Sunrise Market Commentary
- Rates: Sentiment-driven trading
Today’s eco calendar is empty suggesting sentiment-driven trading (currently negative core bonds) with many investors potentially side-lined in the run-up to key US eco releases later this week. The sell-off in Spanish assets could slow as Catalonia seems to favour dialogue instead of unilaterally declaring independence. - Currencies: Dollar tries to break ST top
The dollar extended its gradual rebound yesterday even as the gains were not impressive. Still, the US currency is nearing recent highs against a series of currencies including the euro and the yen. The eco calendar is thin today, but a further rise in US yields might help the dollar to clear these hurdles.
The Sunrise Headlines
- Wall Street (+0.5%) began the fourth quarter with a quartet of closing highs as upbeat data helped boost optimism on the health of the US economy. Asian risk sentiment is somewhat more mixed overnight with China still closed.
- The Reserve Bank of Australia leaves interest rate unchanged at record low 1.5% for 14th month, having previously said it doesn’t need to follow global peers that are tightening policy. AUD/USD tests 0.78 support.
- The Catalan government said it wanted to avoid a ‘traumatic split’ from Spain and appealed to the EU to help mediate with Madrid in signs it was holding back from an early declaration of independence.
- Relatively calm market conditions could encourage the European Central Bank to extend its asset purchase scheme for a relatively longer period but with reduced monthly spending, ECB chief economist Praet said.
- Dallas Fed Kaplan sounded a cautious note, saying officials should ‘look hard’ at whether taking action in December is warranted. Minneapolis Fed Kashkari argued that the Fed’s own actions, not transitory factors, are responsible for weak inflation.
- The Bavarian sister party (CSU) of German Chancellor Merkel’s CDU has said her conservative bloc must agree policies on immigration, pensions and healthcare before opening coalition negotiations with two other parties.
- Today’s eco calendar is extremely thin with only US car sales
Currencies: Dollar Tries To Break ST Top
Dollar extends gradual rebound
Yesterday, the dollar traded with a cautiously positive bias as global investors extended last week’s reflation trade. At the same time, the euro faced some headwinds from the uncertainty on Catalonia. The USD rebound lost momentum in the afternoon trade despite a very strong ISM manufacturing. Still the US currency finished the session with modest gains. EUR/USD finished the session at 1.1733 (from 1.1814). USD/JPY closed the session at 112.77 (from 112.51). US equities set again new records, but were no big help for the dollar.
Overnight, Asian equities ex-Australia join the positive sentiment from WS. The dollar also receives a better bid supported by strong equities and a minor rise in US yields. USD/JPY rebounded north of 113. EUR/USD dropped to a new correction low and trades in the low 1.17 area. The Reserve Bank of Australia as expected left its policy rate unchanged at 1.5%. The policy statement brought no new information, but repeats that a stronger Aussie dollar weighs on inflation, growth and employment. The Aussie dollar declined after the RBA statement and trades around 0.78.
Today, EMU eco reports are limited to the August PPI (producer prices). It is no market mover, as most national PPI data have already been released. US car sales are expected to have rebounded in September after a sharp dip in August. That’s good news for the economy, but markets usually ignore the car sales report.
The dollar rallied last week, as chances on a December Fed rate hike have risen and as the US government stepped up its efforts to put the tax reform on the rails. Both factors propelled US yields and the dollar, but the dollar rebound ran into resistance at the end of last week. It apparently needs good eco news and higher US yields. Yesterday’s USD performance was mildly positive, but the pair near the recent highs against several other currencies including the euro and the yen. A positive risk sentiment and a rise in US yields may be needed to support the USD rebound today.
From a technical point of view EUR/USD hovered in a consolidation pattern between 1.1823 and 1.2070, but broke below last week. There was some hesitation in the USD rebound at the end of last week, but EUR/USD closed below the 1.1823 previous range bottom. The rise in US yields is needed to support the USD rebound. Next support in EUR/USD comes in at 1.1662, while 1.1423 marks the 38% retracement from the 2017 rally. The day-to-day momentum in USD/JPY is constructive, but for and important part due to yen weakness. However, USD sentiment is currently also improving. USD/JPY regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. .
EUR/USD correction lower continues
EUR/GBP
EUR/GBP bottom to become more solid? .
Yesterday, sterling declined against an overall stronger dollar, but also against the single currency. The latter was under slight pressure from the independence vote in Catalonia. Sterling declined after the slightly softer than expected UK manufacturing PMI (55.9). The political bickering on the Brexit strategy between Foreign Secretary Boris Johnson and PM May also weighed on the UK currency. EUR/GBP rebounded to the 0.8868 area and finished the session at 0.8838. The daily losses in cable were substantial as sterling softness coincided with dollar strenght. The pair closed the day at 1.3276 (from 1.3398 on Friday).
Today, the eco calendar only contains the UK construction PMI. A stabilisation at expected. Investors will also keep an eye at the annual conference of the Conservative party in Manchester. The party is divided on the Brexit strategy and PM May’s leadership is contested. However, we expect PM May to stay in charge for now. The noise on Brexit might be a modest negative for sterling. Over the previous days, sterling lost some momentum. Sterling may extend its correction against the dollar. A further decline of EUR/USD may be a hurdle for sustained EUR/GBP gains. Even so, a more solid floor is building in EUR/GBP.
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 puts a solid floor for sterling ST term. We look how far the current correction goes. EUR/GBP nears support at 0.8743 and 0.8652, which is difficult to break. We look to buy EUR/GBP on dips
EUR/GBP: downside support becomes more solid?
