Sunrise Market Commentary
- Rates: Limited impetus, more consolidation?
The eco calendar remains uneventful today and won’t influence trading. Catalan President Puidgemont’s speech after European trading is a wildcard, which warrants some cautiousness as he is rumoured to unilaterally declare independence. We think that core bonds are prone for more consolidation/correction higher. - Currencies: Dollar rally ran into resistance. Catalonia to weigh on the euro?
The dollar stabilized yesterday as last week’s rally stalled. Today, the eco calendar remains thin. The dollar probably won’t receive additional interest rate support. Catalonia remains a wildcard for the euro. Until now there was no negative fall-out on the euro, but his might change if tensions mount after a declaration of independence
The Sunrise Headlines
- European equities ended a calm trading session with minor gains. Spanish equities outperformed on hopes the Catalonian tensions will ease. Asian equities are narrowly mixed overnight, awaiting the return of US traders.
- The ECB should reduce its asset buys from next year with the aim of ending them altogether, ECB Executive Board member Lautenschlaeger said, just weeks before policymakers decide whether to curb stimulus.
- The US’s spat with Turkey could drag on, as animosity builds between the NATO allies. U.S. envoy John Bass said a resolution depends on officials explaining why two Turkish employees at American outposts were detained.
- OPEC chief Barkindo said a drop in floating crude storage and the OECD’s stock overhang are "strong and positive" signs of rebalancing. The comments drew a muted response from traders, suggesting they don’t think the Saudi-led alliance can immediately turn the market around
- Catalan President Puigdemont will make a declaration of gradual independence today (6 PM). The announcement will include a constituent process without a regional assembly vote and will call on negotiations with Madrid
- Theresa May has set out detailed plans for the first time on how Britain would try to keep trade flowing if it fell out of the EU without a deal, as the prime minister prepared for a high-stakes game of brinkmanship with Brussels
- Today, the eco calendar is well filled with US small business confidence and production data from the UK, France and Italy, together with German and UK trade figures. However, these releases usually don’t impact trading much
Currencies: Dollar Rally Ran Into Resistance. Catalonia To Weigh On The Euro?
Dollar awaits eco news. Catalonia remains wildcard
Yesterday, the dollar traded listless in a tight ranges following a failed attempt to gain more ground after the payrolls on Friday. A thin calendar and the absence of US traders (Columbus Day) contributed to the dull trading. Tensions between the US and Turkey and ongoing uncertainty about Catalonia didn’t affect global currency markets. EUR/USD closed the session little changed at 1.1740. USD/JPY showed a similar developed and finished the day at 112.68.
Overnight, Asian equity markets are trading mixed. The PBOC fixed the yuan strong against the dollar. PBOC officials advocated further financial reforms and a more market-based regime for the yuan. Yuan strength weighs on the dollar. EUR/USD jumped from the 1.1740 area and trades currently around 1.1775. USD/JPY is the exception the dollar rule. BOJ governor Kuroda indicated that the BOJ will keep its ultra-stimulating policy until inflation will reach the 2% target. The Aussie dollar rebounds after the recent decline. USD weakness is one factor. The Aussie dollar is also supported as the AUD/NZD cross rises on the ongoing political uncertainty in the New-Zealand. AUD/USD trades around 0.7785.
In the US, the NIFB small business confidence is expected to have stabilized in September near multi-year highs (105 vs. 105.3). We see upside risks as other business indicators surprised on the upside in September but the report has usually only a limited impact on the dollar. In EMU, there are only national data. The main market event may be the potential unilateral declaration of independence of the Catalonian government (after market closure). Until now, tensions on Catalonia hardly affected to euro. However, if the situation escalates, there could be negative fall-out on other European markets and maybe on the euro.
The dollar started with a negative bias in Asia this morning, due to local/regional factors (CNY strength). It is unsure that European markets will join this trading dynamics. With little guidance from the eco data, we expect more technical trading ahead of the statement in the Catalonian Parliament late today. The rise in core yields has taken a breather. For now, the US currency doesn’t receive additional interest rate support, preventing further gains. Still, EUR/USD 1.1823 (previous range bottom) might continue to cap the topside in EUR/USD. US CPI and retail sales on Friday are the next milestones for USD trading
From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern. The USD rebound develops very slowly, keeping 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 cautious sell-onupticks pattern. The USD/JPY momentum was constructive of late, but for an important part due to yen weakness. USD sentiment recently 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 last week. So a break beyond 114.49 is difficult.
EUR/USD rebounds as 1.1662 support stayed out of reach
EUR/GBP
Sterling decline takes a breather
Yesterday, sterling rebounded following a 6 days losing streak as the the political future of PM May became again a bit more secure. The political situation in the UK remains fragile, but for now this relative stability was enough to ease recent sterling selling. EUR/GBP was already downwardly oriented in late Asian trading and continued to slide lower in the European session. The correction petered out later in the session. EUR/GBP finished the day at 0.8935 (from 0.8981). Cable closed the session at 1.3142, up from 1.3066 on Friday.
Overnight, BRC like for-like sales rebounded in September from 1.3% Y/Y to 1.9% Y/Y. BRC indicated that most of the rise was due to price rises. If confirmed by other data evidence, it might reinforce the case for BoE tightening. Later today, the UK eco calendar is well filled with production data, the trade balance and the NIESR GDP estimate. Production is expected to growth modestly. The trade deficit to remain wide. Sterling trades marginally stronger against the dollar and flat against the euro. However, we don’t expect this “countermove” to go very far. We maintain a buy-on-upticks approach for EUR/GBP.
EUR/GBP staged a 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 but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 are difficult to break. We look to buy EUR/GBP on dips. Last week’s rebound above the 0.89 area improved the ST technical picture of EUR/GBP. EUR/GBP 0.9026 is the 50% retracement of the recent countermove
EUR/GBP rebound slows, but holds north of 0.89
