Sunrise Market Commentary
- Rates: Can payrolls pave the way for full retracement?
The Fed indicated that Q3 eco data might be distorted by the impact from hurricanes. Therefore, we don’t expect US Treasuries to strongly profit from disappointing payrolls. If, on the other hand, payrolls are strong, it should pave the way for a full retracement in the US note future towards 124-14+. - Currencies: Payrolls to support further USD gains?
The dollar received support from higher US yields and a new record race of US equities yesterday. Today’s US payrolls will probably distorted by the impact of the hurricanes. Still, a decent report might support further USD gains. Rising uncertainty on the political fate of UK PM May kick-started a new down-leg of sterling
The Sunrise Headlines
- The S&P 500 (+0.5%) closed at its sixth consecutive record, its longest streak of highs since 1997. Asian stock markets trade with more or less similar gains this morning with China still closed.
- The second-largest bank based in Catalonia, Banco de Sabadell, has decided to move its legal headquarters out of the region as Catalan separatists and the Spanish authorities hurtle towards a showdown over independence.
- Theresa May faces rebellion among Tories. Grant Shapps, who served as Tory chairman, said he has a list of colleagues who want a new leader and prime minister. The plotters aren’t yet numerous enough to push her out.
- Congressional Republicans moved to hasten an overhaul of the US tax code, while Federal Reserve officials warned in rare public remarks that President Trump’s tax plan could lead to inflation and unsustainable federal debt.
- The global economy is enjoying its best growth spurt since the start of the decade, IMF Lagarde said, as she urged governments and companies not to “let a good recovery go to waste”.
- The US Senate approved Randal Quarles for a key banking oversight post on the Federal Reserve Board, marking President Donald Trump’s first imprint on the central bank and his first full-time appointment of a banking regulator.
- The focus of today’s agenda is on the US payrolls report. Average hourly earnings and unemployment rate will also be closely monitored. A number of European and US central bankers is scheduled to speak
Currencies: Payrolls To Support Further USD Gains?
Dollar profits from renewed reflation trade.
Initially, there was again no clear story to guide USD trading, yesterday. There were only second tier eco data in the US and Europe. Tensions on the Spanish markets eased, but it didn’t support the euro. Later, the dollar was supported by some ‘hawkish’ Fed comments. The US reflation trade also regained momentum with major US stock indices setting new record levels and interest rate differentials slightly widening in favour of the dollar. EUR/USD finished the day at 1.1711 (from 1.1759). USD/JPY closed session at 112.82 (from 112.76)
Overnight, Asian markets profited from positive spill-over effects from WS record race. Even so, the gains in USD/JPY are modest. The pair continues struggling to overcome the 113.00/26 resistance. Uncertainty on the outcome of the Japanese parliamentary elections might play a role. Overall USD strength finally pushed EUR/USD for the test of the recent lows below 1.17. The decline of the Aussie dollar accelerates after RBA-member Harper indicated that the economy isn’t out of the woods and as he suggested that an additional rate cut isn’t ruled out.
Today, the US September payrolls will be published. The tropical hurricanes likely impacted the payrolls negatively. How much is difficult to say. The consensus stands at a modest 80K net job growth. It compares to a trend growth of about 200K. Also other key metrics of the report like the unemployment rate (expected 4.4%) and the average hours earnings (expected 0.3% M/M and 2.5% Y/Y) might be distorted too.
We see an asymmetrical risk. If payrolls are indeed weak, markets may discard them as unreliable. Better than expected job growth and, maybe even more important, a positive surprise in wage growth will be seen as confirming recent strong US data. It might reinforce the reflation trade, including the rise of the dollar. A weak figure might have only a modest negative impact on the dollar. The central bank parade continues today with Fed governors Dudley, Kaplan and Bullard and ECB governor de Galhau. Uncertainty on Spain/Catalonia remains a wild card for the euro, but currently we don’t see a big impact on the single currency.
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, but the pair holds below the 1.1823 previous range bottom. Higher US yields are 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. EUR/USD is captured in a sell-on-upticks pattern. 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 and underperformance the overall USD rebound. So a break beyond 144.49 probably is not evident.
EUR/USD: nears 1.1662 support. Will the payrolls force the break?
EUR/GBP
Sterling sell-off accelerates
Yesterday, sterling came under more pressure after the failed key note speech of UK PM May. The ‘event’ brought additional uncertainty on the political support for PM May and weighed on sterling. The EUR/GBP short-squeeze accelerated as the pair broke the 0.8900/07 resistance area. BoE ‘s McCafferty, as expected, spoke hawkish. He expects economic slack to disappear quickly and saw CPI persistently overshooting the target. His view iss well-know and was ignored. EUR/GBP closed the session at 0.8927. Cable finished the day at 1.3119, a substantial additional loss from Wednesday’s close (1.3248).
Today, UK Halifax House prices and the Q2 unit labour costs will be published. However, the focus for sterling trading will be on the internal political developments. According to rumours, up to 30 lawmakers already support a campaign to replace May as prime minister. The risk of a political vacuum causes further sterling losses this morning. The pound will probably remain vulnerable as long as this topic dominates to financial and political headlines. Sterling again looks like a falling knife, especially the decline of cable is becoming quite impressive…
EUR/GBP made an strong 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. Yesterday’s rebound above the 0.89 area improved the ST technical picture of EUR/GBP.0.9026 is 50% retracement of the recent countermove.
EUR/GBP: clears 0.89 resistance area
