Sunrise Market Commentary
- Rates: Summer trading set to continue
Today’s eco calendar remains razor thin with only US housing starts and building permits. Normally they are no market mover, but a downward surprise won’t go unnoticed and could benefit US Treasuries further. Overall, we expect trading to remain confined to tight ranges ahead of the ECB. If any, core bonds could trade with a small upward bias. - Currencies: Dollar decline slows, at least for now
Yesterday, the USD was aggressively sold in Asia and in Europe, but tensions eased in US trading. US housing data probably won’t be a game-changer for USD trading. The dollar desperately needs high profile good news, but that isn’t available right now. Some consolidation might be on the cards today, but a sustained USD rebound isn’t around the corner yet.
The Sunrise Headlines
- After an initial decline due to the failure of Republican efforts to end Obamacare, American equity markets rebounded. The tech-heavy Nasdaq closed at a record high. The good mood transferred to Asian markets.
- The Australian Prudential Authority announced that the country’s four major banks would need to have tier 1 capital ratios of at least 10.5%. The announcement was less onerous than expected.
- China’s holdings of US Treasuries climbed to the highest level since the country ceded its status as America’s largest creditor nation to Japan last year. China’s total holding of US paper rose by $10B from a month prior to $1.1T in May.
- Greece’s return to bond markets is held off partly due to a ceiling set by the IMF on the amount of debt the country can hold, according to unnamed officials. The IMF is expected to discuss a new credit line to Greece tomorrow.
- US President Trump said he was disappointed about the collapse of Republicans’ efforts to replace or repeal Obamacare and added that his plan was now to “let Obamacare fail”.
- Not much on the eco calendar today apart from the US housing starts and building permits data and a German bond auction
Currencies: Dollar Decline Slows, At Least For Now
Dollar decline takes a breather
On Tuesday, the dollar nosedived after Conservative lawmakers in the US admitted that a repeal/replacement of Obamacare won’t occur anytime soon. Dollar selling was aggressive in Asia and in Europe, but eased later in US dealings. EUR/USD settled north of the 1.1489/1.15 resistance and finished the session at 1.1554. LT interest rate differentials between the US and Germany narrowed further. USD/JPY dropped temporary below the 112 handle but finished the day at 112.07.
Overnight, Asian equities mostly show modest gains as the tension due to the Obamacare stalemate are ebbing. USD/JPY stabilizes near the 112 pivot. EUR/USD trades in the 1.1535 area, off yesterday’s correction top (1.1583 area). There is no high profile story to guide trading. Investors are looking forward to tomorrow’s BOJ and ECB policy meetings. The Aussie dollar takes a breather after its recent impressive run. AUD/USD is changing hands in the 0.7920/25 area.
Today, the eco calendar is thin with only US housing starts and permits able to move markets. They will get more attention than usually. Starts disappointed over the previous three months, permits during three of the last four months. A rebound is expected as special (weather) factors were probably in play during spring. If the rebound fails to materialize, it might weigh push US yields and the dollar lower. In a day-to-day perspective, we expect some USD calm to return as investors are looking forward to tomorrow’s BOJ and ECB decision. We don’t expect a meaningful rebound of the dollar. Investors will be cautious to be euro short going into the ECB meeting. We expect the ECB to maintain a balanced approach, but hints on a gradual policy normalisation may trigger more euro gains.
In a broader perspective, the dollar was in the defensive of late. Mediocre US wage growth, Yellen’s focus on the recent setback in inflation and soft eco data made markets questioning the pace of future Fed normalisation and weighed on the USD. Initially, EUR/USD didn’t retest the 1.1489/1.15 resistance, but this area was broken yesterday on the failure to replace Obamacare. In a longer term perspective, the market discounts very little Fed policy normalisation. At some point this might lend the dollar support. However, in a day-to-day perspective there is no reason to try to catch the falling USD. The dollar needs high profile good news and that isn’t available at this stage.
USD: technical picture worsens further
End June, EUR/USD rebounded above the 1.1300/66 resistance. The payrolls and other recent data were not good enough to trigger a sustained USD rebound. Yesterday EUR/USD broke beyond the 1.1489/1.15 resistance. This break opens the door to the LT-correction tops at 1.1616/1.1714. A break would end the long consolidation that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area is not easy to break. We don’t preposition for a break, but the pressure is mounting. Return action below 1.13 would be a first indication of a loss in upside momentum. EUR/USD 1.1119/10 is the next support.
The USD/JPY rally ran into resistance in May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair above the 112.13 correction top, but follow-through gains remain modest. USD/JPY 114.37 resistance was tested, but for now the test is rejected. This suggests a pause in the recent USD/JPY uptrend. We stay cautious on USD/JPY long positions despite the recent decent performance.
EUR/USD nears top of LT consolidation pattern as dollar tumbles on failure to repeal Obamacare act
EUR/GBP
EUR/GBP holding near recent top
Sterling was mostly driven by technical considerations of late. Eco data again came in play yesterday. UK CPI unexpectedly declined from 2.9% Y/Y to 2.6% Y/Y (2.9% was expected).The report eased market expectation/speculation that the BoE would raise its policy rate in the near future. EUR/GBP jumped from the 0.88 area to levels just shy of 0.89 and closed the session at 0.8860. EUR/USD strength reinforced the move. Cable initially lost a full big figure despite broad-based US weakness but rebounded slightly later as USD-selling eased. The pair finished the session at 1.3040.
Today, there are no important eco-data in the UK. Given the thin calendar in the US and Europe, trading in the euro and to dollar will probably also provide little guidance. Brexit remains a wildcard, but it is probably too early to expect big news from the negotiations. So, sterling might also shift into consolidation mode today.
From a technical point of view, EUR/GBP recently broke above the 0.8854/66 resistance (2017 top) to set a new correction top north of 0.89, but the move finally fell prey to profit taking (sterling short squeeze). A break below 0.8720 would suggest that upside momentum is easing. For now, we see all sterling rebounds as technical in nature and don’t expect them to last very long. We still look to buy EUR/GBP on more pronounced dips. For that the happen, EUR/GBP probably needs some help from a correction in EUR/USD. This isn’t the case yet
EUR/GBP correction short-lived as sterling declines again after soft inflation data
