is currently setting minor new highs. We look out how this test turns out, but we are not convinced of a sustained break higher. If EUR/USD would regain the 1.10 barrier, next resistance comes in in the 1.1145/1.13 area (US pre/post‐election swings).
EUR/USD extends gains. Range top under heavy strain
EUR/GBP
Euro strength continues to drive EUR/GBP
The March UK budget deficit was slightly wider than expected at £5.1 bln yesterday. Disappointing VAT revenues might be another indication that UK consumers are pressured by rising prices. As usual, the impact of the report on sterling trading was limited. EUR/GBP initially held a tight range around the 0.85 big figure, but regained the big figure as the euro extended gains overall. The pair closed the session at 0.8509. Cable traded with a slight upward bias intraday and returned north of 1.28. The pair closed the session at 1.2842.
Today, there are no again no important eco data or BoE speeches. EU’s Juncker and Barnier meet UK PM May in London. However, for now, Brexit is not really an issue for currency traders. Yesterday’s gains in EUR/GBP were again mainly euro driven. The global performance of the euro (EUR/USD) will probably again be decisive for EUR/GBP trading today.
We had a neutral short‐term bias on EUR/GBP. Early last week, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After this week’s rebound, the range bottom looks better protected. Longer term, Brexit‐complications remain a potential negative for sterling. Of late, this was not the focus of sterling trading. Nevertheless on technical considerations we are inclined to reconsider a cautious EUR/GBP buyon‐ dips approach.
EUR/GBP jumps on French election. 0.83 range bottom looks safe for now. Rebound continues on euro strength
