Sunrise Market Commentary
- Rates: Shun Catalan political risk
Eco data and central bankers won’t impact trading today. The Catalan-Madrid stand-off could escalate to a new phase. Cautiousness might be warranted. The Bund might profit in a daily perspective, with more outperformance vs the US Note future while Spanish spreads could widen. - Currencies: EUR/USD resilient despite Catalan uncertainty
Yesterday, the dollar rebound was a bit different from earlier this week. USD/JPY profited from higher core yields and a risk-on sentiment, but the US currency lost ground against the euro. Today, the focus for global FX trading will be on Catalonia. (Currency) markets are positioned for a non-disruptive outcome. This is far from sure. So, we see downside risk for the euro.
The Sunrise Headlines
- US stock markets ended positive, but with big differences between S&P (+0.07%), Nasdaq (+0.01%) and Dow (+0.7%). Asian stock markets are mixed overnight with China underperforming (-0.3%).
- China’s economy expanded at a robust 6.8% pace in Q3, meeting expectations, as traditional growth drivers such as manufacturing and exports gained steam. September retail sales (10.3% Y/Y) and industrial production (6.6% Y/Y) were close to consensus while investments (7.5% Y/Y) slightly disappointed.
- Australia enjoyed another month of solid jobs growth in September (+19.8k), with the annual pace of gains sprinting ahead to the fastest in almost a decade and nudging the unemployment rate lower (5.5%).
- Catalonia is on the precipice of losing its autonomy. Regional President Puigdemont has until 10 a.m. local time to renounce his independence claims or have Madrid take control.
- While the Bank of Korea held interest rates at a record low, higher GDP/CPI forecast, hawkish comments from the governor and a dissenter calling for a rate hike indicate that a change in monetary policy is getting closer.
- Republicans in Congress are examining how to block a potential move by Trump to pull the US out of NAFTA as members of the president’s own party also warn him that any such move could put a joint push for tax cuts at risk.
- Today’s eco calendar contains UK retail sales, US weekly jobless claims and Philly Fed Business Outlook. Spain and France tap the market. EU leaders hold a Summit in Brussels.
Currencies: EUR/USD Resilient Despite Catalan Uncertainty
EUR/USD resilient despite Catalonia
The dollar initially stayed well bid yesterday. However the relative performance of individual USD cross rates was different from earlier this week. The dollar struggled to make further headway against the euro, despite the Catalan uncertainty. Some ‘hawkish’ ECB comments blocked the euro decline. There was also talk of substantial EUR/JPY buying. EUR/USD closed the day slightly higher at 1.1787 (from 1.1766). USD/JPY outperformed, supported by higher core US/EMU yields and by a strong risk sentiment. The pair finished the session at 112.94 (from 112.10).
Overnight, the Chinese Q3 GDP was in line with expectations. The composition was OK. September retail sales and production were also as expected. Even so, the Chinese data were not enough to enhance the Asian risk rally. Most regional indices show modest losses of less than 0.5%. Japan outperforms on overall yen weakness. USD/JPY is testing the 113 level. EUR/JPY is trading well north of 133. EUR/USD maintains yesterday’s intraday gain and trades in the 1.18 area. The Aussie dollar profited temporary from good labour data but failed to maintain the initial gain. AUD/USD trades again in the mid 0.78 area.
There are no important data in the EMU and the US calendar is also thin. Jobless claims are expected little changed. The Philly Fed business outlook is expected slightly softer at 22.0 from 23.8. These data won’t change the global picture for the dollar. The deadline expires for Catalonia to renounce its independence claim. If it doesn’t, Madrid said it will activate laws to suspend the region’s autonomy. Until now, the impact of the Catalan tensions on broader European markets was limited. Yesterday’s price action of the euro suggests that markets assume that any action from Spain against the region will be modest/non-disruptive. Even so, uncertainty on the next steps will probably persist. This might still be a (slightly?) negative for the euro. On the dollar side of the story, the picture remains diffuse as well. USD/JPY finally gained some traction on higher yields core yields (US & Europe). EUR/JPY also profits. At the same time, the dollar struggles to extend gains against the euro even as interest differentials are at cycle highs (2-y USD/Germ) or at a ‘multi-month’ top (10-y). This is disappointing for USD bulls. Earlier this week, we kept a neutral-to-tentatively negative bias for EUR/USD. We maintain this call, but due to uncertainty on Catalonia rather than on assumed USD strength. We remain cautious on USD/JPY despite this week’s better performance. Event risk from whatever source might weigh on the pair
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. 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 lost momentum last week. A break beyond 114.49 looks ever more difficult.
EUR/USD: holding up well despite Catalan uncertainty
EUR/GBP
UK retail sales and EU summit in focus for sterling trading
Balanced comments from BoE gouvernor Carney earlier this week convinced markets that any BoE tightening will be modest. This continued to weigh on sterling yesterday. UK labour data were mixed. Wage growth was marginally stronger than expected at 2.2% Y/Y, but real wages remain negative (-0.4%). The small beat in wage growth didn’t change market expectations that any BoE tightening will be very limited (probably only one hike). EUR/GBP temporary dropped a few ticks, but the move was soon reversed. The pair was further supported by a broader euro rebound later in the session. EUR/GBP finished the session at 0.8926 (from 0.8920). Cable was mainly driven by the overall swings in the dollar. The pair closed the session at 1.3205.
UK retail sales will be published today. Monthly data are very volatile. For September, a modest decline (-0.1% M/M) is expected after a strong rebound in August (1.0%). September CBI retail data were strong. So, the report shouldn’t be too bad. Markets will also keep a close eye at the comments from the EU Summit. The UK will probably press to start with negotiations on trade and a transition period. The EU will probably repeat that there hasn’t been made enough progress on the terms of the separation, but maybe the tone might be quite reconciliatory. We don’t expect the data or the EU summit to bring any breaking news for sterling. We hold on to the view that any upside of sterling will be difficult as the recent rally has run into resistance. We look to buy EUR/GBP on dips.
EUR/GBP staged a strong uptrend from April till late August to set a top at 0.9307. Rising UK inflation data and hawkish BoE comments reinforced a sterling rebound, but this rebound has run its course. EUR/GBP supports at 0.8743 and 0.8652 proved difficult to break. 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 50% retracement of the recent countermove
EUR/GBP: sterling rebound runs into resistance as BoE tightening will be limited.
