Sunrise Market Commentary
- Rates: Test of contract high (Bund) likely; sell-the-uptick?!
The German Bund is near the 163.43 contract high. Failure to sustainably move above this level could be an opportunity to sell-the-uptick. The rally of oil prices didn’t impact bonds until now and we look out whether that remains the case. The start of the US’ quarterly refinancing operation is negative for US Treasuries. - Currencies: Dollar fails to overcome technical resistance, for now
The dollar came close to/tested important technical levels yesterday and against the euro and the yen, but no real break occurred. Today, the calendar is again thin. Still we look out whether a next attempt might succeed. Sterling regains most of the post-BoE decline. For now, we don’t seen any fundamental news to explain the move.
The Sunrise Headlines
- US equities ended with small gains, led by the energy sector after crude price soared more than 3%. Brent crude rose above $64/barrel for the first time since June 2015. Asian indices gain up to 1% this morning.
- Australia’s central bank showed increasing confidence in the investment picture outside mining while retaining concerns about the prospects for household spending as it kept interest rates at a record-low 1.5%
- New Zealand’s government confirmed it’s considering a dual mandate for the central bank targeting full employment alongside price stability. WSJ reported that Fed Williams advocates the adoption of a price level targeting strategy in the face of the ongoing low inflation.
- The ECB will reinvest €130bn of bonds that are set to mature in the coming year, according to data released yesterday – but the early months of 2018 are likely to see a low amount of re-investments.
- The ECB’s plan to force banks to set aside more money against future bad loans got tacit support from euro zone finance ministers despite concerns in Italy the move might weaken some of its banks.
- Italy’s centre-right led by former prime minister Berlusconi has fended off a strong challenge from the populist Five Star Movement to win the presidency of Sicily, ringing alarm bells for Matteo Renzi and his centre-left Democratic party (PD) in a poll seen as the final test ahead of Italy’s next general election.
- Today’s eco calendar contains German industrial production, EMU retail sales and US JOLTS job openings. ECB Draghi, Lautenschlaeger and Nouy speak at an ECB conference. Austria, Germany and the US tap the market
Currencies: Dollar Fails To Overcome Technical Resistance, For Now
Dollar holding near recent highs
Yesterday, FX trading showed two faces. Initially, the euro was in the defensive even as EMU eco data were strong. USD/JPY, EUR/JPY and EUR/USD all lost ground in lockstep. EUR/USD dropped temporary below 1.16, but the correction stalled ahead of the 1.1575 post-ECB low Late in Europe, the dollar came under pressure. The USD decline coincided with a new up-leg of the oil price. EUR/USD closed the session at 1.1610, little changed from Friday. USD/JPY finished the session at 113.71 (from 114.07).
Overnight, Asian equities are in very good shape. Several indices including the Nikkei are trading at multi-year highs. Higher oil and commodity prices are supporting energy and materials companies. USD/JPY trades again in the 114 area. The USD/JPY performance remains mediocre given the stock market rally. EUR/USD is little changed in the 1.1605/10 area. The Reserve Bank of Australia as expected left its policy rate unchanged at 1.5%. The RBA remains positive on growth and employment, but low inflation/wages and a high consumer debt make the RBA cautious to raise rates in the foreseeable future. The AUD trades little changed below 0.77.
The eco calendar remains thin today, with the September US JOLTS job openings and the EMU retail sales. None is a market mover. The speeches of Draghi, Lautenschlager and Nouy at an ECB forum on supervision on “Europe’s changing banking landscape” might be important for banks shares, but not for FX or bond markets. The start of the US quarterly refunding and some political events may be the focus today.
Last week, EUR/USD held close to the post-ECB low, but there were no followthrough losses for the euro. The nomination of Powell as next Fed-Chairman, new proposals to change the US tax code and Friday’s payrolls were not able to break this stalemate. Until now, the dollar failed to really profit from high interest rate differentials (especially at the short end of the curve). This is slightly disappointing for USD bulls. That said, EUR/USD currently trades more than 400 ticks below the cycle top. The wide positive interest rate differential should give the dollar downside protection unless there is high profile US negative news. For now, the rise in oil prices had hardly any impact on interest rates or on FX. We look out whether this remains the case. Yesterday’s USD price action was mixed. EUR/USD failed to go for a test of the 1.1575 area. USD/JPY was again not able to break the 114.50 range top. We maintain a sell-on-upticks bias, but the dollar clearly needs good news to realise any sustained gains. It is not sure this news will come in very soon.
From a technical point of view, EUR/USD dropped below 1.1670/62 support, but no convincing follow-through dollar gains occurred. A break below the 1.1575 post-ECB low would confirm that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY’s momentum was positive in past months. The pair regained 110.67/95 resistance. The pair tested the 114.49 MT range top, but the attempt failed. A sustained break would improve the technicals. We remain cautious to preposition for further USD/JPY gains.
EUR/USD nearing the 1.1575 post-ECB low, but no real test yet
EUR/GBP
Sterling extends rebound
On Friday, sterling regained modest ground after Thursday’s post-BoE sell-off. This rebound continued yesterday. We didn’t see any eco or political news to explain the follow through sterling buying. Maybe some investors hope on progress in the next round of Brexit-negotiations which starts later this week. For now, the political scandals (inside and outside the Conservative party) don’t affect sterling trading. EUR/GBP closed the session at 0.8815. The decline was at least partially due to euro softness. Cable also rebounded and finished the session at 1.3171.
Overnight, the Like for like BRC retail sales unexpectedly declined 1.0 Y/Y (a more modest slowdown from +1.9% Y/Y to +0.8% was expected). Later today, the Halifax house prices will be published. They probably won’t be important for sterling trading. So, domestic politics and Brexit will probably set the tone for trading. We look out how far the repositioning of sterling goes.
MT technical. In September, sterling rebounded as the BoE prepared markets for a rate hike. This rebound ran into resistance as markets anticipated that any rate hikes would be very gradual and limited. This view was confirmed at last week’s BoE policy meeting. EUR/GBP currently trades in a 0.8733/0.9033 consolidation range. A downside test of this range was rejected last week. We maintain the view that the 0.8733 -0.8652 support area will be though to break in a sustainable way. A EUR/GBP buy-on-dips approach is favoured. 0.9023/33 is the first important resistance for the EUR/GBP cross rate
EUR/GBP: reverses most of post-BoE sterling decline, but no important technical levels are hit.
