Sunrise Market Commentary
- Rates: Range trading remains in vogue
Yesterday, some modest further losses, which pushes core bonds back lower in the reach, while equities recaptured the highs. Today, the calendar is thin. Surprises are possible from the ECB speakers or FOMC Minutes, but overall we bet on another technical driven bond session. - Currencies: Dollar decline shows tentative signs of slowing
Yesterday, the dollar finally rebounded supported by a rise in equities and US yields; Today, the focus is on the Minutes of the May FOMC meeting. More signs that the Fed normalization process will continue might help to put a floor underr the dollar. Equities remain a wild card.
The Sunrise Headlines
- US equities rallied for the fourth day in a row, leaving the S&P 500 within striking distance of its all-time high at the close. Financials outperformed and recouped last Wednesday’s rout. Asian equities area trading mixed. Japanese equities outperform on weaker yen, while Chinese ones lose on a rating downgrade.
- China’s credit rating has been downgraded by Moody’s from Aa3 to A1 (stable) on expectations the country’s financial strength will ‘erode somewhat’ over coming years as debt rises, but its outlook was lifted to stable from negative.
- New Zealand reported its largest monthly trade surplus since 2015 in April as dairy, wood and wine exports grew. Its trade deficit year to date decline to NZD 4.4B. The Kiwi dollar was little changed around NZD/USD 0.70
- S&P Global Ratings has placed the ratings of 38 Brazilian financial institutions on negative watch amid a political scandal that rocked the country’s markets. It may delay an economic recovery and increases the risks for credit fundamentals.
- Philadelphia FED Harker said June ‘is a distinct possibility’ for the U.S. central bank’s second interest-rate increase of 2017. He still sees 3 hikes in 2017 as appropriate and expects an balance-sheet unwinding as likely to start in 2017.
- Ben Bernanke subtly criticized the BOJ: It’s disappointing the 2% CPI target had to be pushed back, policy transmission channels are near their limits and the government and BOJ have to do better coordinating fiscal and monetary policy.
- Today calendar is light with speeches of ECB Praet and Draghi, a US 5-yr Note auction and the FOMC Minutes.
Currencies: Dollar Decline Shows Tentative Signs Of Slowing
USD finally gets (modest) interest rate support
On Tuesday, the trends of the previous days initially persisted. USD/JPY (111.10) struggled to avoid further losses even as sentiment on risk remained constructive. The euro remained well bid supported by very strong EMU data. Finally, the dollar received interest support later in the session, lifting the USD currency off the recent lows. EUR/USD dropped below 1.12 to close session at 1.1183. USD/JPY rebounded higher in the 111 big figure to finish the day at 111.78 (from 111.30).
Overnight, Asian equities show a mixed picture. Japanese equities are supported by a weaker yen. USD/JPY trades currently at 111.85. Chinese markets underperform after Moody’s cut the China debt rating to A1 from Aa3, stable outlook. The China rating downgrade also put additional pressure on the Aussie dollar. AUD/USD trades currently in the 0.7450 area (top around 0.7517 yesterday). EUR/USD is holding a tight range in the 1.1180 area.
Today, in the US the Existing Home sales (April) will be published. A slight decline at a high level is expected. This evening, the focus will turn to the minutes of the May FOMC meeting. For an in dept analysis see the fixed income part. We expect the report the confirm the Fed’s intention to raise rates in June. If the Fed would give concrete hints on the roadmap for its balance sheet reduction, it would be hawkish and USD supportive.
Over the previous days, the dollar hardly profited from the post-Turmp rebound of equities. Euro strength prevailed. Yesterday afternoon, fortunes finally changed in favour of the dollar. Recently, but not yesterday, interest rate differentials drifted gradually against the dollar. If the Fed minutes confirm the Fed’s intention to normalize policy further, interest rate differentials between the US and Europe shouldn’t go against the dollar anymore. The global equity performance is also a wildcard for USD trading. Yesterday, the dollar finally profited from a better equity sentiment. A risk-off correction, if it would occur, might be mixed for the dollar. However, we are not convinced on the safe haven characteristics of the euro. Over the previous days we suggested that the EUR/USD rebound has gone far. Yesterday’s price action suggests that the upside has indeed become tougher. We look to cautiously sell EUR/USD on upticks.
Technical picture.
The USD/JPY rebound ran into resistance two weeks ago. Wednesday’s selloff/ 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. Yesterday, the USD/JPY decline took a breather, but the global picture didn’t change fundamentally.
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 will become tougher. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD rally running into resistance as USD stages a comeback
EUR/GBP
EUR/GBP rally running into resistance
Yesterday, the news flow on the UK remained sterling negative. The terrorist attack in Manchester weighed on sterling early in the session. The CBI May reported sales were also softer than expected. EUR/GBP touched a new correction top in the 0.8675 area around noon, but this move was also driven by euro strength. Later, EUR/USD fell prey to profit taking as the dollar rebounded. EUR/GBP closed the session at 0.8628. The decline in cable was more modest. The pair closed the session at 1.2961.
Today, the UK eco calendar is empty. So sterling trading will be driven by to global moves in the dollar and the euro. If the EUR/USD rally takes a breather, the topside of EUR/GBP will probably also be capped. So, some profit taking on EUR/GBP shorts might be on the cards.
EUR/GBP rally to take a breather
