Sunrise Market Commentary
- Rates: Risk sentiment takes turn for the better, weighing on core bonds
Risk sentiment improved this morning as a worst case scenario was avoided for several events (North Korea, Hurricanes). The US Note future opened significantly lower, Asian stock markets gain around 1.5% and the dollar stages a cautious comeback. Today’s empty eco calendar suggests that global risk sentiment will dominate trading. - Currencies: Dollar sell-off to ease?
Investors adapted positions for all kinds of event risk at the end of last week, weighing on US bond yields and on the dollar. The pressure is slightly easing as sentiment turned risk on in Asia this morning. The dollar might look for a bottom in a session deprived of key eco data.
The Sunrise Headlines
- US equities ended last week nearly unchanged with Nasdaq underperforming (-0.5%). Risk sentiment took a turn for the better overnight as North Korea didn’t launch a missile on its founding day and as Irma’s force degenerated.
- Hurricane Irma smashed into Florida, leaving more than 3m properties without power. On Sunday afternoon Irma was downgraded from a Category 4 storm to Category 2.
- US officials are pushing the UN Security Council to ban North Korea textile exports, embargo oil sales to the country and prohibit it from renting out its workers abroad.
- The IMF should decide whether it will fund Greece’s current bailout programme by the end of the year and help Greece conclude a key bailout review on time, PM Tsipras said.
- Chinese authorities plan to shut down domestic bitcoin exchanges, delivering a final blow to a once-thriving industry of commercial trading for virtual currencies, which took off inside the mainland four years ago.
- NY Fed Dudley said that balance sheet reduction would commence "relatively soon". The next interest rate hike was more uncertain now due soft inflation that is proving less transitory than they originally thought, plus external global factors that are causing risk aversion.
- Today’s calendar is empty. The US Treasury starts its mid-month refinancing operation with a $24B 3-yr Note auction. ECB Coeure speaks on monetary policy in non-standard times.
Currencies: Dollar Sell-Off To Ease?
USD sell-off eases
FX markets searched for the right strategy to avoid event risk this weekend or in the near future (storms, North Korea). The dollar was most sensitive of the major currencies. EUR/USD set a new correction high in the high 1.20 area early in the session. The rally stalled later, but there was no sign of any meaningful correction. EUR/USD closed the session at 1.2036. USD/JPY remained below the key 108.13 area and finished at 107.84.
Risk sentiment on Asian equity markets is clearly positive this morning. The damage of Hurricane Irma is very substantial, but markets apparently assume that the impact on the US economy is manageable. The tensions between the US and North Korea remain in the headlines as the US called for a new UN vote on tougher sanctions against North Korea. It is not clear whether this resolution will pass. US bond yields opened higher this morning easing some pressure on the dollar after last week’s sell-off. USD/JPY returned north of 108 (currently 108.35). The gains of the dollar against the euro are more modest. EUR/USD trades in the low 1.20 area. The yuan declined this morning after Chinese policymakers removed a cash requirement on forward buying of USD. The move might be an attempt to prevent further yuan gains.
The US eco calendar is empty and the EMU one contains only the BdF industrial sentiment survey for August and Italian production for July. None of these will affect markets. Following some leaks about the discussions inside the ECB last Thursday, we will closely listen to the speech of ECB Executive Board member Coeuré at an ECB workshop (Monetary Policy in non-standard times). The euro could get some support if he indicates that the debate on ECB tapering is already quite well in progress. However, global risk sentiment will probably dominate USD trading. At the end of last week, markets were positioned for a very negative scenario on hurricane Irma and North Korea. Both issues are still developing. Hurricane Irma eases, but its impact on the US economy is still highly uncertain. It is also unclear whether the US’s proposal to the UN on North Korean sanctions will be accepted. If China or Russian vetoes the bill, it might prevent further action from North Korea short term. This would be a defeat for the US, but it might temporary ease tensions. Maybe it can be a slight USD supportive
Global context. Last week, the ECB delayed the communication on APP tapering till October and Draghi kept a soft tone. However, the euro remained strong. Markets apparently take the view that ECB policy normalisation will come anyway. At the same time, the dollar continued to lose interest rate support as global uncertainty kept US yields on a downward trajectory. The decline in US yields and of the dollar has probably gone far enough given recent US eco data, which were still fairly good. However, until now this assessment didn’t help the dollar short-term. The dollar in the first place needs an improvement in global sentiment and higher yields. US data will probably become noisy due to the impact of the hurricanes. This might cloud the outlook on the Fed strategy and might complicate a sustained USD rebound.
Sentiment on the dollar remains fragile and this is visible in the technical picture of both EUR/USD and USD/JPY. EUR/USD last week set a minor new correction top at 1.2092. A return below 1.1823 would be a technical sign that the EUR/USD rally has run its course short-term. We are not that far yet. USD/JPY tries to regain the previous range bottom at 118.13, but for now, the downtrend remains also intact. So, more confirmation is needed to conclude that the dollar is bottoming.
EUR/USD holds near cycle top. Rally to slow?
EUR/GBP
Sterling rebound continues
There were again plenty of headlines on the stalemate in the Brexit-negotiations last Friday while the UK eco data calendar was well filled. However, those topics played no important role in sterling trading. The rise of the euro took a breather early in Europe and sterling gained momentum against the single currency. UK data were OK, but had little impact on trading. Sterling momentum improved further later in the session. Sterling evidently extended gains against a bleeding dollar, but EUR/GBP resisted the overall strong bid in the euro. EUR/GBP closed the session at 0.9119. Sterling showed remarkable resilience.
The Brexit debate will again dominate the headlines. Today, the UK government tries to find a majority for its Brexit bill that will allow the government to copy EU law into UK law. A positive vote might be a slightly positive for sterling. Even so, last week’s price action suggests that sterling is gaining some momentum anyway. This correction might continue as investors further reduce sterling shorts after the Summer sell-off.
From a technical point of view, EUR/GBP cleared 0.8854/80 resistance (top end June), opening the way for further gains. The move was the result of euro strength. Simultaneously, UK price data were soft enough to keep the BoE sidelined. MT, we maintain a buy EUR/GBP on dips approach as we expect the combination of relative euro strength and sterling softness to persist. The 0.9415 ‘flash-crash spike’ is the next target on the charts. However, we wait for a correction, e.g. to the technical support in the 0.88/89 area, to sell sterling again versus the euro.
EUR/GBP sterling rebound continues
