Sunrise Market Commentary
- Rates: Underperformance of US Treasuries vs German Bunds?
Risks for EMU PMI data are tilted to the downside of expectations which might trigger a test of nearby resistance at 164.90 though we don’t anticipate a break higher. French election worries might continue to influence (EMU) risk sentiment. In the US, focus will gradually turn to Trumps’ fiscal stimulus plans, causing underperformance of US Treasuries. - Currencies: Dollar extends gradual rebound
Yesterday, EUR/USD and USD/JPY held extremely tight ranges. Political uncertainty caps the topside of the euro. The dollar receives support from hawkish Fed speak as markets await Trumps’ fiscal plans. Sterling is reversing the losses incurred after Friday’s poor retail sales.
The Sunrise Headlines
- US markets were closed for Presidents’ Day yesterday. Overnight, Asian equities are trading stronger, also Japanese ones despite a stronger dollar. European equities may start positive, but election uncertainty may hold them back.
- China’s central bank said that it will extend a preferential scheme for some banks that will free up additional funds for lending, as long as they channel money to weaker, cash-starved sectors of the economy.
- Greece and its international lenders agreed to let teams of experts work out new reforms to Greek pensions, income tax and labour market that would allow Athens to eventually qualify for more cheap loans, euro zone officials said.
- Growth at Japanese manufacturers continued to improve in February as activity in the sector expanded at the fastest rate since early 2014. The preliminary February PMI increased from 52.7 to 53.5.
- Portugal has made a new early repayment of €1.7B to the IMF, meaning it has reimbursed half of the bailout loans provided by the IMF during the 2011 debt crisis, the Finance Ministry said.
- Philly Fed Harker repeated in an MNI interview that he could support a rate increase next month. ‘I would not take March off the table at this point. We’ll have to see how it plays out in the next few weeks’.
- Issuing another upbeat assessment of the economy, the Australian central bank said it expects wage pressures to rise gradually, but one factor that may force it to raise rates earlier might be an outbreak in catch-up pay demands.
- Today, attention goes to the EMU business confidence (PMI). Fed speakers on duty have recently spoken, but the appearance of Draghi will be scrutinized closely for signs that the election season is affecting policy. US Treasury starts its mid-month refinancing operation (see below).
Currencies: Dollar Extends Gradual Rebound
Dollar extends gradual rebound
On Monday, USD trading developed in thin markets, as US markets were closed for Presidents’ Day. The dollar held very tight ranges against the euro and the yen even as political uncertainty on the French elections persisted. EUR/USD hovered in a narrow range in the 1.0605/30 area. USD/JPY stabilized in the low 113 area, awaiting more guidance from the US today.
Overnight, Asian equities show modest gains. The dollar rallied early in Asia as Fed’s Harker reepeated that a rate in March isn’t off the table. USD/JPY rebounded to the 113.70 area and trades currently around 113.55. EUR/USD fell below the 1.06 barrier, currently changing hand in the 1.0580 area. In the Minutes, the RBA was rather positive on the economy, taking into account the positive impact of higher commodity prices on the economy. Even so, the Aussie dollar is trading marginally softer in line with the broader USD rebound after the Harker comments. AUD/USD trades currently in the 0.7670 area.
Today, the advance EMU PMI’s will be published. Markets expect a near stabilization at 54.3 for the EMU composite PMI. German confidence is expected stable at 54.8. For France a slight decrease to 53.8 from 54.1 is expected. The indicator indicates ongoing decent growth, but some downside risk might materialize due to political uncertainty. The US Markit PMI is no market mover. A slight increase is expected (55.3 vs 55 for manufacturing, 55.8 from 55.6 for services). Fed speakers Kaskhari, Harker and Williams spoke recently and probably won’t bring no new info. Over the previous days, political uncertainty in France installed a modest risk-off trade in Europe. It weighed on the euro and was also slightly yen positive. The theme of political uncertainty in Europe will continue to play its role. At the same time, the focus in the US will turn to the Trump fiscal plan and to Fed comments. The combination of both factors suggests further USD buying against a weakish euro. USD/JPY rebounded on the Harker comments this morning. Any further gains probably need support from higher USD bond yields. We maintain a cautious USD positive bias in an day-to-day perspective. This applies especially to USD/EUR
Global context. The dollar corrected downward since the start of January as the Trump reflation trade slowed down. Two weeks ago , the dollar bottomed out, supported by the ‘Trump tax promise’. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and thus still favour a sell EUR/USD on upticks approach. 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. The comments of Yellen before Congress (and of other Fed members) were USD supportive, but had little lasting impact on yields and/or on the dollar. We keep a cautious USD positive bias, but remain more cautious on the upside potential of USD/JPY compared to USD/EUR.
EUR/USD: near the ST low on euro softness and USD strength
EUR/GBP
Sterling fights back after last week’s setback
Yesterday, sterling reversed part of Friday’s losses which were due to poor UK retail sales. We didn’t see a specific driver for this comeback. At the Brexit-debate in the House of Lords, some members want more influence before the final vote, but for now there are no indications that the debate in the House of Lords will profoundly derail PM May’s Brexit strategy. The CBI orders and output data were stronger than expected. The data were maybe a slightly supportive for sterling. EUR/GBP closed the session at 0.8517 (from 0.8561). Cable rebounded to close the day at 1.2463.
Today, the UK monthly budget data will be published. We don’t expect the report to be of lasting importance for sterling trading. Good data might be slightly sterling supportive in a daily perspective. Overnight, the decline of EUR/USD also pushed EUR/GBP back below the 0.85 barrier. EUR/GBP recently hovered in a tight range north of the 0.8450 support, but a break didn’t occur. Sterling sentiment softened slightly of late as the market feels that a BoE rate hike is still very far away. At the same time, euro softness due to political uncertainty is a risk for all euro cross rates, including for EUR/GBP. Longer term, we have a sterling negative view as the Brexit still has to (negatively) impact the UK economy. However, this is no issue at this stage. The test of 0.8450 support is rejected, but the upside momentum isn’t convincing. In case or further EUR/USD softness, a retest of 0.8450 is still possible
EUR/GBP: new test of 0.8450 support avoided, but rebound fails to convince
