Sunrise Market Commentary
- Rates: Reflation trade back in the driver’s seat
Investors fell back under the spell of reflationary spirits after US President Trump announced details of his tax reform proposal. Core bond yield curves bear steepened and the US Note future loses more ground overnight. We expect more bond losses today, especially in case of higher than expected German inflation data. - Currencies: Higher US yields support USD comeback
The reflation trade supported the dollar yesterday. There are plenty of eco data today, but they probably won’t change the broader picture. The USD rebound might take a breather, but higher US yields should provide a solid floor for the US currency.
The Sunrise Headlines
- US stock markets gained around 0.4% yesterday with Nasdaq outperforming (+1.15%). Equities benefit together with the dollar from revived reflationary bets. Overnight, Asian risk sentiment is more mixed.
- US President Trump presented Republican’s proposition for tax reforms including lower taxes on corporate profits, incentives for business investment, fewer and lower individual income tax brackets and the end of estate taxes.
- Bank of England Chief Economist Haldane said he saw encouraging signs of pay growth and any increase in interest rates should be seen as a "good news story" for Britain’s economy.
- St. Louis Fed Bullard said "the current level of the policy rate is appropriate" given the economy and the fact that inflation "has surprised to the downside." But Boston’s Fed Rosengren said the central bank should raise rates in a "regular and gradual" way despite low inflation.
- New Zealand’s central bank kept its policy rate at 1.75% and hinted at a lower growth outlook as a long construction boom loses momentum and against the backdrop of political uncertainty from an inconclusive national election.
- The Canadian loonie extended its losses against the US dollar after Bank of Canada governor Poloz said the central bank that will proceed “cautiously” with any additional rate rises.
- The eco calendar contains EMU EC confidence data, German inflation, US weekly claims and the final US Q2 GDP reading. Several central bankers speak and Italy & the US tap the bond market.
Currencies: Higher US Yields Support USD Comeback
Dollar rebound gains momentum
European investors kick-started an new phase in the reflation trade yesterday. Yellen’s confirming the Fed’s intention to normalize policy, the prospect of a US tax reform and good eco data added to the overall positive sentiment. The dollar also profited. The break of EUR/USD below 1.1823 is confirmed. EUR/USD finished the session at 1.1745. USD/JPY temporary regained the 113 big figure, but closed at 112.84.
Asian equities show again a mixed picture. Japanese equities profit from the rise of the dollar/decline of the yen. USD/JPY trades again in the 113 area. A further rise of US bond yields overnight suggests that the dollar might continue to enjoy interest rate support. The impact of a rising dollar and higher US yields on other Asian/EM markets is mixed. EUR/USD (1.1735 area) holds within reach of yesterday’s correction low. The rise of the oil price has halted, but with no direct impact on the dollar.
Today, the EC economic confidence survey is expected to show minor gains (112 versus 111.9). We put the risks to the downside, but the decline shouldn’t be dramatized. The German September HICP inflation is probably more important for markets. The consensus expects a 0.1% M/M rise. The Y/Y reading is expected at 1.9% from 1.8%. We join the consensus, but any deviation, especially on the upside, might affect core bonds. The US eco data are less in interesting. The final Q2 GDP is expected unrevised at 3%, jobless claims might still be distorted by the hurricanes. The trade deficit is expected to have widened, but Q3 trade is still likely to add positively to Q3 GDP. There are lots of ECB and Fed speakers, but we don’t expect them to rock the boat. Recent Fed talk indicated that the Fed wants to hike rates again in December en in 2018, unless data surprise.
Yesterday, the dollar rebound continued, making the overall picture for the US currency more solid. The Trump administration indeed announced a ‘bold’ tax plan, but plenty of details (including the financing) have still to be worked out. So, the positive impact from this theme might gradually fade. Today’s US data won’t be than important, but a further trend-rise in US yields might keep the downside of the dollar protected. Higher German inflation might support the overall reflation trade and shouldn’t be that negative for the overall USD performance. The dollar rebound might slow/take a breather today, but we expect the trend to persist.
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 earlier this week yesterday. The rise in US yields looks more solid and so does the rebound of the dollar. This week’s price action is growing more 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 correction continues as break below 1.1823 is confirmed
EUR/GBP
Sterling rebound against the euro slows.
There are tentative signs that the sterling rebound is losing momentum. EUR/GBP yesterday still touched a minor new correction low in the mid 0.87 area, but this move was due to the EUR/USD decline. The overall rise of the dollar also kept cable under pressure. The sterling support from very strong CBI retail data proved temporary. EUR/GBP closed at 08774, off the intraday lows. Cable closed the session at 1.3387. In an interview, BoE’s Haldane said that a rate hike would be good news as it shows that the economy is healing.
There are no important eco data on the UK agenda today. Markets will keep an eye on the BoE Independence conference in London. On Brexit, there are rumours that the EU is considering small concessions and start talking on the transition period. This might be slightly sterling supportive, but we don’t expect a big impact on sterling. It already made a nice rebound of late. We have to impression that the decline of EUR/GBP is losing momentum. The rise of the dollar sent cable in downward correction.
EUR/GBP made an impressive uptrend from April to set a MT top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of 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. We gradually look to by EUR/GBP on dips.
EUR/GBP: downtrend show tentative signs of slowing.
