Sunrise Market Commentary
- Rates: More outperformance of US Note future vs Bund?
Short covering in an oversold US Treasury market started after US yields failed to pierce through key resistance levels after the end of the government shutdown. The correction can continue today, causing more outperformance of the US Note future vs the Bund. Another strong batch of EMU PMI’s could weigh on the Bund from the EMU side. - Currencies: USD is fighting an uphill battle
The dollar couldn’t profit from the end of the US government shutdown. Any USD up-tick was again used to offload USD longs with USD/JPY taking the lead. Investors also don’t want to be positioned short euro/long dollar going into tomorrow’s ECB meeting. Will Draghi be able to change fortunes for the euro?
The Sunrise Headlines
- US stock markets ended marginally higher with Nasdaq outperforming, receiving a strong boost from Netflix. Asian risk sentiment is more mixed overnight with Japan underperforming on yen strength.
- The Senate confirmed Jerome Powell to become the 16th chairman of the Federal Reserve, clearing the way for a new leader likely to continue raising interest rates to keep the nation’s economic expansion on track.
- Japan’s exports to China and Asia hit record levels as shipments rose for a 13th straight month in December and manufacturing growth hit a four-year high in January, pointing to an economy that powered through Q4 and into 2018.
- China’s Ministry of Commerce condemned the US tariffs, calling them a misuse of trade measures, and said it hopes Washington will show restraint in imposing trade restrictions.
- Robert Mueller wants to question Trump about firing former FBI Director Comey and removing Flynn as national security adviser, a person familiar said, indicating the probe is intensifying its focus on possible obstruction of justice
- Eleven countries aiming to forge an Asia-Pacific trade pact after the United States pulled out of an earlier version will sign an agreement in Chile in March, Japan’s economy minister said, in a big win for Tokyo.
- Today’s eco calendar contains EMU PMI’s, the UK labour market report and US existing home sales. The US Treasury continues its refinancing operation with 2-YR FRN and a 5-YR Note auctions
Currencies: USD Is Fighting An Uphill Battle
USD remains in the defensive
Dollar sentiment eroded again yesterday. The (temporary) solution of the government shutdown didn’t help the USD. EMU eco data were strong, but no big factor for the EUR/USD rise. Broad-based USD softness prevailed. US yields failed to stay above key resistance levels and eased slightly. USD/JPY’s price action was telling. Yen weakness after soft BOJ comments was soon undone and used to reduce USD exposure. USD/JPY dropped from 111+ levels to close the session at 110.31. EUR/USD revisited 1.23 and closed the session at 1.2299.
Overnight, Asian equities mostly trade with modest gains. Japanese trade data were ok with imports (14.9% Y/Y) rising faster than exports (9.3%), indicating a healthy economic context. Japanese equities underperform, suffering from a further rise of the yen. Yesterday’s USD decline continues. USD/JPY dropped below the 110 barrier. EUR/USD set a minor new top in 1.2335 area. AUD/USD tries to sustain north of 0.80.
EMU PMI’s are expected to ease slightly after last month’s peak levels . The US Markit PMI’s and existing home sales will only be of intraday significance. Global factors (comments on US tariffs in Davos), US interest rate markets and a positioning in the run-up to the ECB meeting will drive USD trading. The ST term trend is clearly USD negative. Investors are cautious on euro short positions going into the ECB meeting. Draghi will probably maintain a soft tone and warn on the impact of a strong euro to reach the inflation target. Whatever the outcome of tomorrow’s ECB meeting, we look for signs of a pause on the recent euro rally. Global Picture: the dollar is in the defensive as markets prepare for a change in policy from central banks outside the US. This propelled EUR/USD despite a huge interest rate differential in favour of the dollar. The USD decline slowed last week, but the trend remains in place for now. A return below previous resistance at 1.2092 is needed to call off the ST alert for the dollar. EUR/USD 1.2598 (62% retracement) is next important resistance on the charts.
Sterling’s rebound slowed yesterday despite constructive UK eco data. EUR/GBP settled in the upper half of the 0.87 big figure. Cable was well bid near 1.40 on USD weakness. Today, UK labour market data will be published. The report showed tentative signs of a loss of momentum in job creation last month. Weekly earnings are expect stable at 2.3% Y/Y. Another soft report might slow the recent performance of sterling. EUR/GBP is drifting lower in the 0.8928/0.8692 consolidation range. We keep the view that the EUR/GBP 0.87 area is a tough support.
EUR/USD: testing cycle top ahead of the ECB meeting
