Sunrise Market Commentary
- Rates: Implied probability of March rate hike hits 50%
US Treasuries sold off after European trading after voting FOMC member Kaplan said that the Fed should hike rates sooner rather than later which means in the near future. Odds of a March rate hike hit 50% for the first time. Today, investors will probably take a wait-and-see approach ahead of President Trump’s speech in Congress. - Currencies: USD still in a limbo, even as Fed rate expectations rise
The dollar struggles to move away from short-term lows even as markets discount a rising probability of a Fed rate hike. EUR/USD is holding in the 1.06 area. USD/JPY struggles not to drift back lower in the established trading range. Will Trump’s statement be convincing enough to support Fed rate hike expectations and trigger renewed USD buying?
The Sunrise Headlines
- US equities ended marginally higher going into today’s key Trump speech before Congress. Overnight, the majority of Asian stock markets also trades with minor gains.
- President Trump, in an address to Congress tonight, will call for a $20B boost in current military spending and sharp cuts in other programs, and insist on raising budget caps that call for future cuts to defence outlays.
- Industrial output in Japan staged an unexpected reversal in January (-0.8% M/M) and contracted for the first time in six months. Japanese retail sales (0.5% M/M) returned to growth in January giving the best result since November.
- Australia boasted the smallest current account deficit in 15 years last quarter as booming resource exports delivered a whopping turnaround of A$8 billion to the nation’s finances, boosting company profits and economic growth.
- Dallas Fed Kaplan reiterated his view that policy makers should raise interest rates “sooner rather than later”, which “means in the near future”, and without paying excessive attention to market expectations.
- The odds that the Fed will lift rates at its next meeting hit 50% in an indication that there is an increasing likelihood the central bank will tighten policy next month, according to calculations on federal funds futures by Bloomberg.
- Today’s eco calendar heats up in the US with the second reading of Q4 2016 GDP, trade balance, Chicago PMI, consumer confidence and Richmond Fed manufacturing index. US President Trump addresses Congress.
Currencies: USD Still In A Limbo, Even As Fed Rate Expectations Rise
Dollar stays soft even as Fed rate expectations rise
On Monday, investors kept mostly side-lined ahead of the testimony of US president Trump before Congress today. Investor caution initially held the dollar near the recent lows. Later in US dealings, a rise in US yields reinstalled a cautious USD bid. The release of some details on Trump’s budget plans and comments from Fed Kaplan probably caused this bid. Whatever the reason, EUR/USD dropped from 1.06+ levels and closed the session at 1.0587. USD./JPY finished the day at 112.70 (after trading in the low 112 area for most of the day).
Overnight, Asian equities basically stay in wait-and see modus and are divided between small gains and limited losses. Japanese eco data were mixed (retail data) to soft (production), but had no lasting negative impact on the yen. USD trading still faces conflicting signals. Futures are discounting a 50 % of a March Fed rate hike. Still, investors are uncertain whether Trump will provide enough details to continue to reflation trade. The dollar is trading off the overnight highs against the yen and, to a lesser extent, against the euro. USD/JPY is again trading in the 112.50 area. EUR/USD changes hands just below 1.06.
Today, the US eco calendar is well filled, but probably only of moderate importance for markets. US Q4 GDP is expected to be upgraded to 2.1% from 1.9%, a small change and outdated. The Chicago PMI dropped sharply in January. A rebound to 53 is expected. For the Richmond Fed business sentiment, a small decline is expected. These business sentiment surveys fall a bit short with other surveys (NY/Philly Fed, Kansas). Even so, they won’t really change the broader picture ahead of the key ISM confidence tomorrow. Consumer confidence (Conference board) is expected to have declined from 111.8 to 111, still a very high level. Markets will also keep a close eye at the price indicators of the surveys. In globo, US eco data shouldn’t question the continuation of the reflation trade or the scenario of a Fed rate hike in the near future. In theory that should help to put a floor for the dollar. Of course, the focus for markets will remain on Trump’s appearance before Congress. For US yields and for the dollar, we look out whether Trump’s message will be strong/convincing enough to keep the probability of a March rate hike at 50% (or higher). Of late, investors reduced USD longs. So, there is probably room for some USD buying on dips if Trump gives a reasonable prospect on a pro-growth policy.
Global context. The dollar corrected lower since the start of January as the reflation trade slowed down. Two weeks ago, the dollar bottomed out, supported by Trump’s tax promise. Underlying euro weakness due to political uncertainty in the area is a factor too. We see 1.0874 as solid resistance and favour a sell EUR/USD on upticks approach. The downside test of USD/JPY was rejected. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains key support. Recent Fed comments were USD supportive, but had no lasting impact on yields. We keep a USD positive bias longer term, as the dollar might still get additional interest support if the Fed continues its normalisation process. For now, the momentum of USD/EUR is more convincing than in USD/JPY.
EUR/USD looking for clear guidance as markets await Trump
EUR/GBP
EUR/GBP still going nowhere near 0.85 barrier
Yesterday, sterling traded with a slightly negative bias, as press headlines indicating that the UK government is preparing a strategy to handle a new referendum on Scottish independence. A spokesman of PM May said that there was no need for a new Scottish referendum. EUR/GBP initially gained some further ground on the broader rebound of EUR/USD, but the rally stalled later in US dealings. EUR/GBP closed the session at 0.8509. Cable basically hovered sideways in the 1.24 big figure to close the session at 1.2442.
Overnight, the Lloyds business Barometer remained strong at 40, but was as usual ignored. No further eco data today. End of month repositioning might be slightly supportive for EUR/GBP. The EUR/USD trend will remain important. In the House of lords a detailed review of the Article 50 bill continues. Markets will keep an eye on any headwinds for the PM May’s Brexit strategy, but we assume that the impact on sterling will be limited. Earlier last week, the (temporary) acceleration of the euro sell-off pushed EUR/GBP to the 0.84 area. However, a sustained break lower didn’t occur. As is the case for EUR/USD (and for several other markets), there is currently no clear driver for sterling trading. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy. A sustained break below 0.8450 opens the way for a return to the 0.8304 correction low. We maintain a neutral bias on sterling short-term.
EUR/GBP: drifting higher from the recent lows, but to sustained trend.
