Sunrise Market Commentary
- Rates: Position for hawkish outcome ECB
The Bond market reaction will be put against the consensus scenario of a 9-month extension of APP while slashing the pace of purchases to €30 bn/month from January. If consensus is right, the lifespan of the Bund rally will be limited. Our favourite scenario of a 6 month extension will put the Bund on the defensive with key yield resistance at 0.50% unable to stand. - Currencies: Will Draghi prevent further euro strength
The euro is resilient going into the ECB meeting . The dollar struggles as sentiment on risk turns less positive. Today, the ECB policy decision will decide the short-term fate of the euro. Given recent euro resilience, any perceived signs of hawkishness might support the single currency.
The Sunrise Headlines
- US stock markets corrected around 0.5% lower yesterday. Asian risk sentiment is mixed overnight with China outperforming.
- The ECB meeting today will decide on the future of APP. Consensus expects a 9-months extension to September 2018 while halving monthly purchases to €30 bn from January onwards. Risks are on the hawkish side of expectations. We favour only a 6-month extension until June 2018.
- South Korea’s economy kicked into gear in the third quarter (1.4% Q/Q) as renewed investment in construction and a return to growth for exports helped the country’s gross domestic product expand at the fastest pace in 7 years.
- The Bank of Canada held interest rates steady even as it said the economy was at or near full capacity, signalling it was willing to let the economy run a little bit hot amid uncertainty over NAFTA renegotiations. USD/CAD surged from 1.2650 to 1.28.
- “In my opinion, in order to make a fair deal with Nafta, you have to terminate the deal and you have to see where you’re going to come. And we’ll come out,” President Trump said.
- Today’s eco calendar contains EMU M3 money supply, US weekly claims and US trade balance. Swedish and Norwegian central banks meet as well. The US (7-yr Note) and Italy (I/L) tap the market
Currencies: Will Draghi Prevent Further Euro Strength
Will Draghi be dovish enough to avoid euro gains?
On Wednesday, trading showed its recent usual pattern. Core (EMU and US) yields extended their rise supported by strong eco data (German IFO and US durable orders). This rise in yields was fairly neutral for EUR/USD. Euro investors looked forward to the ECB meeting. USD/JPY and EUR/JPY outperformed and came close to MT highs. Later in the session, the rise in yields was aborted as equities fell prey to profit taking. This time, the dollar suffered most. EUR/USD returned north of 1.18 and closed at 1.1813. USD/JPY finished the session at 113.74.
Overnight, Asian equities are trading mixed with China outperforming. Asian investors are in wait-and-see modus ahead of the ECB policy decision and ahead of the results from major tech companies, expected later today. EUR/USD trades with a slightly positive bias in the low 1.18 area. Dollar is also losing a few ticks against the yen (EUR/USD at 113.45). AUD/USD struggles not to fall below the 0.77 handle.
Today, the US jobless claims, the advance trade balance and the pending home sales reports won’t be important, while halving monthly purchases to €30 bn from January 2018. We see risks for a shorter extension. Forward guidance on the end of APP will also be important. Even more important is the forward guidance on interest rate policy. Will the ECB repeat that rates will remain at the current levels for an extended period and well past the end of the APP programme? We think so as it is key to keep market expectations about the first rate hike at bay. Over the previous days, the euro traded strong across the board. The dollar failed to gain against the single currency even as interest rate differentials have risen sharply since early September. A prolongation of the APP by nine months and the ECB maintaining the forward guidance on interest rates should be negative for the euro. However, giving recent resilience of the single currency any hawkish deviations in the ECB assessment won’t go unnoticed in FX market
In that scenario, there are upside risks for the euro, especially short-term. Further down the road, issues like Spain, the replacement of Yellen and the US tax cuts come to support the dollar. For today, any ‘perceived hawkishness’ (or e.g. a positive tone on the economy) might already be enough to trigger a substantial up-tick in the single currency.
From a technical point of view, EUR/USD dropped below the 1.1823/ 1.2070 consolidation pattern, but there was no sustained follow-through price action, which was disappointing for EUR/USD bears. The pair needs to drop below 1.1670/62 to give comfort to EUR/USD bears. ON the topside, a break of the 1.1880 area might open the way for a retest of the 1.2092 correction top. The USD/JPY momentum was positive in September. The pair regained 110.67/95 resistance, a short-term positive. The 114.49 correction top is the next resistance. Sentiment improved further last week, but we still assume that a break beyond 114.49 will be difficult. This week’s failed return above 114 confirms our view.
EUR/USD: holding within established ranges going into ECB meeting
EUR/GBP
EUR/GBP holds near 0.89 as BoE rate hike is discounted
Yesterday, the focus for sterling trading turned from Brexit to the eco data. UK Q3 GDP growth printed slightly stronger than consensus. The ‘stronger’ Q3 GDP removed most market doubts on a BoE rate hike next week and kick-started a sterling rebound. EUR/GBP returned below 0.89 and closed the session at 0.8909. The rise in cable was even more impressive. The pair jumped from the 1.3120 area and closed the session at 1.3262. USD softness also play a role.
Today, the CBI retail data will be published. For October, a substantial setback is expected after a remarkable upswing in September. The correlation between the monthly CBI data and the ONS retail sales is very loose and the market reaction is thus modest at best. A one-off BoE rate hike is now ‘discounted’ after yesterday’s better than expected GDP data. We don’t expect the CBI data to amend it. Maybe there is room for a slightly bigger reaction in case of a weak than of a strong report. The euro reaction after the ECB will also be key for EUR/GBP.
EUR/GBP staged a strong uptrend from April till late August and set a top at 0.9307. Rising UK inflation and the BoE preparing markets for a November rate hike triggered a sterling rebound, but it has run its course. EUR/GBP supports at 0.8743 and 0.8652 proved too 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: holding tight ranges, but bottom looks well protected
