Sunrise Market Commentary
- Rates: Can Trump revive reflationary spirits?
Today’s eco calendar won’t impact trading. Trump’s tax plan is the biggest wildcard which could revive some reflationary spirits on markets. Together with the US Treasury’s supply operation, it suggests and underperformance of the US Note future vs the German Bund. - Currencies: ‘Trends’ of euro softness and dollar rebound to continue?
EUR/USD finally dropped below 1.1823 support. The euro continues to trade soft after the German election. At the same time, the dollar is supported by a growing market belief on a December Fed rate hike. These trends might continue today. The Trump tax cut plans are a wild card. The recent sterling short squeeze shows tentative signs of slowing.
The Sunrise Headlines
- A modest rebound in tech stocks and remarks from Fed Yellen did little to budge US equities indices, leaving the Dow Jones down for the day and the S&P 500 and Nasdaq with very slight gains. Asian risk sentiment is mixed overnight
- Federal Reserve chair Janet Yellen said policymakers ought to be careful of “moving too gradually” on monetary policy despite “significant uncertainties” over inflation.
- President Trump warned North Korea that any US military option would be "devastating" for Pyongyang, but said the use of force was not Washington’s first option to deal with the country’s ballistic and nuclear weapons program.
- Annual profits at China’s industrial companies rose 24% in August, accelerating from the previous month in an indication economic growth remains in good shape even as signs emerge of fading momentum following a robust first half.
- Emmanuel Macron made an impassioned appeal to EU leaders to be “bold” against the threat of populism as he presented a cascade of initiatives to overhaul the bloc.
- Republicans’ latest push to dismantle the Affordable Care Act sputtered to an end on Tuesday when Senate GOP leaders scrapped a vote on a bill that had failed to gain sufficient traction within their party.
- The eco calendar contains EMU M3 data, US durable goods orders and pending home sales. The RBNZ and CNB decide on rates, Fed Bullard & Brainard speak, US president Trump announces tax plans and the US Treasury taps the market.
Currencies: ‘Trends’ Of Euro Softness And Dollar Rebound To Continue?
Dollar extends cautious rebound
There was no distinct theme to guide FX trading yesterday. The euro extended Monday’s correction and dropped below the EUR/USD 1.1823 support. The dollar was also better bid overall. Fed’s Yellen defended the strategy of gradual rate hikes (see fixed income section). The dollar surprisingly lost a few ticks on her comments, but preserved most of its intraday gains. EUR/USD ended the day at 1.1793 (from 1.1848), below the 1.1823 support. USD/JPY finished at 112.24 (from 117.73). The trade-weighted dollar also rebounded off the lows.
There is no clear trend on Asian markets this morning. Japanese equities struggle to build out gains even as USD/JPY remains well bid. The pair trades in the mid 112 area. Chinese equities outperform. Industrial profits rose from 16.5% to 24.0% Y/Y. Brent oil holds just below $ 59 p/b after a modest correction yesterday. EUR/USD trades in the 1.1775 area, marginally lower from yesterday’s close. So, the dollar is able to maintain yesterday’s gains.
Today’s EMU economic data releases (M3 Money supply and confidence data in France and Italy) are of second tier importance for FX. In the US, durable orders dived 6.8% M/M in July, largely a Boeing effect. Excluding transportation, orders were up a decent 0.6% M/M. The market expects a sluggish rebound in August (1% M/M), but we see risks on the upside. Fed governors Brainard and Bullard speak. Bullard didn’t spoke recently, but he is concerned about too low inflation. The EMU data and Fed speaker won’t be a dollar game-changer. A decent durable orders report might be slightly supportive for the dollar.
Yesterday’s price action in the major dollar cross rate far from spectacular. However, the ‘trends’ of a gradual dollar rebound and tentative euro softness persisted. These trends might continue today. The announcement of a new ‘tax plan’ of the Trump administration is wildcard. Question is how concrete the plan will be and whether it has a chance of Congressional approval. If the market see progress on this key issue, it might be USD supportive
From a technical point of view EUR/USD hovered in a consolidation pattern between 1.1823 and 1.2070. It took time for the pair to break below the 1.1823 range bottom, but the break occurred yesterday. More confirmation is needed that the bottoming out process in US yields and in the dollar against might be the start of more sustained EUR/USD gains. Even so, yesterday’s move is encouraging for USD bulls. Next support in EUR/USD comes in 1.1662 The day-to-day momentum in USD/JPY was constructive recently, but it was primarily due to yen weakness. USD/JPY regained the 110.67/95 previous resistance, a short-term positive. The 114.49 correction top is the next important reference. The cross rate remains sensitive to changes in overall risk sentiment
EUR/USD dropped below 1.1823 support as ‘trends’ of a USD rebound and euro softness persist
EUR/GBP
Sterling short-squeeze to slow?
EUR/GBP set a minor new correction low the 0.8755 area yesterday morning driven by a large order and an overall euro decline. However, EUR/BP gradually decoupled from the EUR/USD decline and some sterling selling kicked in. The recent sterling short-squeeze might be losing momentum. EUR/GBP closed the session at .0.8763, near the recent low. Cable traded with a negative intraday bias and closed the session at 1.3458. The Brexit negotiations restarted, but comments from EU’s Barnier suggested not much progress despite the modestly positive comments after PM May’s speech last week.
Today, the CBI September retail data will be published. Reported sales are expected to rebound from -10 to 8. Official retail sales were strong in July and August. Another strong figure might reinforce the case for BoE rate hike. However, the FX reaction to the CBI data is usually modest. We look out after yesterday’s disappointing sterling performance for more signs that the sterling short-squeeze loses momentum. Overnight price action suggests some GBP softness.
EUR/GBP made an impressive uptrend since April and set a MT top at 0.9307 late August. Recent UK price data amended the dynamics and the reversal of sterling was reinforced by hawkish 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. However, the prospect of (limited) withdrawal of BOE stimulus put a solid floor for sterling ST term. We look how far the current correction goes. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break
EUR/GBP: near recent lows, trends shows tentative signs of slowing.
