Sunrise Market Commentary
- Rates: Will the sell-off take a pause or will strong US data hit especially US bonds?
The US ISM could be stronger than expected today, but traders might be hesitant to react ahead of tomorrow’s holiday. We do expect strong US labour market data later this week, which might give US Treasuries the lead in the global sell-off. German bonds face tough resistance. A sell-on-upticks might therefore be appropriate, unless a break occurs. - Currencies: US data to help the dollar
US data will be key this week. Today, the US manufacturing ISM is expected at a decent level. An upward surprise might restore confidence on the US recovery and on the dollar. If so, last week’s EUR/USD top might become a first resistance.
The Sunrise Headlines
- US stocks closed Friday with slight gains (S&P 500 at +0.15%). Asian stock markets continue on this path as they also struggle to gain traction in early trading.
- Japanese PM Abe’s Liberal Democratic Party suffered an historic defeat in an election in Tokyo (losing half of its seats), signalling trouble ahead for the Abe, who has suffered from slumping support because of a favouritism scandal.
- Japan’s Tankan survey of business conditions at Japan’s large manufacturers jumped to 17 in Q2 from 12 in Q1, besting a median forecast of 15. Business conditions also improved more than predicted for SME manufacturers
- The Japanese Nikkei-Markit PMI increased to 52.4 in June from 52 in May. Manufacturers upped their purchasing activity on new orders and higher production requirements. Employment rose too.
- The China Caixin-Markit manufacturing PMI rose to 50.4 in June after falling into contraction in May (49.6 in May, consensus of 49.8). Growth in output and new orders rose marginally, while employment continued to contract.
- China and Hong Kong have launched a bond trading link that allows foreign fund managers to trade in China’s $9 trillion government, agency and corporate debt markets without the need for an onshore account.
- The eco-calendar’s most interesting releases are the UK’s manufacturing PMI, the US manufacturing ISM and the Eurozone unemployment rate
Currencies: US Data To Help The Dollar
US data to help the dollar?
The strong three-day EUR/USD rally ran into resistance Friday, but there was also no real USD rebound. Yield differentials widened slightly in favour of the dollar. US equities outperformed European ones. EUR/USD closed at 1.1426 versus 1.1440 on Thursday. USD/JPY traded in a small band. The yen started strong, but USD/JPY closed with a small gain at 112.39 as US equities kept up well. Appetite to take additional positions was clearly missing, as it was the final the day of the quarter and as many US traders prepared for a long weekend with US markets closed for the 4th of July holiday tomorrow.
Overnight, Asian equities are trading mixed. The Japan Tankan business sentiment was stronger than expected (see headlines). The Caixin China manufacturing PMI also improved slightly. Decent regional data don’t help the yen this morning. USD/JPY opened slightly in the red, but reversed the initial loss. A further rise in the oil price and a rise in US yields are supporting the dollar. USD/JPY trades in the 112.50 area. EUR/USD dropped slightly to the low 1.14 area and trades currently at 1.1415.
The attention turns this week to the US eco data. We expect an improvement after the lacklustre performance of late. EMU data are less important with today the final June manufacturing PMI and the unemployment rate. The US manufacturing ISM is expected to rise slightly, but we see risks to the upside of consensus. Further out this week the US labour market data will be of paramount interest. We see upward risks. The Minutes of the FOMC meeting might also be interesting to get a better take on the start of the balance sheet tapering and on the different value the Fed attributes to a strong labour market on the one hand and lower inflation on the other hand. The EMU data are less important, but after the bond sell off, it will be interesting whether ECB speakers will try to change market views on the outlook for policy.
In a daily perspective, we look out whether the US ISM might be strong enough to help a USD rebound against the euro. A decent report, which we expect, should help a topping out process after the recent EUR/USD rally. In case of good US labour data, we see also room for a re-widening of the USD/EMU interest rate differential as the recent rise in German/EMU yields was quite impressive. That said, the dollar remains vulnerable in case of a negative surprise. We start the week with a tentative USD-positive bias and look out whether last week’s top in EUR/USD might become a more solid resistance. A decent US ISM and a constructive equity sentiment might also be a USD/JPY positive. However, it will be difficult to take out the recent top just below 113. For that to happen, as strong Payrolls report is probably needed.
Technical picture: USD looking for a bottom
A combination of hawkish ECB comments and weaker US eco data pushed EUR/USD last week above the 1.1300/66 resistance area with a new high at 1.1448. The next resistance is now the 1.15 area. Further out LT correction tops are coming in at the 1.1616/1.1714. A break would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area will be difficult to break for now. A drop below 1.1119 would suggest the pair enters calmer waters.
The USD/JPY rally ran into resistance in early May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair the 112.13 correction top early this week, but there were no real follow-through gains , So, the break isn’t confirmed yet. A break would improve the ST-picture. Even so, were remain cautious on further USD/JPY gains.
EUR/USD Will good US data support the dollar and cap the EUR/USD rally?
EUR/GBP
Sterling extends rebound
On Friday, cable approached key 1.3044 resistance in Asia, but a real test didn’t occur, sending GBP/USD temporary lower again. UK data made no difference: Outdated Q1 GDP was confirmed at a weak 0.2% Q/Q. Trading in Cable and EUR/GBP was mostly technical in nature. Some sterling short-covering prevailed at the end of the month/quarter. EUR/GGBP closed the session at 0.8771 (from 0.876). Cable finished the day on a strong bid at 1.3030.
Today, the UK Manufacturing PMI is expected little changed at 56.3 from 56.7. This is still a healthy level and other UK data were not too bad of late. So, we assume that the report might be considered constructive in the markets. The past weakening of sterling is a positive for the UK manufacturing sector. So, the report might support a further technical comeback of sterling. The Brexit negotiations are on ongoing issue. Any progress on the rights of EU/UK citizens might suggested a less hard Brexit. All in all, we see EUR/GBP staying below the key resistance of 0.8866/80 and cable’s fate will depend on EUR/USD. If the cross would move higher, cable may test the 1.3048 resistance but a break looks unlikely.
From a technical point of view, EUR/GBP set a minor top north of the 0.8854/66 resistance (2017 top), but a sustained break didn’t occur. Recent setbacks will probably block further gains ST. A return below the 0.8655 correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured.
EUR/GBP topside test rejected. A modes/temporary sterling comeback might be on the cards
