Sunrise Market Commentary
- Rates: Some downside correction as risk sentiment improves?
Friday, equities continued their rebound and overnight Asian equity trading suggests some continuation today. With little on the calendar, we favour technical sentiment driven trading. Core bonds might come under some mild downward pressure. No key supports seem to be in danger. - Currencies: Dollar still doesn’t profit from risk-rebound
On Friday, the Trump-tensions eased further, but the improved risk-sentiment didn’t help the dollar. EUR/USD jumped to the 1.12 area. Today, global sentiment will again set the tone for USD trading. Will the dollar finally get some downside protection from higher yields and rising equities?
The Sunrise Headlines
- US equities closed Friday’s session with good gains and have now about halved the losses of earlier last week when president Trump came in problems. Asian equities start the week on a solid footing.
- President Trump dialed back his criticism of Islam while basking in a slew of praise from Gulf leaders during a visit to Saudi Arabia. Defence contracts worth about $110 billion were announced. Today, he visits Israel, where the PM is set to ask him for tougher sanctions on Iran.
- The ECB will need to ‘demonstrate backbone’ when price pressures increase again, ECB Weidmann said. ‘At the present time, it’s indisputable that an expansive monetary policy is appropriate. However, there are diverting views on the necessary degree of monetary expansion and on the instruments that we use’.
- EU ministers have a busy day in Brussels, trying to clinch a deal on a Greece bailout while also laying out their Brexit negotiating positions.
- The U.K. will quit talks on leaving the European Union unless the bloc drops its demands for a divorce payment as high as €100B, Brexit Secretary David Davis said. Britain’s negotiations would otherwise be plunged into ‘chaos’.
- S&P affirmed the Dutch AAA rating, stable outlook. It anticipates small budget surpluses over 2017/20 and a further reduction of the debt ratio.
- OPEC and other producers agreed on extending oil output cuts by nine months, according to Saudi’s energy minister. ‘We think we have everybody on board,’ Khalid Al-Falih said. Brent oil traded overnight just above $54/barrel.
- Brazilian real and equities rose as traders seem less sensitive to fresh news tied to JBS plea bargain deal. The Supreme Court will on Wednesday decide on Temer’s request to suspend the inquiry until the authenticity of the clandestine recording be definitively verified.
- The Market calendar is light. The Eurogroup meeting, Trump’s trip and speeches of Kashkari and Harker are the only events.
Currencies: Dollar Still Doesn’t Profit From Risk-Rebound
USD still struggles even as risk sentiment improves
On Friday, dollar weakness still dominated FX markets. Remarkably, the decline of the dollar occurred as the Trump crisis eased and as risk sentiment improved. Still, EUR/USD and EUR/JPY remained in the driver’s seat. EUR/USD regained the 1.12 barrier and close the session at 1.1206. Interest rate differentials narrowed slightly in favour of the euro. The gains of USD/JPY were non-existent given improved US/global risk sentiment. The pair close the session at 111.26 (from 111.49).
Overnight, Asian equities join Friday’s US rebound. A further rebound in the oil price is supporting oil- and commodity related assets. The focus on the US political scene turned away from the links of the Trump campaign with Russia to the visit of the President to the Middle East. The constructive risk sentiment still doesn’t help the dollar much. EUR/USD is trading just below 1.12, still within reach of Friday’s top. USD/JPY dropped temporary below 111 overnight, but rebounded to the 111.50 area. Even so, the USD gains remain very modest.
Today, the eco calendars in EMU and the US are uneventful. Fed’s Harker and Kashkari are scheduled to speak, but we don’t expect them to change the markets’ assessment on the Fed in a profound way. So, USD trading will again be driven by global sentiment. The headlines of president’s Trump visit to Israel are a wildcard.
At the end of last week, we assumed that an easing of the Trump-crisis could slow the decline of the dollar. For now, core yields and the dollar hardly profited from the rebound of equities. The EUR/USD rebound was probably partially inspired by euro strength going into the June 08 ECB meeting. However, the mediocre performance of USD/JPY also suggests USD softness. We think that the USD correction has gone far enough, but it remains dangerous to row against the EUR/USD rally as long as interest rate differentials move (slightly) in favour of the euro. Investors are also cautious to be short euro going into the ECB meeting
In a longer term perspective, the recent turmoil maybe makes it more difficult for US equities to extend the record rally. 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 much interest rate support anymore. In this context, we think that a sustained rebound of USD/JPY has become more difficult.
A cautious sell-on-upticks approach is preferred. We remain also sceptic on the safe haven characteristics of the euro if sentiment would turn really risk-off. In that context, EUR/JPY and EUR/USD might decline in lockstep. However, for now this scenario isn’t in play
Technical picture.
The USD/JPY rebound ran into resistance twee weeks ago. 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.
Earlier this month, it looked that EUR/USD could revisit the 1.0821/1.0778 support (gap). However, poor US data and political upheaval finally propelled EUR/USD north the 1.1023 range top. 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. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: euro rally continues even as Trump-tensions ease .
EUR/GBP
EUR/GBP tests 0.86 on euro strength
On Friday, sterling trading was primarily driven by the broader moves in the dollar and the euro. EUR/GBP held a very tight sideways range in the high 0.85 area and closed at 0.8596 as EUR/USD rebound well bid. The swings in cable were more pronounced. The pair copied the intraday gains of EUR/USD and returned north of 1.30, to close the day at 1.3036. The CBI order data were better than expected, but the price component of the report was slightly softer than expected.
Overnight, the Rightmove house prices were stronger than expected at 1.2% M/M and 3.0% Y/Y. The data don’t help sterling. There are no other UK eco data today, but there might be quite some Brexit related noise. The UK election campaign continues and might yields some hard comments on the Brexit issue. The euro group discussing the starting position of the EU for the negotiations might also be quite tough. We don’t expect a big negative reaction of sterling. However, this context probably won’t help to change fortunes in favour of sterling.
Of late, the positive sterling sentiment faded 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 shortterm. Longer term, Brexit remains potentially negative for sterling
EUR/GBP: euro strength dominates
