Sunrise Market Commentary
- Rates: Eyes remain on the Fed
Core bonds lost slightly more ground yesterday in thin trading conditions. Today’s eco calendar contains eco data with little market moving potential, especially ahead of the FOMC. We expect neutral trading within small ranges. Since last week, market reduced dovish bets, making the technical picture and positioning more neutral. - Currencies: Sterling rebound runs into resistance
The dollar showed no clear trend yesterday. Yen weakness remains the key trend among the major currency cross rates. Today’s eco calendar probably won’t inspire big directional USD bets going into tomorrow’s FOMC policy announcement. The easiest part of the sterling rally on recent hawkish BoE comments is apparently behind us.
The Sunrise Headlines
- US stock markets closed with limited gains (+0.2%) in a session devoid of eco data with investors waiting tomorrow’s FOMC meeting. Overnight, most Asian bourses lose slightly ground with Japan outperforming (yen weakness).
- BoE Carney said Brexit is undermining the UK’s supply capacity, making it harder for the economy to grow without generating inflationary pressures. That’s one reason why the BoE may need to hike rates in the coming months.
- The Bank of Canada will pay close attention to how the economy responds to both higher interest rates and a stronger CAD, and remains data-dependent as it looks ahead to further decisions on interest rates, BoC Lane said.
- Senate Republicans are considering writing a budget that would allow for up to $1.5 trn in tax cuts over the next decade, said people familiar with the discussions. Budget talks are continuing and no final decision has been reached.
- Theresa May has moved to tighten her grip on the UK’s disjointed Brexit operation, shaking up her negotiating team and dismissing efforts by her foreign secretary, Boris Johnson, to push her towards a hard exit.
- Hurricane Maria barrelled into the eastern Caribbean as a Category 5 storm, ripping roofs from homes, knocking out electricity on the island of Dominica and threatening others in the region already ravaged by Hurricane Irma.
- Today’s calendar contains German ZEW investor sentiment, US housing starts and building permits
Currencies: Sterling Rebound Runs Into Resistance
Yen weakness prevails. Dollar trades mixed
Yesterday, technical considerations drove USD trading in the absence of hard news. Core yields traded with a slight upward bias. This rise weighted on the yen with USD/JPY and EUR/JPY breaking through key resistance (recent highs). There was no directional impact on EUR/USD. The pair hovered in the mid 1.19 area.The pair finished the day at a1.1954. USD/JPY closed the session at 111.57.
Overnight, Asian equities trades with modest losses. Japan outperforms on catching up to do after yesterday’s holiday and yen weakness. PM Abe is rumoured to call snap parliamentary elections. Markets assume that a continuation of the current policy also includes an extension of the ultra-loose BOJ policy. This is an additional negative for the yen. The yuan extends its recent decline. EUR/USD maintains a cautious upward bias (1.1975 area). There is no indication of broad-based USD strength going into tomorrow’s FOMC decision.The trade-weighted dollar (91.86) is going nowhere.
Today the eco calendar is again only modestly interesting. The September German ZEW economic confidence survey is expected little changed from August. As German equities recovered in September, we have no reasons to distance us from consensus. The market reaction to the release is mostly modest at best. In the US, housing starts and permits are expected respectively slightly higher and slightly lower in August. Sales look to have peaked, but no such sign yet from permits, which urges for caution in interpreting the housing market. Markets will look forward to an tomorrow’s Fed decision. For an in extenso analysis see the fixed income part of the this report. The focus will be on the reduction of the balance sheet, but the ‘dots’ are important too. We expect the ‘median dots’ for December 2017 and for 2018 to remain unchanged. If so, it might be slightly supportive for the dollar. The speech of Trump before the UNand the US tax reduction debate are wild cards.
Last week’s cautious USD rebound (due to positive risk sentiment) was not convincing as soft US data created a mixed dollar context. Despite disappointing US data, core yields (in the US and EMU) extended their rise, suggesting that markets don’t expect an overly soft FOMC. This might prevent further USD losses going into the FOMC policy meeting
We did start the week with a neutral bias on the dollar. EUR/USD hovers in a sideways consolidation pattern between 1.1823 and 1.2070. It was disappointing for EUR/USD bears that last week’s correction didn’t reach this range bottom. More confirmation is still needed that the recent bottoming out process in US yields and in the dollar might be the start of more sustained USD gains (againstthe euro).
The day-to-day momentum in USD/JPY is more constructive. The yen trades weak across the board. USD/JPY regained the 110.67/95 previous resistance. This a short-term positive. EUR/JPY shows a similar positive picture. So, the yen might stay under pressure at least until the next event risk pops up.
EUR/USD consolidation off recent top, but no test of first significant support level.
EUR/GBP
GBP rebound losing steam
After a week of very strong gains on hawkish BoE talk, sterling finally fell prey to modest profit taking yesterday. Investors holding sterling longs took some chips off the table. BoE governor Carney confirmed recent BoE communication that chances of a rate hike have risen, even as Brexit contains plenty of risks for the UK economy. The speech of the BoE governor didn’t help sterling anymore though. It fell even prey to more profit taking. EUR/GBP closed the session at 0.8856. Cablefinished the day at 1.3495.
Technical considerations will probably prevail today as the calendar is emty. Markets will continue to look forward to PM May’s Brexit speech Friday. The sterling rally clearly lost momentum yesterday. We look out whether/how soon sterling can return to the recent correction top .If that move fails, the easiest partof the BoE rate hike rebound might be behind us.
From a technical point of view, EUR/GBP cleared the 0.8854/80 resistance (top end June), opening the way for a protracted August rebound. The move was the result of euro strength. Simultaneously, UK price data were soft enough to keep the BoE side-lined at the August meeting. Recent price data amended this story and the ST-trend reversal of sterling was reinforced by recent BoE comments. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of relative euro strength and sterling softness to persist. The prospect of withdrawal of BOE stimulus put a solid floor for sterling ST term. We look out how far the current correction has to go. EUR/GBP is nearing next support at0.8743 and 0.8652. We start looking to buy EUR/GBP on dips.
EUR/GBP: GBP-rebound rebound slows
