Sunrise Market Commentary
- Rates: Commodity weakness takes a grip on global risk sentiment
Oil and other commodities took another hit and start affecting global sentiment. The US Note future profits. A very strong payrolls report will be needed to push the US Note future below 125-04+/03+ support, if commodity weakness remains today’s trading theme. We expect a near-consensus outcome though and have a positive intraday bias for core bonds. - Currencies: EUR/USD near 1.10 barrier
The dollar hardly profited from rising market expectations on a June Fed rate hike yesterday. Weaker risk sentiment due to a sell-off in commodities weighs more on the dollar than on the euro. US payrolls are in focus today. If risk sentiment deteriorates further, the payrolls will probably have to be very strong to change fortunes in favour of the dollar
The Sunrise Headlines
- US stock markets ended a second straight session nearly unchanged, failing to profit from European optimism. Overnight, the commodity rot gets a grip on risk sentiment, sending Asian bourses lower.
- House Republicans repealed most of ex-President Obama’s signature health-insurance law in a tight vote, handing President Trump his first legislative victory and vindicating GOP leaders who failed twice before to pass a bill.
- The House Financial Services Committee launched a Republican-supported rollback of Obama-era financial regulations, voting 34-26 along party lines for a plan to undo significant parts of the 2010 Dodd-Frank law.
- Oil prices fell by as much as a further 3% this morning, after prices had crashed to five-month lows in the previous session. Other commodities feel the pain as well with eg iron ore futures down 8%.
- Jeremy Corbyn, the UK Labour party leader, is braced for heavy losses in local elections across Britain on Friday, in an ominous foretaste of what could happen in next month’s general election.
- The administrators of Euribor have decided against an overhaul in which they would calculate the benchmark based on actual transaction data rather than the old system of banks’ best estimates.
- Today’s eco calendar contains US payrolls. Fed Yellen, Fischer, Williams, Rosengren, Evans and Bullard are scheduled to speak.
Currencies: EUR/USD Near 1.10 Barrier
EUR/USD nears 1.10 barrier
European assets initially took the lead in a risk-on trade yesterday. This trade supported at the same time EUR/USD, USD/JPY and EUR/JPY. So, rising expectations for a June Fed rate hike weren’t unequivocally positive for the dollar. Later in the session, risk sentiment turned less positive. Ongoing commodity selling slowed the rise of core yields and turned out to be dollar negative. The US House approving the repeal of Obamacare also didn’t help the US currency. EUR/USD even cleared the recent highs and finished the session at 1.0985. USD/JPY reversed earlier gains and closed the session at 112.46.
The ongoing decline in commodities weighs on Asian equities overnight. Japan and Korea are closed for regional holidays. The risk-off correction supports the yen. USD/JPY dropped to the low 112 area. The decline in commodities also weighs on the Aussie dollar (AUD/USD 0.7375) and on the Canadian dollar (USD/CAD 1.3785). In its quarterly report, the RBA was quite positive on the growth outlook and grew more confident that domestic inflation is strengthening. The comments don’t help the Aussie dollar currently. With the dollar and commodity currencies in the defensive, the euro is ‘by default’ outperformer. EUR/USD hovers near the recent highs just below 1.10.
US payrolls are today’s key feature. Consensus expects US job growth to have picked up in April to 190K after a disappointing March report (only 98K). This week’s ADP report at least suggest that the odds for a rebound are good, even as the employment component in the ISM’s eased substantially. Wage growth is expected at 0.3% M/M and 2.7%Y/Y. We also keep an eye at speeches from Fed governors (especially Fed Williams), for comments on the reduction of the Fed’s balance sheet. Last but not least, global risk sentiment will be important. The the decline of commodities might become a source of global uncertainty. Short-term, the dollar momentum remains fragile, to say the least. A series of potential USD positive factors (rising expectations for a June Fed rate hike, the healthcare deal in the House,) didn’t help the dollar. The dollar has often an inverse correction with commodity prices, but this trick currently also doesn’t work.
At the same time, the euro profits from the expected victory of Macron in the French Presidential elections and from market speculation that the ECB is coming closer to scaling down policy stimulation in a not that distant future.
In this context, the payrolls will probably have to be very strong to change fortunes in favour of the dollar. In addition, negative risk sentiment (commodities) is currently more negative for the dollar than for the euro. We don’t expect the euro to continue to outperform in case of a more pronounced risk-off correction. However, short-term market momentum remains euro positive and dollar fragile. So for now there is no hurry to add to USD long positions. We wait for a sign that the dollar is bottoming out.
From a technical point of view, USD/JPY bottoming out in April. The pair regained 112.20 resistance earlier this week. This improved the technical picture. However, for now there are no follow-through gains. Next intermediate resistance comes in at 115.51. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair returned to the range top after the French election and set minor new highs. Yesterday’s break beak north of the recent highs (if confirmed), would improve the ST picture. Next resistance stands at 1.1129 (62% retracement) and at 1.1366 (correction top). A decline below 1.0821 would suggest that the dollar is regaining traction against the euro.
USD breaks above the recent highs in the 1.0950 area. Will the payrolls be strong enough to ‘save’ the dollar?
EUR/GBP
EUR/GBP returns to 0.85 area on euro strength
Sterling trading mostly followed the major trends of euro strength and relative dollar softness yesterday. EUR/GBP drifted north to the high 0.84 area, supported by the rise of EUR/USD. Cable dropped temporary lower early this morning, but rebounded north of 1.29 as the dollar couldn’t maintain its post-Fed gains. The UK services PMI was again better than expected (55.8 from 55.00), but didn’t really help sterling. On the negative side negative side for sterling, the Brexit bickering between the UK and the EU continued as the EU prepares measures to gain control on euro clearing activity which is mainly centralised in London. EUR/GBP closed the session at 0.8500. Cable finished the day at 1.2923.
There are no important eco data in the UK today. Markets might keep an eye at the local election as a precursor for the general election next month. However, global trends in the dollar and/or the euro will probably dominate sterling trading. The Brexit bickering between the EU and the UK will probably continue, but for now it has no really big impact on sterling. Of late the downside in EUR/GBP has become better protected, mostly due to euro strength. This trend might continue short-term?
Two weeks ago, 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 last week’s EUR/GBP rebound, the range bottom is better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations we slightly prefer a EUR/GBP buy-on-dips approach
EUR/GBP: downside better protected after last week’s rebound
