Sunrise Market Commentary
- Rates: Catalan issue not resolved yet, cautiousness remains warranted
Focus of today’s trading session will be on Spanish-Catalan issue. Uncertainty remains high at this stage and continues to warrant some cautiousness vis-à-vis Spanish assets, while it might even support some safe haven flows in the Bund especially if we get a strong verbal response from Madrid. FOMC Minutes and a speech by ECB Praet (!) are wildcards. - Currencies: EUR/USD profits slightly from ‘Catalan solution’
The dollar traded with a soft bias yesterday. EUR/USD finally regained 1.18 after Catalonia kept the door open for negotiations. The eco calendar offers no clues for FX trading today. The minutes of the September Fed meeting and a speech of ECB’s Praet might be slightly USD supportive and/or euro negative.
The Sunrise Headlines
- US stock markets ended 0.1% to 0.3% higher after returning from the long weekend. Risk sentiment remains positive overnight with man indices clocking gains of around 0.5%
- Catalan leader Puigdemont stepped back from making a formal declaration of the region’s independence as he called for more dialogue with Spain following last week’s referendum.
- Theresa May risked upsetting both sides of the Brexit debate when she refused to say how she would vote in another Brexit referendum and appeared to suggest EU citizens’ future rights in the UK were in doubt.
- The EC will present today a list of measures it plans to put forward by next spring on reducing bad loans held by European banks, a draft document said, a move that could slow similar moves by the ECB.
- Germany may need to wait until next year for a new government as the three blocs trying to form an alliance are so far apart they will need a deeply detailed coalition deal, a senior Bavarian ally of Chancellor Merkel has told Reuters.
- The leader of the small nationalist party that will decide New Zealand’s next government said that "huge" progress had been made in coalition talks, but he has dropped a self-imposed deadline of Oct. 12 to announce a government.
- Today’s eco calendar remains rather thin with only Minutes of the previous Fed meeting. Spain’s cabinet holds an emergency session on Catalonia. Germany, the Netherlands and the US tap the market while several central bankers speak.
Currencies: EUR/USD Profits Slightly From ‘Catalan Solution’
USD confined to tight ranges. Euro gains slightly
Yesterday, the dollar traded soft in Asia and this bias persisted in Europe early in the US. Later, the euro received a better bid as Catalonia leader Puidgemont applied some kind of a ‘forward start’ for the start of the independence after the referendum. EUR/USD closed the session at 1.1808. USD/JPY dropped to the 112.00 area early in US dealings, but finally still closed the session in well-knowterritory in the mid 112 area, propelled by new intraday highs on WS.
Overnight, Asian equities continue their uptrend with several indices nearing multi-year or even all-time record levels (Kospi). The dollar stabilizes after recent setback, but without an indication of a real comeback. Political bickering within the Trump administration raises questions on the ability to execute the tax reform plans. EUR/USD trades in the 1.1815 area. USD/JPY is little changed at 112.50. The Aussie dollar initially profited from a record bond auction and strong consumer confidence, but the gains evaporated. AUD/USD trades at 0.7780.
The eco calendar is again very thin. In the US, only US JOLTS labour market report is scheduled for release. It is interesting from an economic point of view, as it gives a richer pictures of developments inside the labour market, but it lags the payrolls. The FOMC Minutes are interesting. However, after the September meeting, the Fed eco and rate projections were published and Yellen elaborated during a press conference on the decisions and the outlook. Nevertheless, the debate on too low inflation may give us some interesting insights. ECB’s Praet speaks after European trading in NY about the European exit strategies. Praet preaches slowness in changing the current ultra-easy policy stance. He might support the “lower (amount of monthly purchases), but for longer (in time)” tactic for the APP. In this way, the ECB may fight market expectations of higher official rates.
Yesterday the dollar traded soft for most of the day. The euro profited slightly from the news from Catalonia. This process might still go a bit further this morning, but we don’t expect big euro gains. The stalemate in Catalonia isn’t solved and it doesn’t look the Spanish government is prepared to start negotiations. The Fed minutes should support the scenario of a December rate hike. The comments from Praet might be soft. In this context, we expect any EUR/USD rebound to run into resistance soon. It won’t be easy for EUR/USD to regain the 1.1823/33 area in a sustainable way.
EUR/USD: EUR/USD returns to 1.1823/33 intermediate resistance
EUR/GBP
Sterling awaiting directional news
Moves in sterling were modest yesterday , even as there were plenty UK data. Those data painted a diffuse picture. UK (manufacturing) production rose at a fairly healthy pace in August (0.4% M/M) and Y/Y figures jumped higher due to revisions of earlier data. At the same time, the August UK trade deficit printed at a record as imports rose much more than exports. This set of conflicting data had no noticeable impact on sterling. EUR/GBP closed an uneventful session at 0.8943. Cable succeeded some modest further gains on overall USD softness. The pair closed the session at 1.3203.
There are no important eco data in the UK today. UK PM May will answer questions of the UK Parliament. She probably won’t be able to bring any high profile news/progress on Brexit. We don’t see a trigger for a clear directional move in EUR/GBP. The pair might continue to drift sideways in the 0.89 big figure, awaiting new eco or other news.
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
