Sunrise Market Commentary
Rates: Cautiousness remains warranted, but 2.16% should hold
Risk sentiment will remain key for trading. Ahead of the weekend, cautiousness could be warranted (positive core bonds) with investors waiting on new developments in the Trump affaire. The US Note future tested the contract high (126-20) yesterday (2.16% support for US 10-yr yield), but a break higher didn’t occur. Time to enter new short positions?
Currencies: Dollar decline slows, but no sustained rebound yet
The USD decline slowed yesterday as US tensions became less intense. The equity performance will probably guide USD trading short-term. Some ST consolidation might be on the cards. Cable failed to sustain north of 1.30 after strong UK retail sales, suggesting some underlying sterling softness
The Sunrise Headlines
- US stocks recovered from opening weakness to end around 0.3% higher with Nasdaq outperforming (+0.75%). Overnight, most Asian stock markets eke out small gains in subdued trading.
- President Trump said that the “witch hunt” should be quickly brought to a close, but the appointment of a special counsel and recent grand jury subpoenas suggest a federal probe is expanding to other suspicious activity and countries.
- The ECB should use its June meeting to start building the case for unwinding its monetary stimulus before making an announcement in the fall, according to Governing Council member Vasiliauskas.
- Cleveland Fed Mester said that financial-market volatility has not affected her economic outlook and the US central bank prefers to look through short-term swings in markets as it guides monetary policy
- Greece’s Parliament approved a raft of fresh austerity measures and economic reforms that the country must implement in the next four years to unlock a much-needed cash payment to meet upcoming debt obligations.
- Mexico’s central bank defied most market expectations and lifted its key lending rate by 0.25 point to 6.75%, after inflation surged past its target range last month. The increase is the sixth in a row and the eighth since February 2016
- Today’s eco calendar only contains EMU consumer confidence. ECB Praet, ECB Constancio, Fed Bullard and Fed Williams are scheduled to speak
Currencies: Dollar Decline Slows, But No Sustained Rebound Yet
USD decline slows
On Thursday, European markets initially stayed in modest in risk-off modus, but the risk-off trade had no additional negative impact on the dollar. Interest rate differentials turned slightly in favour of USD. The US eco data were also better than expected. Later in the session, US equities even recouped a small part of Wednesday’s losses, squeezing the dollar higher. EUR/USD closed the session at 1.1103 (from 1.1159). USD/JPY finished the session at 111.49 (from 110.83).
Overnight, Asian equities are trading slightly higher, reversing earlier losses. The immediate stress from the Trump crisis is easing. For now, the fall-out from the Brazil crisis on other Emerging markets looks contained. The cautious riskrebound is no big help for the dollar. USD/JPY is going nowhere and trades currently in 111.40 area. EUR/USD is holding a tight range in the low 111 area. Markets look for new impetus.
Today, there are no US data and only second tier ones in the EMU. Markets will keep an eye at the speeches from ECB’ Praet and Constancio and Fed governors Williams and Bullard. We expect the ECB speakers to take a guarded approach as the internal debate on the communication at the June ECB meeting is still ongoing. The Fed speakers won’t question the case for a June rate hike. Remarks on the tapering of the balance sheet remain interesting, but the impact on USD trading will be limited. The dynamics of equities will probably remain the key driver for FX trading.
In an daily perspective, some further consolidation might be on the cards, both for equities and for the dollar. Markets haven’t made up their mind on the LT impact of the recent developments.
In a longer term perspective, we maintain the working hypothesis that recent turmoil makes it more difficult for US equities to extend the record rally. Maybe, we entered a sell-on-upticks market. At the same time, a June Fed rate hike is not in question and US yields are near important support levels. So, the dollar shouldn’t lose that much interest rate support, even if sentiment on risk turns less buoyant. In this context, we assume that a sustained rebound of USD/JPY has become tough short term. A cautious sell-on-upticks approach is preferred. There is maybe more room for a ST rebound of the dollar against the euro. We remain sceptic on the safe haven characteristics of the euro if sentiment on risk would turn really risk-off.
Technical picture.
The USD/JPY rebound ran into resistance last week. Initially, it was no more than a correction, but Wednesday’s sell-off/re-break below the 112.20 previous top aborted the uptrend and made the short-term picture negative. Return action lower in the 108.13/114.37 range is possible.
Last week, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, Friday’s US data and political unheaval finally propelled EUR/USD north the 1.1023 range top, improving the technical picture. The correction tops at 1.1300/1.1366 is the next resistance. We think that USD sentiment will have to be extremely negative to clear this hurdle short-term. Further ST EUR/USD gains might become tougher. Yesterday’s top at 1.1172 is a first reference. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: euro breaks topside of the ST range but the rally is slowing
EUR/GBP
Cable fails to sustain gains north of 1.30
Yesterday, sterling showed two faces. Initially, sterling rebounded after very strong UK April retail sales. The report eased recent fears that a decline in real income due to higher inflation could weigh on domestic spending. EUR/GBP dropped from the 0.86 area to fill bids around 0.8525. Cable finally cleared the 1.30 barrier and came close to the 1.3050 area. However, sterling couldn’t maintain the positive momentum. Especially cable was hit hard by a USD up-tick during the US trading session. We don’t see high profile UK news to explain the manifest underperformance of sterling. The pair dropped to the 1.29 area and closed the session at 1.2938. EUR/GBP finished the session at 0.8580.
Today , the CBI trends orders are expected stable at 4. The impact of the report will only be of intraday significance for sterling trading. Sterling might be slightly more sensitive to a weak report rather than to a strong one. Of late, the positive sterling sentiment eased and euro strength prevailed in EUR/GBP trading.. The pair bottomed out with 0.84/0.8330 as a solid bottom. The breach of 0.8509/31 (previous ST tops) improved the technical picture. For now, we stick to the EUR/GBP uptrend even as the euro rebound might slow short-term. Longer term, Brexit remains potentially negative for sterling.
EUR/GBP: jumps north of ST range top
