Sunrise Market Commentary
- Rates: US reflationary spirits in the driving seat?
US Treasuries lost significant ground after the US Senate adopted a budget for the next fiscal year, clearing a crucial hurdle for tax reforms. Reflationary spirits could inflict more losses on US Treasuries given today’s eco calendar. European investors might decide to take a wait-and-see attitude with next week’s ECB meeting looming on the horizon. - Currencies: US senate vote ‘saved’ the dollar
The dollar stayed in the defensive yesterday. Interest rate differentials moved against the US currency despite the crisis in Catalonia. A budget vote in the US senate changed fortunes again in favour of the dollar. However, the gain of the dollar against the euro remains modest. EUR/GBP returned to the 0.90 barrier on poor UK eco data and little Brexit progress
The Sunrise Headlines
- US stock markets recovered from opening losses to the tune of 0.5% to end flat. Nasdaq underperformed (-0.25%). Overnight risk sentiment is positive with Japan underperforming .
- The US Senate’s passage of the budget blueprint for the next fiscal year, in a 51-49 vote primarily along party lines, helps unlock a procedure that Republicans plan to use to rewrite the tax code with just GOP votes.
- European leaders rebuffed British PM May’s pitch to revive stalled Brexit talks, but German Chancellorl Merkel said she was confident negotiations would advance by December.
- CIA director Pompeo warned that North Korea could be just ‘months away’ from developing the ability to strike America with a nuclear-armed ballistic missile.
- Separatist campaign group the Catalan National Assembly is calling on its supporters to pull cash from lenders including CaixaBank SA and Banco Sabadell SA between 8 am and 9 am today.
- President Trump will support a bipartisan bill of health care only if it includes a series of conservative measures that Republicans sought in their failed effort to repeal the Affordable Care Act.
- Today’s eco calendar is extremely thin with only US existing home sales. The Q3 earnings season continues with GE, P&G,…
Currencies: US Senate Vote ‘Saved’ The Dollar
Dollar saved by US Senate vote
All eyes were on Spain yesterday. EUR/USD spiked lower as the Spanish government initiated the process of suspending the regional powers of the Catalan government. However, the euro decline was almost immediately reversed. EUR/USD even moved in positive territory. A tentative global risk-off sentiment caused US Treasuries to outperform German bunds, reducing the interest rate differential in favour of the euro. EUR/USD finished the session at 1.1852 (from 1.1787). USD/JPY closed the day at 112.54.
Overnight, the US Senate adopted a fiscal 2018 resolution which is an important step for a tax overhaul further down the road. The approval triggered a rebound in US bond yields and supported the dollar. USD/JPY jumped north of 113. EUR/USD returned to the 1.18 area. The hope on a US tax reform also propelled US equity futures. The impact on Asian equity markets is diffuse and modest. The Hong Kong market reverses part of yesterday’s late session decline. Japanese indices are little changed despite the rise of USD/JPY. Investors look forward to the outcome of the Japanese parliamentary elections to be held this weekend. The Kiwi dollar declined further below 0.70 after the formation of a government with Labour and the New Zealand first party.
The eco calendar is extremely thin today. There are no important data in EMU. US the existing homes sales (September) will only be of intraday significance for USD trading, at best. Fed’s Yellen will give a lecture on ‘Monetary policy since the Financial crisis’ after the US close. We don’t expect the Fed chair to change her view on the Fed’s policy action in the near future.
A global risk off context, partially inspired by tensions in Catalonia weighed more on the dollar than on the euro yesterday as interest rates in the US declined more than in EMU. Overnight fortunes changed again in favour of the dollar as US yields jumped higher on the approval of a 2018 budget resolution in the US Senate. The rise in US yields and a constructive risk sentiment support the dollar overnight. The gains of the dollar against the euro remain modest. EUR/USD still trades north of 1.18. We see room for some further USD gains today. However, the price action earlier this week indicated that it wasn’t that easy for the dollar to gain ground against the euro even if the move was supported by a favourable interest rate differential. The day-to-day picture of USD/JPY is improving and the pair is nearing the recent highs. Investors will look out for the outcome of the Japanese elections. The prospect of the continuation of Abenomics (including an easy monetary policy) might be a slightly negative for the yen.
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. Sentiment improved again this week, but we still assume that a break beyond 114.49 will be difficult.
EUR/USD: Holding tight ranges, despite plenty of ‘event risk
EUR/GBP
EUR/GBP returns to 0.90 barrier
UK retail sales fell by 0.8% M/M in September, reversing a rise of 0.9% the previous month. The report suggested that there is little room for the BoE to raise its policy rate beyond a sole rate hike in November. This prospect of little additional interest rate support weighed further on sterling yesterday. EUR/GBP spiked to the 0.8990 area and held close to that level for the remainder of the session. At the EU summit, German Chancellor Merkel indicated that both parties in the EU-Brexit talks should move so that a deal on the divorce can be reached by the end of the year. However, there were no concrete steps. The statement didn’t help sterling much. EUR/GBP even closed the session north of 0.90 (0.9006). Cable finished the day at 1.3159.
Monthly UK budget data will be published today. However, we don’t expect this data series to have a lasting impact on sterling trading. The UK currency remains in the defensive this morning, both against the euro and the dollar. Recent eco data reinforced investors’ feeling that any interest rate support for sterling in the near future will be very limited. At the same time, there is no noticeable progress in the Brexit talks. We hold on to the view that any upside of sterling will be difficult. 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 followthrough gains. EUR/GBP 0.9026 is 50% retracement of the recent countermove
EUR/GBP: Poor UK eco data and little progress in Brexit talks propel EUR/GBP back to 0.90
