Sunrise Market Commentary
- Rates: Caught between Spain and US payrolls
The underperformance of Spanish assets can continue as the stand-off between Madrid and Barcelona persists. Today’s Spanish auction could also have consequences for other markets, especially in case of difficulties (risk-off). We expect more outperformance of the Bund vs. the US Note future ahead of US payrolls. Minutes of the ECB meeting are a wildcard. - Currencies: dollar awaits guidance amid diffuse news flow
Yesterday, there were too many divergent news topics to give USD trading a clear directional guidance. This pattern might continue today as investors look forward to tomorrow’s US payrolls. Catalonia, the ECB minutes and speculation on the succession of Yellen are wildcards. Sterling remains in the defensive and EUR/GBP nears the 0.89 resistance
The Sunrise Headlines
- The three major US equities indices (+0.1%) all hit minor new record closing highs for the third day in a row. Overnight, most Asian stock markets are positively oriented with Japan underperforming and China still closed.
- Catalan President Puigdemont said he’ll soon apply the results of its illegal independence vote, but stopped short of saying when he’d trigger secession. He urged Madrid to accept an offer of mediation, which they declined (AFP)
- US secretary of state Tillerson denied longstanding rumours about his possible resignation after a report that he referred to Mr. Trump as a “moron” and had to be talked out of quitting by Vice President Mike Pence and others.
- Theresa May promised to give a “voice to the voiceless” in a speech intended to quell questions about her leadership. Instead, she lost her own voice and was confronted by a prankster as the Tories’ conference backdrop literally fell apart.
- The Trump administration objected to a UK-EU deal to divide valuable agricultural import quotas, in a sign of how the US and others plan to use Brexit to force the UK to further open its sensitive market for farm products.
- Australian retailers suffered their worst sales since early 2013 in August as debt-laden consumers tightened their purse strings, cutting back sharply on food, furniture and clothing. AUD/USD drops towards key support (0.78).
- Today’s eco calendar contains few eco data (US weekly jobless claims), but it is filled with central bank speeches and the publication of the ECB September Minutes. Spain and France tap the bond market
Currencies: Dollar Awaits Guidance Amid Diffuse News Flow
Dollar awaiting clear guidance
Yesterday, USD traders faced several conflicting issues including strong EMU eco data, uncertainty on Catalonia and the US debate on who will succeed Yellen at the helm of the Fed. EUR/USD and USD/JPY hovered up and down. The US non-manufacturing ISM was very strong and helped the dollar to regain some ground. However, at the end of the day, EUR/USD (1.1759 from 1.1744) and USD/JPY (112.76 from 112.85) closed the session little changed.
Overnight, several Asian markets are still closed for regional holidays. Other markets show a mixed picture. Japanese indices are little changed and so is USD/JPY (112.75 area). Australia August retails sales were very weak. AUD/USD declined 0.7865 to the 0.7830 area. EUR/USD holds a very tight sideways range in the 1.1760 area. The speech of Catalan President Puigdemont yesterday evening brought little insight in the next steps in the independence process.
Today, the US eco calendar only contains second tier releases. Initial claims are expected to have fallen somewhat, but is still well above the pre-storm levels. The August trade deficit is expected slightly lower. If confirmed, trade would positively add to Q3 GDP. The factory orders are expected to have rebounded, as already suggested by the durable orders. The event calendar is long. Fed governors Powell, Williams, Georges and Harker speak, but on non-policy issues. Since Powell is on the shortlist to become Fed chairman, any policy comment of him may affect markets. ECB Praet and Coueré chair panels at an ECB conference. Chances are slim they will unveil market sensitive info. The ECB Minutes will be closely read, looking for hints in what direction the debate on the APP is going.
Yesterday, the dollar didn’t find a clear direction as the news flow contained too many conflicting signals. We don’t see a single dominant theme to guide FX trading today. In addition, investors aren’t keen to add directional positions ahead of tomorrow’s US payrolls. So, more sideways trading is likely, mirroring yesterday’s session. Concrete hints in the ECB Minutes on policy normalisation might be supportive for the euro, but no key technical levels should be taken out. Catalonia and speculation on the succession of Yellen remain wildcards
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 is some hesitation in the USD rebound, but the pair holds below the 1.1823 previous range bottom. Higher US yields are probably needed to support additional USD gains. Next support in EUR/USD comes in at 1.1662, while 1.1423 marks the 38% retracement from the 2017 rally. The USD/JPY momentum was constructive of late, but for an important part due to yen weakness. USD sentiment recently also improved though. USD/JPY regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. The rally lost momentum this week. So a break beyond 144.49 probably is not evident.
EUR/USD: dollar rebound stalled, as it needs additional good news
EUR/GBP
GBP holding near the recent lows .
Sterling traded on the defensive earlier this week as the Manufacturing and construction PMI were softer than expected. Yesterday, the news flow was more sterling supportive. The services PMI rebounded from 53.2 to 53.6. The report fits in a scenario of a limited BOE tightening in the near future. Sterling rebounded, but the move was limited given the recent correction. PM May said she is seeking a Brexit deal that works, but the government is also preparing for a no-deal scenario. The impact on markets was limited. However, sterling reversed most of the intraday rebound later in the session. EUR/GBP closed the day at 0.8876 (from 0.8871). Cable finished at 1.3248 (from 1.3237).
Today, BoE’s McCafferty and Chief economist Haldane speak in London. McCafferty voted already for a rate hike in September. Haldane likely supports the majority MPC view that rates might be raised in the near future. So, if they address monetary policy issues, they might sound rather hawkish, but that shouldn’t come as a surprise. Sterling was in the defensive of late. However EUR/GBP nears the 0.8900/07 resistance area. Maybe there is more important news needed for EUR/GBP to clear this hurdle. Even so, the test has started.
EUR/GBP made an impressive uptrend since April to set a 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. The prospect of (limited) withdrawal of BOE stimulus triggered a good sterling countermove. However, this rebound has apparently run its course. EUR/GBP supports at 0.8743 and 0.8652 are probably difficult to break. We look to buy EUR/GBP on dips. A sustained rebound above the 0.89 area would improve the ST technical picture of EUR/GBP.
EUR/GBP: nears 0.89 resistance area
