Sunrise Market Commentary
- Rates: Outcome healthcare bill vote reflection of prospects fiscal stimulus plans?
Today’s eco calendar heats up, but investors could turn to wait-and-see mode. If US President Trump manages to push through the new healthcare bill, it bodes well for pursuing his economic agenda and supports the reflation trade. Failure to do so might bring more of Tuesday’s risk off scenes to markets. - Currencies: Dollar still struggles to stay above key support levels.
Yesterday, the dollar remained in the defensive even as the equity correction eased. EUR/USD and USD/JPY are still within reach of key technical levels. Global sentiment on risk and the first votes on the replacement of Obamacare might decide to which side the USD domino will fall. Sterling lost only temporary ground on the terrorist attack in London.
The Sunrise Headlines
- US equities ended between flat (Dow) and +0.5% (Nasdaq), recovering from Tuesday’s sudden sell-off. Overnight, Asian stock markets trade mostly positive as well.
- A suspected Islamist terrorist mowed down pedestrians on a crowded bridge before crashing his car near the gates of Parliament and stabbing a policeman, leaving 4 dead in an attack that struck at the heart of British democrac
- US President Trump and House leaders pushed for votes for their plan to overhaul Obamacare and said they were making progress in their efforts to win over conservative Republicans. A vote on the bill is possible as soon as today
- The RBNZ kept its policy rate unchanged at 1.75%. Governor Wheeler said that while NZD had weakened by 4% since February, partly thanks to softer dairy prices, “further depreciation is needed to achieve more balanced growth.”
- A study to be presented at the Brookings Papers conference this week by two Federal Reserve Board economists finds that rates could hit zero as much as 40% of the time – far more often than predicted by other studies.
- Fitch downgraded Saudi Arabia by one notch to A+ (stable outlook) from AA- (negative outlook). It said that that while the leadership was strongly committed to diversifying the economy beyond oil, that intention might not be enough.
- Today’s eco calendar heats up with UK retail sales, US weekly jobless claims & new home sales and EMU consumer confidence. The ECB announces the results of its final TLTRO and publishes its economic bulletin. Fed Yellen, Fed Kashkari, ECB Lautenschlaeger and ECB Nouy speak.
Currencies: Dollar Still Struggles To Stay Above Key Support Levels
USD holding near key technical levels
On Wednesday, investors tried to find out what could be next after Tuesday’s risk-off correction. Risk sentiment remained fragile and core yields declined further. This weighed on the dollar, with USD/JPY (temporary) sliding below the 111 big figure. However, the decline in core bond yields and in the dollar halted as there were no sustained follow-through losses of US equities. USD/JPY closed the session at 111.16 (from 111.71). EUR/USD finished the day at 1.0797 (from 1.0811).
Overnight, Asian equities are trade slightly stronger, while the gains of both equities and the dollar are modest. Amongst others, global investors are awaiting a first vote in US house of representatives to repeal Obamacare. It is seen as a condition to pass other fiscal legislation. USD/JPY is trading in the 111.35 area. EUR/USD is trading a narrow range close to, slightly below 1.08. The Reserve Bank of New Zealand kept its policy rate unchanged at 1.75%, as expected, and maintained a neutral bias. The domestic economy performs solidly, but the bank sees many risk outside the country. The RBNZ still sees a need for a weaker kiwi dollar. NZD /USD trades currently slightly softer in the mid 0.70 area.
The calendar is better filled today, but still misses a real market mover. In EMU, several confidence data will be published. They are a precursor for tomorrow’s more important PMI confidence. In the US, the initial claims are expected little changed at 240K and New Home sales are expected up 1.8% M/M in February. Given the recent easing of sales and the low inventory of existing homes for sale, we expect sales to have increased in February. Fed Yellen and Kaskhari speak but on non-policy issues (community development & education). ECB Lautenschlaeger, a hawk, speaks too, but she often shies away from the policy outlook. Markets will keep a close eye whether a replacement for Obamacare can pass Parliament. In case of a an agreement, sentiment on risk might again improve, which might help to put a floor for the dollar. With only second tier eco data on the agenda, sentiment on risk and the political developments in the US (healthcare bill) will set the tone for USD trading. The jury is still out, but yesterday’s price action was not too bad as there were no follow-through losses on Tuesday’s equity correction. However, a clear signal of an USD bottoming out process is needed. Especially USD/JPY remains vulnerable as the pair still struggles not to fall below the 111.36/60 support.
The picture for EUR/USD remains slightly different. Of late, the narrowing of the US-German 2- and 10-year yield spread weighed on the dollar, but this narrowing halted yesterday and capped the topside of EUR/USD. The jury is still out whether or not interest rate differentials will narrow further, but for now, the 1.0829/74 resistance remains intact. A test of the 1.0829/74 resistance is very well possible, but the EUR/USD rebound might further slow. Even so, it is still too early to row against the USD downtrend/ EUR/USD rebound. In a longer term perspective, we don’t change our USD-constructive bias based on the eco fundamentals. However, this doesn’t tell anything on the short-term momentum dynamics
EUR/USD holding near the key 1.0829/74 resistance
EUR/GBP
UK retail sales in focus for sterling trading
Yesterday, no data or other high profile UK specific news events was scheduled. Sterling tried to establish some follow-through gains on Tuesday’s post-CPI rally. However, the focus was on the global factors. EUR/USD and cable broadly followed a similar trading pattern till the headlines on the London terrorist attack hit the screens. This triggered some temporary sterling selling with EUR/GBP jumping to the 0.87 barrier. EUR/GBP closed the session at 0.8649 (from 0.8663). Cable finished the session also marginally stronger at 1.2485.
Today, the UK calendar is better filled with both the February retail sales and the CBI March distributive sales. Official retail sales are expected to have rebounded (0.4% M/M and 2.6% Y/Y) after a setback December and January. After last week’s BoE statement, price data have again become more important for sterling trading rather than activity data. Even so, a positive surprise might make markets pondering the probability of a BoE rate hike further down the road. At the same time, the euro also remains well bid, slowing any potential decline of EUR/GBP. Last week, the sterling decline took a breather. Some time ago, EUR/GBP cleared 0.8592 resistance, improving the MT technical picture. However, this week’s (substantially) higher than expected UK inflation probably put a decent floor for sterling short-term. We changed our short-term bias on EUR/GBP from positive to neutral. Some further consolidation in the 0.85/0.88 area might be on the cards. Longer term, Brexit complications remain a potential negative for sterling, but this issue isn’t in the spotlights right now.
EUR/GBP: sterling remains well bid after higher UK inflation earlier this week
