Rates: US manufacturing ISM kicks off busy data week
Overnight events are bond friendly with China and the US struggling to agree a timetable for trade talks and the UK inching towards snap elections. The market reaction was muted though in Asia. Upside risks to today’s US manufacturing ISM can cause underperformance of US Treasuries but this week’s backloaded agenda might keep the reaction guarded.
Currencies: Sterling haunted by political headline risk
The dollar retained the benefit of the doubt yesterday and this might remain the case today. The US manufacturing ISM might confirm that the US economy remains in rather good shape, supporting the USD outperformance. In the UK, the Brexit process might be entering some kind of last straight line, raising sterling volatility.
The Sunrise Headlines
- US financial markets were closed in observance of Labour Day yesterday. Asian equities show no clear direction this morning. Stocks are trading mixed with Japan (+0.5%) outperforming peers.
- The Australian central bank has kept policy rates stable at 1%. The RBA expects growth to gradually strengthen to around trend and sees more signs of a stabilizing housing market. The Aussie dollar strengthened slightly.
- The US and China are having difficulties in setting up a meeting in September to continue trade talks. The issues arose after Washington rebuffed China’s request to hold off on the latest round of tariffs.
- According to leaked audio recording, HK leader Lam said that if she had a choice, she would resign to end the “unforgivable havoc” caused by introducing the extradition bill in June. Lam denied even considering (asking to) resign.
- New Zealand Finance minister Robertson said he still sees some solid data in the economy and expressed confidence about the fundamentals. He doesn’t see a case for unconventional monetary policy in the short term.
- South Korean August inflation hit the lowest on record (0% YoY). However, the central bank is not worried about deflation and expects prices to pick up again. The vice Minister of Finance said it is also preparing steps to revitalize demand.
- Today’s economic calendar contains US manufacturing ISM for August. Producer price inflation is due in the EMU. The UK government faces a key vote today which, if lost, could trigger new general elections
Currencies: Sterling Haunted By Political Headline Risk
Sterling haunted by political headline risk
EUR/USD drifter further south yesterday, confirming Friday’s break below the 1.1027/1.10 support area. The move was mainly technical in nature. Expectations for aggressive ECB easing next week and, to a lesser extent, rising Brexit tensions supported the move. At same time, the dollar remained strong overall. EUR/USD closed at 1.0970.
This morning, Asian equities mostly trade with modest losses as the US and China are rumoured to have difficulties to restart negotiations on trade. ‘By default’ USD strength persists. EUR/USD is drifting further south in the 1.09 big figure (1.0940 currently). USD/CNY extends gains (7.1825 area). AUD/USD rebounded back north of 0.67 after the RBA left its policy rate unchanged. The statement wasn’t that dovish.
Later today, the eco calendar is only modestly interesting. The US manufacturing ISM is the exception to the rule. A stabilisation at a rather low level (51.2) is expected. Other regional indicators don’t suggest a negative surprise, on the contrary. A decent figure might support the view that the US economy remains in rather good shape and confirm the market positioning that the ECB will have to take a more aggressive approach compared to the Fed. So, there is still no reason to fight the established EUR/USD downtrend trend in the short run. EUR/USD 1.0821/1.0778 (gap April 2017) is next support on the technical charts.
Sterling came again under pressure yesterday as the Brexit process is coming to a culmination point. The decline started after UK PM Johnson warned he will remove ‘rebels’ out of the conservative party if they support opposition action to delay Brexit today. Later, Johnson said that he would consider successful action of his opponents today as a no-confidence vote, which might trigger early elections. October 14 is rumoured as a potential election date. Today, all eyes will be on the Parliamentary vote this evening as the opposition (and conservative dissenters) will try to schedule a vote on a Brexit delay tomorrow. The next sequence of event remains highly uncertain. From a sterling point of view, question is whether current developments will ‘per se’ raise chances on a no deal Brexit. At least for now, this isn’t that sure. So, even as there will be plenty of headline risk, we are cautious to engage in ‘last minute’ sterling shorts
EUR/USD extends drop below 1.10 mark on ‘by default’ USD strength and as investors continue to anticipate aggressive ECB easing
