Sunrise Market Commentary
- Rates: Short term picture neutral for core bonds
The Bund and US Note future moved back above 160.64 and 125-04+/03 levels on Friday, making the technical picture more neutral again. Given this week’s razor thin eco calendar, we expect sideways action. If oil prices extend their rally, they could nevertheless inflict some losses on core bonds. - Currencies: Dollar comeback aborted by weaker eco data
After Friday’s dollar sell-off, we expect more sideways-oriented trading today and maybe also further this week. The eco calendar is razor thin and equity sentiment seems neutral as positives (Merkel’s surprising regional election victory) and negatives (North Korea / cyber-attack) cancel each other out.
The Sunrise Headlines
- US equities closed the session again narrowly mixed after a largely sideways trading session, shrugging off weaker eco data. Overnight, Asian stock markets trade mixed with China outperforming despite weaker data.
- An unrivalled global cyber-attack is poised to continue claiming victims, even as UK health facilities whose systems were crippled early in the assault are returning to normal operation.
- Chancellor Merkel’s conservatives won a surprise victory in regional elections in Germany’s most populous state (North Rhine-Westphalia) giving Europe’s most powerful leader a boost in the run-up to national elections in September.
- Oil prices jumped after the energy ministers of top producers Saudi Arabia and Russia jointly said that an OPEC-led crude production cut would be extended from the middle of this year until March 2018.
- Chinese eco data disappointed. Retail sales (10.7% Y/Y), industrial production (6.5% Y/Y) and fixed asset investment growth (8.9% Y/Y) all cooled more than expected in April.
- Downside risks to inflation continue to cloud the outlook for interest rates despite an otherwise healthy US economy, Chicago Fed Evans said. He added that he could be fine with two more rate increases this year.
- North Korea fired a ballistic missile early Sunday, just days after South Korea elected a president who vowed to engage with Un’s regime to defuse tensions over its nuclear weapons program
Currencies: Dollar Comeback Aborted By Weaker Eco Data
Dollar suffers modest loss on small data miss
On Friday, the dollar lost ground against euro and yen after weaker than expected US inflation and retail sales pushed US yields lower, narrowing the yield spread versus Germany (and Japan) somewhat. EUR/USD traded ahead of the data in a tight 1.0860/80 range, but surged after the US data release to 1.0933 in the close, up from 1.0861 on Thursday eve. Equities held up well in the face of the data, but couldn’t avoid USD/JPY weakening either, even if it was slightly more limited than the EUR/USD gains. USD/JPY fell from openings levels at 113.96 to intraday lows around 113.20 before closing at 113.38, a loss of about 50 ticks.
High oil prices support commodity currencies
Overnight, Asian stocks trade narrowly mixed with China outperforming despite weaker data. Increased signs of an extending of the OPEC production cut agreement to March 2018 (see headlines) pushes oil (and many other commodities) higher. This is reflected in modestly higher commodity currencies. USD/JPY pushes higher to 113.36, reversing some of the opening losses, but is still only level with Friday’s close. EUR/USD is little changed at 1.0935.
Calm trading amid thin calendar
Markets expect a modest improvement in the May NY Fed manufacturing survey while the NAHB homebuilders’ sentiment index is expected unchanged at lofty levels. We see no reasons to expect sharp deviations from these data releases, which don’t have strong market moving potential. Friday’s sharp negative reaction of the dollar shows that it remains vulnerable to weaker data. The market slightly reduced Fed rate hike expectations, especially for H2 meetings. The expected chance for a June rate hike is still an overwhelming 97%, according to Bloomberg data. Merkel’s regional election victory in NRW is a euro and equity positive event, while the worldwide cyber-attack and the North-Korean missile launch are equity negative, so they cancel each other out. The uninspiring eco and event calendars suggest technical and sentiment driven range-trading today.
Short term trading assessment
The USD/JPY rebound ran into resistance last Thursday when equities stabilized and Friday on weak US inflation and retail sales. A correction was upcoming after a 6 big figure gain from mid-April to mid-May. The weaker data and stabilizing equities were a welcome trigger.
Some more corrective losses shouldn’t surprise, but as long as USD/JPY 112.20 holds, the outlook for the dollar versus yen remains positive. A buy on dips of USD/JPY near these levels looks appropriate. The Fed will continue to tighten policy and the stronger labour market should ultimately lead to higher wages and inflation. If so, EUR/USD might revisit the 1.0821/1.0778 support (gap). However, Friday’s data poured some cold water on the dollar’s short term comeback chances. The US and EMU eco calendars are unattractive this week, which means trading may be confined to the 1.0821/1.0778 to 1.1023 range.
Technical notes
From a technical point of view, USD/JPY broke the 112.20 resistance, 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 finally broke above the 1.09/1.0950 resistance last week, but the break wasn’t confirmed and a correction kicked in. 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 suggests that the dollar is regaining traction against the euro.
EUR/USD: EUR/USD fall aborted after weaker eco data
EUR/GBP
Post-BoE repositioning pushes EUR/GBP closer to 0.85
Sterling remained under pressure versus the euro during the Friday’s session Investors adapted positions further as they concluded after Thursday’s policy meeting that the BoE won’t tighten soon, hampered by parliamentary elections and second and Brexit negotiations. EUR/GBP rose further after the weaker US eco data (inflation and retail sales) as EUR/USD outperformed cable. EUR/GBP started the day at 0.8430 to close at 0.8476, with an intraday top at 0.8488, a 47 pips daily gain. Cable fell in the morning on sterling weakness, but recovered after the US eco releases when dollar weakness dominated. Cable closed nearly unchanged at 1.2890.
There are no eco data in the UK or EMU today and the US data are second tier and likely near consensus. Technical considerations and sentiment should drive the price action. Sterling gained against the euro and dollar overnight, likely as a reaction to Friday’s losses. Cable re-takes the 1.29 handle, EUR/GBP drops to 0.8467. We consider it as consolidation which might be the dominant theme in today’s session. EUR/GBP is locked in a ST broad sideways range (0.83/0.85) after a substantial decline in March/April. Recent price suggest a bottoming out of EUR/GBP with 0.84/0.8330 a solid bottom. To improve the EUR/GBP picture, we need to see a break of 0.8508/31 (previous ST tops). On technical considerations, we slightly prefer a EUR/GBP buy-on-dips approach at levels closer to 0.83. Longer term, Brexit-complications remain potentially negative for sterling.
EUR/GBP: Sterling loses on follow through post BOE selling and EUR/USD outperforming cable after weaker US data
