Sunrise Market Commentary
- Rates: Bearish view temporary on hold because of Trump?
Strong US eco data, Yellen’s testimony, hawkish Fed comments and anticipation on Trump’s fiscal stimulus plans raised odds of a March rate hike to nearly 50% this week, pulling US Treasuries lower. However, the developing scandal in Trump’s administration might temporary break bearish sentiment on core bond markets via safe haven flows. - Currencies: USD upside momentum falters despite strong US data
Yesterday, the dollar touched new ST highs against most majors on very strong US data, including a higher than expected CPI. However, the US currency fell prey to profit taking. For now, this is nothing more than a correction on the recent rally . However, we look out whether US political issues might become more important for USD trading..
The Sunrise Headlines
- US stock markets fired through after initially hesitating following strong US eco data. They eventually gained around 0.5%. Overnight, Asian stock markets are more mixed with Japan underperforming.
- Boston Fed Rosengren said that the potential for an overshoot in US economic growth may justify a more rapid tightening in monetary policy than the central bank had forecast in December. Philly Fed Harker expects 3 rate hikes in 2017.
- Australia’s unemployment rate fell from 5.8% to 5.7% in January. The economy added 13,5k jobs last month (10k expected), but there was a decline in the number of full-time jobs (-44,8k), while 58.3k part-time jobs were added.
- The EU is preparing an early summit with China in April or May in Brussels to promote free trade and international cooperation in the face of a more protectionist and inward-looking Washington, three EU officials said.
- Ireland’s minority government has survived a vote of no-confidence over its handling of a police whistle-blower scandal. The motion was passed by 57 votes to 52, with 44 abstentions.
- Rebel French conservative lawmaker Fenech said voters were deserting their party, the Republicans, and it faced election defeat unless it ditched Fillon.
- Italy’s former PM Renzi called on rivals not to quit the ruling PD-party, after a group of senior figures were said to be poised to break away. Renzi said this week he would hold a PD leadership contest, hoping to reassert his authority.
- Today’s eco calendar contains US housing starts, building permits, weekly jobless claims and Philly Fed business indicator. The ECB releases the Minutes of its previous meeting and governors Coeure and Nowotny speak. Spain and France tap the bond market.
Currencies: Dollar Rally Slows Ahead Of Yellen Testimony
USD fails to hold gains despite strong data
On Wednesday, the dollar showed two faces. The US currency stayed well bid in Europe, building on Tuesday’s post-Yellen gains. The dollar rally accelerated as the US data (Empire Manufacturing, CPI and retail sales) all came out much stronger than expected. However, profit taking kicked in going into the US equity market opening. The dollar reversed the earlier gains. USD/JPY closed the session at 114.16 (from 114.26). EUR/USD finished the session at 1.0601 (from 1.0578 on Tuesday).
Overnight, Asian equities trade mixed-to slightly positive supported by a softer dollar. Japan is the usual exception, as the decline of USD/JPY weighs. The PBOC fixed the USD/CNY rate little changed from yesterday, but yuan (USD/CNY 6.8585) is trading strong in line with the USD correction. The Aussie dollar profits slightly from decent January labour data. AUD/USD tries to regain the 0.77 level. EUR/USD is changing hands in the 1.0620 area, one big figure higher than yesterday’s postdata low.
Today, the US housing starts & permits, the initial claims and the Philly Fed business sentiment survey may affect trading. Housing starts & permits are expected to have stabilized after a sharp rise of starts and a stabilization of permits in December. We have no reason to expect starts (and permits) have reached a turning point. The Philly Fed business sentiment is ahead in time of the NY one (published yesterday) and surged higher in January (highest in 2-years). Given the upward surprise of the NY index, we see upside risks, but a slight decline remains possible.
Yesterday, the dollar profited from strong US data and from hawkish Fed comments, but couldn’t maintain its gains. Question is why? For now we assume that it was a simple correction on the recent rally. Even so, we look whether other factors might come in play. Are markets growing nervous on the ability of the Trump administration to deliver on the changes it promised? For now, this is only hypothetical thinking. Even so, we turn more neutral on the dollar in a dayto- day perspective. We also look whether or not the dollar will profit in case of more positive eco data. If not, it would be a further reason to turn more cautious
Global context: The dollar was in a corrective downtrend since the start of January as the Trump reflation trade petered out. Last week, the dollar showed tentative signs of a bottoming out process, supported by the ‘Trump tax promise’. Euro weakness is a factor too. As we see the 1.0874 as solid resistance, a sell EUR/USD on upticks approach is favoured. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. Post-Yellen, the downside of the dollar is better protected. Even so, we are still more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD: dollar fails to maintain post-data gains
EUR/GBP
EUR/GBP still looking for guidance
On Wednesday, the jobless claims declined sharply and job creation in the 3 months to December was stronger than expected. However, wage growth disappointed and slowed from 2.8% Y/Y to 2.6% Y/Y. The market reacted to the wage data (prices) rather than to the activity data and thus Sterling lost some ground. EUR/GBP revised the 0.85 area, but the move had no momentum and petered out very soon. Later in the session, the strong US data pressured cable but there was no negative fall-out from EUR/USD on EUR/GBP. EUR/GBP close the session north of 0.85 (0.8507). Cable rebound on the late session USD correction and finished the day at 1.2361.
Today, global actors will dominate sterling trading in absence of eco data. EUR/GBP recently hovered in tight range close to the 0.8450 support, but a break didn’t occur. Sentiment on sterling is a rather neutral. Activity data remain good, but price data are soft enough to prevent a BoE rate hike anytime soon. Euro weakness in case of rising political uncertainty is a risk for all euro cross rates, including for EUR/GBP. Longer term, we have a sterling negative view as the negative impact from Brexit still has to reach to UK economy. However, this is no issue at this stage. Short-term the picture of EUR/GBP remains indecisive/fragile, but this is partially due to euro weakness, rather than outright sterling strength. We continue to look how the test of the key 0.8540 support turns out. In case of a break, the 0.8304 area is the next MT support. At least partially stop-loss protection on EUR/GBP longs may be considered.
EUR/GBP: new test of the 0.8450 support is avoided, but picture remains fragile
