Sunrise Market Commentary
- Rates: Geopolitical tensions to give bonds some respite?
Strong US ISM aborted a sluggish corrective upturn during the US session with US Treasuries now underperforming Bunds. Geopolitical tensions may give Bunds some upside, but this might be temporary. Mind the technical pictures: red alert in the Bund and code orange for US Treasuries. Sell-on upticks preferred. - Currencies: Risk-off to set the tone for FX trading?
Yesterday, the dollar rebounded as investors anticipated good US eco data. Today, US markets are closed. Geopolitical tensions triggered a risk-off correction in Asia. Such a correction might cap the USD/JPY rebound. The impact on EUR/USD is less straightforward. A correction in EUR/JPY might weigh also weigh on EUR/USD.
The Sunrise Headlines
- US equities closed with modest gains for the S&P 500 with NASDAQ again underperforming (-0.49%) on tech declines. Initially, Asian markets followed but sentiment turned as Asian stocks dropped on political tensions and losses in technology shares.
- President Jinping complained about a ‘negative’ turn in China’s relationship with the US after several assertive US moves in Asia. Tensions are heating up in Asia as North Korea again fired a ballistic missile into the Sea Of Japan.
- The Reserve Bank of Australia is leaving its benchmark interest rate unchanged at 1.5%. There was little change in the RBA statement compared to previous months despite a general move of other central banks to more hawkish stances.
- The US manufacturing ISM was better than expected in June with a reading of 57.8 (55.3 consensus and 54.9 in May). Growth in production, employment and new orders indices point to a vibrant pace of activity in manufacturing.
- Multiple Nasdaq-listed stocks, including Amazon, Microsoft and Apple, saw their share price change to exactly $123.47 on multiple platforms. Nasdaq said this was due to ‘improper use of test data’ sent to third party data providers.
- Bank of Canada governor Poloz expects inflation to be ‘well into an uptrend’ in 2018 as the output gap in the economy closes. He added that the BoC should not wait to react until inflation hits the target otherwise it could be too late.
- With the 4th of July Holiday in the US, the eco-calendar is thin. The Swedish Riksbank rate decision and ECB’s Praet’s speech are the only interesting items on the agenda. The wildcard for today is the tension in international politics
Currencies: Risk-Off To Set The Tone For FX Trading?
Risk-off correction to drive FX trading today?
The dollar made a cautious comeback at the start of the week as investors prepared for key US data to be released this week. Interest rate differentials also (re)widened slightly in favour of the US currency. EUR/USD returned below the 1.14 handle. USD/JPY regained the 113 barrier. The EMU eco data were strong, but the euro didn’t profit. Later, the US manufacturing ISM printed a strong 57.8, but didn’t cause any significant additional USD gains as US markets headed into an early close. EUR/USD finished the session at 1.1364 (from 1.1426). USD/JPY extended its uptrend to close the day at 113.38 (from 112.3).
Overnight, sentiment on Asian equity market deteriorated during the session. Especially Hong Kong stocks are hit hard. A new missile test from North Korea played a role. Tech stocks also remain under pressure. The yen profits slightly from the intraday equity decline. USD/JPY is drifting back to the 113 area. EUR/USD is also losing a few ticks and trades in the 1.1345/50 area (EUR/JPY driven?). The Reserve Bank of Australia left its policy rate unchanged at 1.5%. The RBA maintains a constructive view on the economy but wage growth remains low. The RBA didn’t hint at a change in its policy bias, disappointing hawks. AUD/USD dropped from the 0.7680 area to the 0.7620 area.
Today, there are only second tier eco data in Europe and US markets are closed for the 4th of July National Holiday. In such a context, one expects directionless trading in thin markets. This might still be the case, but we keep an eye on equities after the intraday sell-off in Asia. Will the correction in tech stocks spread to other parts of the market. Will political tensions (North Korean, reaction of Trump/discord between the US and China) cause additional volatility going into this weekend’s G20 meeting? Of late, politics seldom was a lasting issue for global markets’ trading. Even so, we keep an eye on it.
Yesterday, the dollar was well bid as investors anticipated good US eco data this week. However, if sentiment on risk deteriorates, this picture might change. A risk-off correction might cap the recent USD/JPY rebound. Remarkably, EUR/USD declined this morning despite the risk-off sentiment. After the recent EUR/JPY rally, time might be ripe for a correction in this cross-rate. This could cap the upside in EUR/USD. More still, it could weigh on this cross-rate in case of a temporary risk-off.
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 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 last week, but follow-through gains were modest. So, the jury is still out. A sustained break would improve the ST-picture. Even so, were remain cautious on further USD/JPY gains
EUR/USD correcting off last week’s top.
EUR/GBP
Sterling declines against dollar; stable against euro.
Yesterday, the sterling trading was driven by the price moves in the dollar and the euro. The overall rebound of the dollar pushed cable back below the 1.30 barrier. There was also a small fall-out from the EUR/USD decline on EUR/GBP. The UK manufacturing PMI unexpectedly declined to 54.3 from 56.3. Sterling lost only modest ground after the release. EUR/GBP closed session at 0.8882 (from 0.8771). Cable finished the day at 1.2940.
Today, the UK construction PMI is expected decline slightly from 56.0 to 55.0. We see slight downside risks. The reaction of sterling to the release is likely limited. The Brexit negotiations are on ongoing issue. A risk-off sentiment, if it would occur, most often is a slightly negative for sterling. Short-term, we see EUR/GBP staying below the key resistance of 0.8866/80 as markets still digest the recent decline of sterling/rise of EUR/GBP. Cable’s fate will depend on EUR/USD.
From a technical point of view, EUR/GBP set a minor top north of the 0.8854/66 resistance (2017 top). A sustained break didn’t occur, causing a correction on the recent EUR/GBP rebound. 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
