Sunrise Market Commentary
- Rates: Upward bias core bonds to start new trading week
The US, 10-yr and 30-yr yields failed to close above key resistance levels last week, suggesting some downward correction this week with event risk looming and a likely positive impact on core bonds (next Fed chair, main US eco data, Russian probe, tax reforms, Catalunya,…). The US Note future could outperform the German Bund. - Currencies: Euro remains weak and loses support versus dollar and sterling
The post-ECB euro selling continued on Friday but its intensity eased. Some technical supports were broken, suggesting that the market may still a bit too long euro. We think the correction might have somewhat further to go. However, sterling and the dollar have issues too. Therefore, we prefer a euro sell-on-upticks ST and a euro buy at lower, key euro supports
The Sunrise Headlines
- US stock markets ended last week on a positive note with a huge outperformance of Nasdaq (+2%) on strong earnings from bellwether tech companies. Asian stock markets are mixed overnight.
- Spain faces a crucial test of its authority over Catalonia today when regional government ministries open under the direct control of Madrid for the first time since the country’s return to democracy 40 years ago.
- President Trump is likely to announce Federal Reserve governor Powell as his nominee to be the next chairman of the US central bank next week, according to a person familiar with the matter.
- The man in charge of the ECB’s €2.5 tn stimulus programme, Benoit Coeure, hopes it will not be extended again when it expires in September, he told a French weekly newspaper.
- Some of the world’s most powerful oil producers including Saudi Arabia are rallying behind an extension of a global supply cuts agreement, providing support to crude prices that have rebounded to $60/barrel.
- S&P unexpectedly upgraded the Italian rating from BBB- to BBB (stable outlook). The upgrade reflects Italy’s firming economic recovery, driven by investment activity and improving labour market trends.
- Today’s eco calendar is busy with German (CPI) and US (PCE) inflation readings. EC EMU confidence indicators are also on the agenda. Italy taps the markets and ECB Costa and Hansson are scheduled to speak
Currencies: Euro Remains Weak And Loses Support Versus Dollar And Sterling
EUR/USD extends decline. Dollar picture improves
EUR/USD extended its post-ECB decline on Friday, but the pace slowed. The move was mostly due to euro softness. The prospect of the dovish Mr. Powell eventually succeeding Ms. Yellen pushed US yields lower in mid US trading and narrowed the interest rate differential, but an attempt of the euro to rally was rapidly aborted and reversed. It suggests that the market is still too long euro. Mr. Draghi’s dovish comments look to shed euro long exposure. EUR/USD eventually sluggishly moved higher on pre-weekend positioning to close at 1.1610 from 1.1650. USD/JPY traded north of opening levels, but could never really make headway. It briefly tested the key 114.50 resistance, but a break didn’t occur despite broad-based equity gains. After the Powell rumours, USD/JPY slid even into negative territory, closing at 113.68 versus a 114 opening.
Overnight, FX markets traded subdued with EUR/USD and USD/JPY little changed from openings levels around 106.09 and 113.73 respectively. The Kiwi dollar remains under pressure as the government wants to change the RBNZ remit, which might mean including employment objective.
Eco calendar uneventful
Today in EMU, the attention will focus on the EC business indicators and the German HICP inflation (October). In the US, the personal income and spending for September is released. For details see the fixed income section. Summarizing: the data shouldn’t be of importance for FX
Events plentiful this week
Five events may affect FX markets. First, President Trump is due to announce his nominee for Fed Chair. Fed governor Powell is the frontrunner and markets have at least partly already discounted his win. A surprise nomination of (hawk) John Taylor would likely hit US Treasuries and favour the dollar. Second, the November FOMC meeting concludes on Wednesday, but no surprises are expected and thus it should be neutral FX-wise. Third, the Republicans will unveil details of the tax reform bill. If the details show bigger tax cuts than recently suggested, it would be negative for US Treasuries and dollar positive. Fourth, the standoff between Spain and Catalonia. Until now, it didn’t play a big role in EUR/USD trading, but as long as the impasse stays, it would be slightly dollar positive. Finally, the payrolls with too high? expectations
Dollar to make more corrective gains versus euro?
The euro traded strong in the run-up to the ECB decision. The dollar failed to gain against the euro despite widening interest rate differentials since early September. This trading dynamic was broken after the ECB decision and extended on Friday. Policy divergence between the ECB and the Fed is again on the radar of (FX) markets. A EUR/USD sell-on upticks bias remains favoured. Any additional interest rate support for the dollar will probably be modest near term, especially if Powell is nominated to succeed Yellen. So, any further EUR/USD decline might develop gradually. For today, we have a neutral bias.
Technicals: EUR/USD uptrend brokenFrom a technical point of view, EUR/USD dropped below 1.1670/62 support. If confirmed, it would signal that the uptrend in place since the turn of the year is broken, as the higher highs, higher lows pattern is shattered. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY’s momentum was positive in September. The pair regained 110.67/95 resistance, a positive. The 114.49 correction top is the next resistance. Sentiment improved last week, but the first test on Friday failed. We don’t preposition for a sustained break higher.
EUR/USD broke below 1.1662 support. If confirmed, the year-long euro uptrend would be finished
EUR/GBP
EUR/GBP returns below 0.89 on euro weakness
On Friday, EUR/GBP initially returned to the 0.89 area, despite EUR/USD staying near the post-ECB lows. Ongoing diffuse comments on the Brexit process from inside and outside the UK weighed on sterling. However, the sterling fought back and gained even some more ground versus the euro (and dollar) after 16 CET when the rumour that Trump leans towards the nomination of dovish Powell couldn’t push EUR/USD sustainably higher. EUR/GBP closed around 0.8840.
The UK eco calendar contains the money supply and lending data, but these are unlikely to make the difference, while EMU data won’t affect the overall euro trading either. The key for sterling might be on Thursday when the market expects a BoE rate hike to 0.50%. There is a strong majority of economists expecting a rate hike and markets price a 88.4% chance of a rate hike. This means asymmetrical risks for sterling. Slight gain in case of rate increase, but heavy losses in case of an unchanged decision. We don’t expect that the rate hike will be the start of a genuine rate cycle and neither does the market. Ahead of the BOE we expect sideways trading in the 0.8743 to 0.9033 range maybe with slight sterling gains on the basis of the technicals. We maintain a EUR/GBP buy-on-dip bias, but are in no hurry to add exposure until we see signs that euro correction is over.
EUR/GBP staged a strong uptrend from April till late August with a top at 0.9307. Rising UK inflation and the BoE preparing markets for a rate hike caused a sterling rebound, but it has run its course. EUR/GBP recently tried to regain the 0.90 area, but there were no follow-through gains. The drop below the 0.8855 area (neckline minor double top) on Friday may, if confirmed, open the way for a return to the 0.8743 or even 0.8652 supports. This area will be tough to break.
EUR/GBP: minor double top, if confirmed, may push sterling correction a bit further. Still sell sterling on up-ticks.
