Sunrise Market Commentary
- Rates: Range trading with US/UK markets closed
Today’s market calendar is extremely thin. US and UK markets are closed, suggesting low volume and sentiment and technically-driven trading. EMU M3 Money data are no market mover while ECB Draghi’s speech in European Parliament is a wildcard if he would prepare markets for the June 8 ECB meeting. - Currencies: Is enough USD softness discounted?
At the end of last week, the dollar decline slowed even as US eco data were mixed. Today, USD trading might take a slow start with US/UK markets closed. Later this week, key US data including the payrolls and manufacturing ISM might decide whether enough USD softness is discounted.
The Sunrise Headlines
- US stock indices ended nearly unchanged last Friday. The S&P 500 closed for the 20th time this year at a new record level. Overnight, risk sentiment marginally deteriorated with Japanese stocks outperforming.
- North Korea launched a ballistic missile from a military base on its east coast in the latest show of force from the regime in Pyongyang. The missile is North Korea’s 12th launch so far this year.
- Europe can no longer completely rely on other countries, Chancellor Merkel said, underlining her frustration with US President Trump at a G7 meeting of world leaders over the weekend. G7 leaders agreed to keep trade fair and fight protectionism, but the US took a separate position on climate change.
- SA President Zuma survived a bid by some members of the ANC’s top leadership to order his removal from office, according to sources. The decision increases the odds that he will survive a no-confidence motion in parliament.
- OPEC and non-members led by Russia decided last Thursday to extend cuts in oil output by nine months to March 2018 as they battle a global glut of crude after seeing prices halve and revenues drop sharply in the past three years.
- SF Fed Williams said three interest-rate increases this year makes sense as the central bank takes gradual steps to tighten monetary policy and shrink its balance sheet to prevent the economy from overheating.
- Today calendar is extremely thin with only EMU M3 money data. ECB President Draghi speaks in front of European Parliament. US and UK markets are closed.
Currencies: Is Enough USD Softness Discounted?
Tentative signs of USD bottoming?
At the end of last week, the dollar showed no clear trend. The US currency lost slightly ground on Wednesday evening and on Thursday as US yields declined after the publication of the FOMC Minutes. Dollar trading became again more balanced towards the end of the week. In technical trade, USD/JPY remained in the defensive, but at same time EUR/JPY and EUR/USD also faced selling pressure. The move wasn’t really due to risk aversion. US data were mixed and US equities traded stable near the all-time highs. USD/JPY finished the week at 111.33. EUR/USD closed the session at 1.1183
Overnight, Asian equities lose slightly ground with Japan outperforming. SF Fed Williams defended the case for three rate increases this year (including March), as he sees “the US economy is as close to the Fed’s dual mandate goals as we’ ve ever been”. He also advocates a very gradual reduction of the balance sheet. The comments are marginally supportive for the dollar, but there is no clear directional move. EUR/USD is trading in the 1.1165 area. USD/JPY hovers in a tight range in the 111.20/50 area.
Today, US markets are closed in observance of Memorial Day. In EMU, the M3 money supply data will be published, but they have usually only a limited impact on (FX) trading. ECB’s Nowotny speaks at an Austrian Central Bank conference and ECB’s Draghi talks before the European Parliament. Looking forward to next week’s ECB policy decision, markets will look for an indication on a change in the ECB’s forward guidance and on hints of scaling back policy stimulation. Of late, Draghi was very cautious on policy normalisation. The ECB president might give some subtle hints, but we expect him to maintain a balanced approach as the debate within the ECB is ongoing. Such a scenario might be neutral, maybe slightly euro negative in a daily perspective
Of late, the dollar traded soft. Recent US data were a bit disappointing and markets turned more cautious on the ability of Trump’s administration to execute its pro-growth agenda. This weighed especially on LT-term US yields and kept the dollar in the defensive. At the same time, the euro was well bid as markets assume that ECB policy could gradually become less easy further out this year. This picture hasn’t changed, but last week, there were tentative signs that the dollar decline could slow. Is enough USD softness discounted? The jury is still out.
We start the week with a more neutral bias on the dollar, especially against the euro. If US data don’t surprise on the negative side, the dollar decline might bottom out. This week’s payrolls and manufacturing ISM might be important in this assessment.
Technical picture
The USD/JPY rebound ran into resistance early May. A mini-sell-off/re-break below the 112.20 previous top aborted the uptrend and made the short-term picture negative even as US equities held up well. Return action lower in the 108.13/114.37 range is possible. Last week, 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 1.0821/1.0778 support (gap). However, poor US data and political upheaval finally propelled EUR/USD north of the 1.1023 range top. The pair reached a short-term correction top at 1.1268. The correction top at 1.1300/1.1366 is 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. This week’s US eco data might decide on a possible USD rebound
EUR/GBP
Sterling suffers as PM May’s lead in the polls declines
At the end of last week, sterling remained in the defensive. In technical trade, cable suffered more for a cautious USD rebound than the euro. Sterling also suffered from polls indicating that the lead of PM May’s conservative party in the June 08 parliamentary election might be less big than assumed of late. EUR/GBP regained the 0.8700 big figure and closed the session at 0.8731. Cable finished the session at 1.2804. So, the test of the 1.30+ area is rejected.
UK markets are closed today for the Spring Bank Holiday. Technical trading in thin market conditions might be on the cards. A further erosion in the lead of the PM May’s conservative party in the opinion polls might keep sterling in the defensive. Cable also looks more vulnerable to a rebound of the dollar compared to EUR/USD.
EUR/GBP rally continues even as euro global euro rebound slows
