Sunrise Market Commentary
- Rates: Core bonds sharply lower
Various factors contributed to a sharp correction lower of core bonds. Is this the beginning of a countertrend? We hope it is, but more evidence is needed. - Currencies: Post-Fed USD rebound to slow?
Yesterday, the dollar rebounded as US shorts were squeezed. The Fed was less soft than expected. Remarkably , the EUR/USD declined occurred as interest rate differentials developed in favour of the euro. We don’t expect this process to continue. Some EUR/USD consolidation might be on the cards. The post-BoE rally of sterling might also slow.
The Sunrise Headlines
- Emmanuel Macron is set to crush the mainstream parties in Sunday’s second round of polling. The French president’s party is projected to win as many as 470 of 577 seats in the lower house, according to recent polls.
- Greece’s creditors agreed to release 8.5 billion euros in new loans for Athens, ending months of uncertainty on whether Greece could meet large bond payments due in July. They did, however, postpone the decision on debt relief to mid-2018 and there is no deal yet on financial participation by the IMF.
- The BOJ decided to keep its monetary policy unchanged as inflation in Japan is still far away from the 2% inflation target. It will continue to manage the yield curve through a negative interest rate and buying trillions of yen bonds.
- Theresa May’s Conservatives have reached broad agreement with Democratic Unionists on a program for governing the UK, buying the prime minister crucial time as she seeks to finalize a longer-term agreement with the DUP.
- The yen lost ground after the BOJ decision, spurring advances in Japanese and other Asian stocks. The FTSE 100 and S&P 500 futures pointed slightly higher. The dollar and pound were steady while 10-year Treasury yields edged higher.
- Brent crude held losses, trading near a seven-month low (support).
- Today’s eco calendar is light today with EMU consumer inflation (final figure), US housing starts and permits and the University of Michigan sentiment indicator coming out. A policy meeting is scheduled for the Bank of Russia and Kaplan (Fed) will speak in Dallas.
Currencies: Post-Fed USD Rebound To Slow?
USD/JPY rebounds north of 111 post FED/BOJ
Yesterday, some further USD short-covering occurred as the Fed intends to extend policy normalisation. EUR/USD dropped further to the 1.1150 area, even as interest rate differentials narrowed against the dollar. USD/JPY also rebounded despite a correction in equities. EUR/USD finished the session at 1.1145. USD/JPY closed the day at 110.93.
Overnight Asian equities are trading mixed. Japanese equities outperform as they profit from yesterday’s rebound of USD/JPY. The rebound continues this morning. USD/JPY trades in the 111.25 area. The BOJ left its policy unchanged as expected. The Bank was slightly more upbeat on consumption and the global economic context. The debate on how to prepare a potential exit is gradually starting, but BOJ’s Kuroda will probably indicate at the press conference later today that no policy change is imminent. Even so, he might face tough questions on this issue. The dollar maintains yesterday’s gains against the euro. EUR/USD hovers in the mid 1.1150’s.
Today, the focus is on the US data. The US housing starts and permits are expected to have rebounded in May after some correction in March and April for starts and April for permits. The indices may be topping out after reaching peak values some months ago, but we don’t expect a sustained downtrend yet. US Michigan consumer sentiment is expected to have stabilized in June, but we see upside risks. Markets will look also to the inflation sub-indices that have fallen in recent months. In particular the Michigan consumer confidence has market moving potential in case of a big deviation from consensus.
The key question is whether yesterday’s post-Fed repositioning will continue. We assume that the EUR/USD decline might slow, at least temporarily. Yesterday interest rate differentials narrowed in favour of the euro, but the single currency lost against an overall strong dollar. This kind of development probably won’t go on forever. That said, the topside in EUR/USD looks better protected. So a cautious sell-on upticks approach is preferred in the post-Fed era. USD/JPY also rebounded nicely yesterday. A positive equity sentiment might protect the USD/JPY downside, but we are still not convinced of a sustained rebound.
Technical picture
The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative and driving the pair further down in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair beyond a firs minor resistance at 110.81. If confirmed, it might be an indication that USD/.JPY downside momentum is easing. For now, were remain cautious to preposition for a real U-turn yet.
Early May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top to a corrective in the 1.12 area. The pair tested the 1.1300 area going into the FOMC decision, but the test is rejected. So the Trump top/correction top at 1.1300/1.1366 proved to be a solid resistance. USD sentiment will have be very negative to clear this hurdle. A return below 1.1023 would indicate that the upside momentum has eased.
EUR/USD: test off 1.1300/66 resistance rejected. EUR/USD returns lower in the established trading range
EUR/GBP
Sterling receives unexpected BoE support, but…
Yesterday, the BoE kept its policy unchanged as expected. However, only five members supported the majority view. Three members unexpectedly voted in favour of a rate hike as the BOE expects inflation to move beyond 3% in Autumn and as inflation is expected to stay above target for a prolonged period of time. EUR/GBP dropped from just below 0.88 to the 0.8725 area and closed the session at 0.8737. Cable jumped from 1.27 to just below 1.28, but eased again later as the dollar was also well bid. The pair finished the session at 1.2758.
There are no important eco data in the UK. Markets will still ponder the impact of yesterday’s BoE vote. The BoE support for a rate hike was a surprise, but we maintain the view that the BoE will remain cautious to raise rates as political and economic uncertainty remains elevated. The focus will again turn to the formation of a new government and to the start of the Brexit negotiations. We don’t expect the political uncertainty to have an overwhelming negative impact on sterling today. Even so, it might be enough to slow the positive sterling momentum after yesterday’s BoE decision.
From a technical point of view, EUR/GBP extensively tested the 0.8854 area (2017 top), but a real break didn’t occur. Some consolidation might be on the cards after yesterday’s EUR/GBP correction. However, the broader technical picture hasn’t changed. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing. We expected such a break to be difficult. A EUR/GBP buy-on-dips approach is still favoured
EUR/GBP: correction of 2017 top accelerates after BoE vote
