Rates: Gradually moving towards upper bound of sideways ranges
The US and German 10-yr yields continue their journey higher within established sideways trading ranges, respectively between 2.8% and 3% and between 0.3% and 0.5%. Today US (PCE) and German (CPI) inflation readings have most market-moving potential. A further rise probably won’t go unnoticed. Risk sentiment on stock markets serves as a wildcard.
Currencies: Sterling captured by impressive short squeeze
Yesterday, risk sentiment continued to set the tone for the intraday USD price action. A further US equity rally blocked a tentative USD comeback. Today, good US data and a pause in the equity rally might help to put a floor for the USD. Sterling rebounded sharply after perceived soft comments from EU’s Barnier. We consider the move mainly as a short-squeeze on recent sterling losses.
The Sunrise Headlines
- US stock markets closed yesterday’s session well, with all US indices in green. NASDAQ (+0.99%) outperforms for a second straight day. Asian markets opened mostly with losses this morning, with China underperforming the bunch.
- US President Trump and Canadian prime minister Trudeau both commented that a deal on revamping Nafta by Friday is within reach. Trudeau remains cautious, however, saying “no Nafta deal is better than a bad Nafta deal”.
- According to EU’s chief Brexit negotiator Michel Barnier, the bloc is ready to offer the UK an unprecedented partnership that goes far beyond any agreement the EU has made with other countries in the past.
- A source familiar with the Berlin government said Germany is likely backing Irishwoman Sharon Donnery as the next chief of the Single Supervisory Mechanism (SSM), the ECB’s banking watchdog.
- EU Comm. Oettinger warned Italy that if EU budget contributions are not paid in time, it would face interest payments. Last week, Italy’s Di Maio threatened to withhold EU contributions if it didn’t agree to take in rescued immigrants.
- Turkey’s Finance Minister Berat Albayrak does not expect a big risk to its economy or financial system. His quote illustrates a deep difference between Turkey and global investors over a worsening currency crisis.
- Today’s eco calendar is richly filled, with in the US PCE inflation (July) Jobless Claims and spending/income data. EMU Economic Confidence for August and German inflation data will be released as well.
Currencies: Sterling Captured By Impressive Short Squeeze
Impressive short-squeeze of sterling
Yesterday, FX trading was mainly driven by global risk sentiment. The risk rally slowed in Asia and Europe, easing the recent slide of the dollar. However, US equities continued outperforming with several indices, including the Nasdaq and the S&P, setting new records. This US equity rally caused the dollar to reverse its intraday gains. EUR/USD closed the session at 1.1707. The trade-weighted dollar finished at 94.52. USD/JPY was the exception to the rule and succeeded a decent gain (111.68). This morning, Asian equities again fail to join the US rally. China still underperforms. The dollar shows no clear trend. EUR/USD struggles to stay north of 1.17. USD/JPY is little changed in the 111.65 area. The Aussie (AUD/USD 0.7285) and the kiwi (0.6655) dollars suffer from soft eco data. Today, the calendar heats up with the EC confidence data, German inflation and US July spending and income data. EMU data might not be too bad, but are probably only second tier for FX trading. US spending and income data are expected solid (0.4% M/M). FX markets will keep an eye at the price deflators. Global risk sentiment will also continue playing its role. Headlines on a US/Cananda trade deal look rather constructive. Question is whether this topic will yield enough additional positive news to fuel further (US) equity gains. If not, the dollar (except USD/JPY) might start some ST bottoming out pattern. In a broader perspective, the USD reversed the early August gain. EUR/USD returned in the 1.15/1.1850 consolidation pattern. The USD momentum eroded further after Fed Powell’s Jackson Hole comments and due to a positive risk sentiment. The jury is still out, but the easiest part of this trade might be behind us. The EUR/USD rebound might slow. A EUR/USD break beyond 1.1791/1.1850 might be difficult.
Yesterday, sterling finally rebounded after comments from EU’s Barnier as he said that the EU wants to keep a close, special relationship with the UK. The market saw the quotes as a sign of a more reconciliatory attitude from the EU. We are not convinced. The move was probably in the first place a short-squeeze on recent substantial sterling losses. Whatever, the correction was quite impressive and deserves monitoring. Today, UK monetary data will be published. We look out how far the short- squeeze goes. The 0.8900/8850 area should provide solid support. A break below this area would signal an improvement in ST sentiment on sterling. This is not our preferred scenario
USD (trade-weighted-DXY): risk rally weighs on the dollar. Trade to slow from here?
