Sunrise Market Commentary
Rates: Technically-inspired, sentiment-driven trading
Today’s eco calendar suggests more technically-inspired and sentiment-driven trading. The underlying environment is unfriendly for core bonds. Comments by ECB President Draghi in Dutch parliament are a wildcard for trading and could move markets, especially if he touches on the sensitive issue of the June meeting.
Currencies: dollar extends gradual rebound
Yesterday, the dollar rebounded against the euro and the yen supported by higher core yields and a global risk-on sentiment. USD/JPY jumped temporary north of 114. The topside of EUR/USD looks better protected short-term unless Draghi would signal a change in the ECB approach, which we don’t expect.
The Sunrise Headlines
- US stocks closed mixed with Nasdaq reaching a new record high, but S&P and Dow Jones correcting marginally lower. Overnight, most Asian bourses gain ground with South Korea underperforming.
- China’s producer price gains slowed more than expected in April (from 7.6% Y/Y to % Y/Y),adding to signs of a potential easing of global reflation fuelled by the world’s second-largest economy.
- President Trump unexpectedly fired FBI Director Comey, plunging the capital into confusion and intensifying calls for a special prosecutor to assume control of the investigation into possible ties between the Trump campaign and Russia.
- Marion Maréchal-Le Pen is set to announce that she will retire from politics. The decision comes amid tensions between her and senior party officials who are attempting to take FN in a radically different direction.
- Despite a weak read on economic growth and cooling auto sales, Kansas City Fed George said that the US economy is on track to grow at “a slightly above-trend rate”. The central bank’s current path of rate hikes remains the right one.
- The Australian government surprisingly announced a 6 bps levy on deposits of the country’s 5 biggest banks in its annual budget, a measure that will deliver A$6.2B through to 2020-21 as it aims to get its finances back into the black.
- Today’s eco calendar is empty. Germany and the US tap the market. ECB president Draghi speaks in Dutch parliament and Fed governors Rosengren and Kashkari also take parole. The RBNZ decides on monetary policy…
Currencies: Dollar Extends Gradual Rebound
Dollar cautiously higher in technical trading
On Tuesday, the risk rally resumed after Monday’s pause. The eco data were few and were ignored. The safe haven currencies like the yen and the Swiss franc were sold. Contrary to the recent pattern, the dollar profited more from the riskon sentiment and from the rise in core yields than the euro. USD/JPY rebounded north of the 114 area, but risk sentiment eased when President Trump fired FBI director Comey. USD/JPY closed the session 113.98 (from 113.26). The dollar maintained most of its intraday gains against the euro. EUR/USD finished the day at 1.0874 (from 1.0925).
Overnight, Asian equities trade slightly positive with Korea underperforming. The yuan trades little changed after CPI/PPI releases (see news) at USD/CNY 6.9050, near the recent yuan lows. The dollar trades marginally softer against the euro and the yen respectively at EUR/USD 1.0895 and 113.80.
Today, the eco calendar is uneventful. ECB’s Draghi speaks before the Dutch parliament. It is a wildcard. Other ECB members recently suggested that the balance of risks may be upgraded at the June meeting and some suggested that the policy outlook for a longer term might be discussed and eventually changed. We doubt that Draghi will join the debate at this forum, but if he would do so it would raise EMU yields and the euro
Yesterday, fortunes changed temporarily in favour of the dollar. The positive risk sentiment and a modest rise in core yields supported the dollar. The decline in EUR/USD was probably due to a further unwinding of euro longs, but at the same time USD/JPY went higher too. We expect some consolidation unless there comes some high profile news e. g. from central bankers. If Draghi maintains the soft mantra from the April press conference, the topside in EUR/USD is probably better protected short-term. A retest of the 1.0821 correction low is still possible. The USD/JPY trend remains positive and a meaningful equity correction, which we don’t see for now, is probably needed to change this trend. So, the downside in USD/JPY looks solid. Friday’s US data (retail sales and CPI) are probably the next points of reference for USD trading
From a technical point of view, USD/JPY broke the 112.20 resistance last week, improving the technical picture. The rebound continues in a gradual way, but looks quite robust. 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 that range top and broke above the 1.09/1.0950 resistance at the end of last week. However, the break wasn’t confirmed and a correction kicked in this week. A sustained break higher 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 topside test again rejected. Return action to 1.0821 is possible, but won’t change the broader picture
EUR/GBP
EUR/GBP drifting back to 0.84 area.
Yesterday, sterling was still driven by non-UK factors. EUR/GBP drifted cautiously lower in the 0.84 big figure, feeling a modest spill-over effect from the broader EUR/USD correction. The pair closed the session at 0.8407 (from 0.8442). Cable outperformed EUR/USD as the dollar rebounded overall. This again suggests underlying GBP resilience. The pair closed the session at 1.2934 (from 1.2940).
Today, there are no eco UK or EMU eco data. Calm technically inspired trading ahead of tomorrow’s BoE meeting is likely. We expected Carney and Co to maintain a balanced tone as there is no reason to reinforce the hawkish rhetoric after more modest Q1 growth and going into June’s parliamentary elections. A balanced tone from the BoE is not really supportive for sterling. Even so, the UK currency remains resilient for now. EUR/GBP filled the gap of the euro rebound after the first round of the French election. Will this slow slide of EUR/GBP going into the BoE policy decision continu?
Two weeks ago, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of key 0.8305 support (Dec low), but no real test occurred. After a late April 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: trading within a tight 0.83/0.85 range
