Sunrise Market Commentary
- Rates: More outperformance German Bund?
Today’s eco calendar contains German ZEW investor sentiment and US industrial production. Risks are on the downside of expectations. Central bank speakers are a wildcard, especially at the ECB side with the rapidly approaching October 26 ECB-meeting in mind. The Bund’s outperformance vs the US Note future is expected to last. - Currencies: Dollar gets the benefit of the doubt, for now.
The dollar was supported by a rising interest rate differential yesterday following speculation about the next Fed chair (Taylor). Today’s eco data probably won’t change the overall picture for the dollar or the euro. Event risk is omnipresent. A negative event might weigh on USD/JPY. The Catalan deadline might inspire some investor caution on the euro.
The Sunrise Headlines
- All three major US indices held on to their gains (+0.3%) and closed at record levels. Netflix Q3 earnings were strong. Overnight risk sentiment remains positive with most Asian indices posting similar gains.
- Theresa May is backing away from a Brussels showdown over Brexit this week after Angela Merkel warned her that the EU would not start discussing a transition deal with Britain until she put more money on the table.
- The Reserve Bank of Australia has warned that any further increases in the currency would hurt growth while again flagging ongoing resistance to joining peer central banks in normalising interest rates.
- New Zealand inflation accelerated more than economists expected in the third quarter (0.5% Q/Q & 1.9% Y/Y), fanned by more expensive food and housing costs, while underlying price pressures remained benign.
- Brent traded near a two-week high as Kurdish authorities halted oil output at two deposits amid clashes with Iraqi forces near Kirkuk. Iraq took control of government buildings, oil fields, a refinery and a military base. The US isn’t happy but isn’t taking sides, Trump said.
- European foreign ministers attacked President Trump’s decision to pull his administration’s backing for the Iranian nuclear agreement, calling the move a serious mistake that could lead to a military confrontation with Tehran.
- Today’s eco calendar contains German ZEW investor sentiment, UK inflation data and US industrial production. Several central bankers speak, Germany taps the market and Q3 earnings season accelerates
Currencies: Dollar Gets The Benefit Of The Doubt, For Now.
USD gets benefit of the doubt, for now.
The dollar held up well yesterday despite Friday’s ‘soft’ US CPI data. Catalan uncertainty weighed on Spanish assets, but the impact on other European markets, including the euro, was limited. The dollar profited slightly from a very strong Empire manufacturing survey. Later in US dealing, USD yields and the dollar jumped higher on headlines that economist John Taylor made a good impression on President Trump in a meeting last week. EUR/USD closed the session at 1.1796. This time, the gain of USD/JPY was more substantial. The pair finished the day at 112.19 (from 111.89).
Overnight, Asian equities continue their established uptrend as major WS indices closed again at record levels yesterday evening. Headlines on all kinds of political event risk are omnipresent (North Korea again warned on a nuclear war, tensions in the Nafta negotiations between the US and Mexico, the dispute in Northern Iraq, Catalonia, Brexit), but they don’t derail the global equity rally. USD/JPY trades in the 112.10/15 area. So, the pair fails to extend the gains after yesterday’s ‘Taylor headlines’. EUR/USD is trading marginally lower in the 1.1770 area.
Today, the ZEW investors sentiment in Germany and EMU CPI (final) will be published in Europe. In the US, import prices, industrial production and the NAHB Housing index will be published. EMU CPI data are expected unchanged from the preliminary reading. ZEW confidence is expect to rise further. The current conditions index might near record levels. Even so, the report is usually only of intraday significance for FX trading, at best. US import prices are expected to rise 0.6% M/M and 2.6% Y/Y (from 2.1%). Industrial production is expected to rebound modestly (0.3% M/M) after a setback in August. The NAHB housing index is expected stable at 64. We don’t expect today’s US data to really change fortunes for the dollar. A bigger than expected rise in import prices might be marginally USD supportive. On the other hand we keep an eye at the housing data. Of late some indicators suggested a potential loss of momentum in the sector
Yesterday, the dollar made marginally progress against the euro and the yen supported by a rising interest rate differential and by speculation that the chances of John Taylor are rising to become Fed chairman. For now, the latter it is nothing more than speculation and rumours.
Today’s data probably won’t give clear guidance for USD trading. Political event risk remains plentiful (cf supra). These risks had only a very limited impact on markets and in particular on the FX markets until now. We assume that a flaring up of one of these uncertainties is a potential negative for USD/JPY. Catalonia might create some uncertainty on European markets and for the euro as the next political deadline (Thursday) nears. Yesterday, we started the week with a neutral-to-tentatively negative bias for EUR/USD. We maintain this call. Even after yesterday’s ‘Taylor-driven rebound’, we are not convinced on the USD/JPY performance.
From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern, but no real test of the 1.1662 support occurred. Last week, the pair even returned (temporary?) above the 1.1823 previous range bottom, which was disappointing for EUR/USD bears. We maintain a cautious sell-on upticks bias. However, the pair needs to drop below 1.1670/62 support to really give comfort to EUR/USD bears. The USD/JPY momentum was constructive in September. The pair regained 110.67/95 (previous resistance), a short-term positive. The 114.49 correction top is the next important resistance. The rally clearly lost momentum last week. A break beyond 114.49 looks ever more difficult.
EUR/USD: resumes gradual decline, but no important technical level within reach
EUR/GBP
Focus turns to price data and to the BoE
The focus for sterling trading remained on Brexit yesterday. UK PM May went to Brussels and met EU commission president Juncker and EU Chief Brexit negotiator Barnier. Sterling initially gained a few tics on the announcement of the Brussels’ trip, hoping on a positive outcome. However, this hope was torpedoed by comments from ‘sources close to the UK government’. According to these rumours, Brexit negotiations were heading for a catastrophic breakdown unless the EU signalled it would allow to move to talks on trade and the transition period. The statement after the dinner didn’t bring any concrete news, but talks were said to have been constructive. The impact on sterling was very limited. EUR/GBP finished the session at 0.8901. Cable closed at 1.3251, but this was partially due to USD strength.
Sterling is trading with a slightly positive bias this morning after yesterday’s meeting between UK PM May and EU Commission president Juncker. Brexit will remain on the radar, but the focus might temporary turn to the UK eco data. UK price data will be published today. Headline inflation is expected to rise to 3.0%. This might reinforce the case for a BoE rate hike in the coming months. BoE’s Carney, Ramsden and Tenreyro will also appear before the UK Parliament’s Treasury committee. The tone of the appearance/assessment might be balanced even if the BoE considers a modest tightening of policy in the near future. Even so, today’s events might be slight supportive for sterling in a daily perspective
EUR/GBP staged a strong uptrend since April to set a top at 0.9307 late August. UK price data 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. The recent rebound above 0.89 improved the ST technical picture of EUR/GBP, but for now there were no convincing follow-through gains. EUR/GBP 0.9026 is the 50% retracement of the recent countermove.
EUR/GBP rebound loses momentum. CPI data might temporary support sterling
