Sunrise Market Commentary
- Rates: Corrective upward bias remains in place
Last week’s failed test of key US yield resistance levels (10y & 30y) induced technical-inspired buying. We hold our corrective upward bias today even if US activity data are expected strong. The German Bund could profit from disappointing core inflation though we fear that the ECB’s 9-month APP extension removed market relevance of EMU data. - Currencies: Dollar rally against euro stopped for now
The euro regained some ground yesterday, but couldn’t take out key resistance. Today, the eco calendar is busy and pressure mounts on president Trump after the prosecutor indicted former campaign chief Manafort. With some key events in the next days, traders will be cautious to put on aggressive positions
The Sunrise Headlines
- US stock markets eventually closed up to 0.35% lower as the Tech rally lost steam. Asian stock markets recover from initial weakness (Chinese PMI’s) and are currently mixed.
- The Bank of Japan kept its massive monetary stimulus program unchanged even as it trimmed its inflation forecasts, signalling further divergence ahead from its global peers.
- Growth in China’s manufacturing sector cooled more than expected in October (PMI dropped to 51.6 from 52.4) in the face of tighter pollution rules that are forcing many steel mills, smelters and factories to curtail production over the winter. The non-manufacturing PMI declined to 54.3 from 55.4.
- Court documents show that interactions between Trump’s campaign and Russia occurred earlier and were deeper than previously documented. Former campaign chair Manafort and his partner are under house arrest after pleading not guilty to tax crimes, money laundering, conspiracy and lying to the FBI. Former advisor Papadopoulos cut a plea deal weeks ago and is cooperating.
- Spain’s state prosecutor accused sacked Catalan leader Puigdemont of rebellion and sedition as the former regional president travelled to Belgium with other members of his ousted administration and hired a lawyer there.
- The IMF has warned that the increasing use of exotic financial products tied to equity volatility by investors such as pension funds is creating unknown risks that could result in a severe shock to financial markets.
- Today’s eco calendar contains EMU CPI inflation, unemployment rate and Q3 GDP. In the US, S&P CS housing data, Chicago PMI and consumer confidence are on the agenda.
Currencies: Dollar Rally Against Euro Stopped For Now
EUR/USD fights back, but gains inconclusive
EUR/USD managed to eke out modest gains yesterday, but key resistance played its role, meaning the advance isn’t significant. A euro rally attempt in the morning didn’t go far (1.1644) and gains were undone when German inflation was weak and surprised on the downside. Special prosecutor Mueller’s unsealed indictment against former Trump campaign director Manafort and revelations former foreign policy advisor Papadopoulos had lied against the FBI and is now cooperating with the FBI should have been a dollar negative, but its precise impact is difficult to measure. Anyway, the dollar lost ground across the board in the US afternoon session. US equities dropped lower and the US-German yield spread narrowed further, common drivers of the pair. EUR/USD moved back higher to 1.1660 and closed at 1.1652, a 45 ticks daily gain. The key resistance (1.1662) was untested. USD/JPY traded sideways until in the US session when lower yields and equities favoured the yen. USD/JPY closed at 113.20 versus 113.67 on Friday.
Overnight, Asian equities trade narrowly mixed, not too far from WS modest closing losses. US Treasuries are insignificantly higher. That’s not enough to move USD/JPY , which is trading flat at 113.20, ahead of BOJ Kuroda’s press conference. The BOJ, as expected, kept its policy unchanged, but revised down its inflation forecasts. The euro is weaker against dollar (1.1625 from 1.1650) and sterling (0.8805 versus 0.8821). EUR/USD failed yesterday to recapture the 1.1662 neckline head and shoulder formation, teasing Asian traders to sell the euro, but dollar gains are evaporating as the European opening nears. Eco calendar busy (see fixed income part: details)
We see some upside risk to Q3 GDP (0.6% Q/Q instead of 0.5% Q/Q?) that will remain strong anyway, while euro area HICP inflation should surprise on the downside after yesterday’s weak German HICP. The key for market reaction will be the core inflation. Has it declined too? If so the euro might weaken. In the US, consumer confidence will be strong, maybe stronger than expected, and Chicago PMI should be strong too, but off last month peak value. The Cost Employment Index is expected to have rebounded. It is no strong market mover, but an upward surprise combined with strong activity data may be dollar positive
Dollar to make more corrective gains versus euro?
The technical picture points to more corrective gains of the dollar versus euro, but some hurdles may avoid these gains to crystallise today or in the next days. The FOMC meeting on Wednesday, while likely a non-event will keep traders cautious, as does the imminent choice on Thursday (?) of the next Fed chairman and the US payrolls on Friday. The judicial action in the Trump-Russian election campaign affaire is a wildcard. Regarding the eco data, activity data will be strong in the US and EMU, but a downward surprise in EMU core inflation could give the dollar an advantage today.
Longer term, 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. A EUR/USD sell-on upticks bias remains favoured with 1.1662 an interesting level. Any additional rate support for the dollar will probably be modest near term, especially if Powell is nominated to succeed Yellen. So, further EUR/USD decline might develop gradually.
EUR/USD broke below 1.1662 support. Return action yesterday failed, but test may not be over.
EUR/GBP
Technicals: EUR/USD uptrend broken
From a technical point of view, EUR/USD dropped below 1.1670/62 support, which was re-approached yesterday. If the break is 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.
Sterling in ST positive flow
Sterling was already for some days in a positive flow and that continued yesterday. The UK eco calendar is empty today. Earlier this morning, consumer confidence was slightly weaker in October (but as expected), while Lloyds business barometer increased to 26 from 23. These are no market movers. Nevertheless sterling traded overnight again with a minor positive bias against the euro. For today, impetus should come from euro trading. If weak inflation hits the euro overall, sterling may make some more gains. However after a four day winning streak, the going will get tougher. The upcoming BOE meeting on Thursday should protect sterling against a significant countermove. 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 technical elements. We maintain a EUR/GBP buy-on-dip bias but are in no hurry to add exposure.
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 open the way for a return to 0.8743 or even 0.8652 supports. This area will be tough to break.
EUR/GBP: minor double top may push sterling correction a bit further. Still sell sterling on up-ticks.
