Sunrise Market Commentary
- Rates: Bunds outperforming US Treasuries on mixed inflation readings?
Influential NY Fed governor Dudley said overnight that the outlook for fiscal stimulus shifts risks to growth, inflation, and the speed of the Fed’s tightening cycle to the upside. Today’s inflation data are expected to show a significant drop in EMU, while rising above the Fed’s 2% target in the US. That should cause outperformance of the Bund vs. US Treauries. - Currencies: EUR/USD nosedives on soft EMU inflation while dollar rebounds
The euro’s decline accelerated yesterday on very soft German inflation data. At the same time the dollar was supported by hawkish Fed comments and a rising interest rate support. Today, a soft EMU CPI shouldn’t come as a surprise, but won’t help the euro. US data might remain mildly USD supportive. Sterling is still captured in a short-squeeze post Brexit
The Sunrise Headlines
- US stock markets extended this week’s comeback and closed around 0.3% higher. Overnight, most Asian stock markets lose some ground with Japan and China outperforming (+0.4%)
- Prospects for the US economy have brightened now that fiscal stimulus from Washington appears more likely, so the Fed will need to keep raising rates and eventually trim its bond portfolio to avoid an overheating, NY Fed Dudley said.
- China’s official manufacturing PMI climbed to the highest in almost 5 years (51.8 from 51.6), the latest evidence of increasing momentum in the world’s 2nd largest economy. The non-manufacturing PMI increased from 54.2 to 55.1.
- Some mixed readings on inflation and a drop in household spending in Japan have taken some of the shine off solid industrial production and unemployment numbers this morning.
- Venezuela’s supreme court, which is controlled by President Maduro’s socialist government, has ruled it is taking over the opposition-dominated National Assembly, sparking fears that the crisis-riven country has moved towards full-blown dictatorship.
- South Africa’s President Zuma fired FM Gordhan and replaced him with Home Affairs Minister Gigaba, a person familiar said, extending the rand’s decline. USD/ZAR trades around 13.5, from 12.5 at the start of the week.
- Today’s eco calendar contains EMU (CPI) and US (PCE) inflation and some second tier data (US personal income/spending, Chicago PMI, final Michigan consumer confidence). More ECB/Fed members speak.
Currencies: EUR/USD Nosedives On Soft EMU Inflation While Dollar Rebounds
EUR/USD hammered on USD rebound and soft euro The euro remained in the defensive yesterday. Market rumours of the ECB being unhappy with the recent hawkish market reaction continued to weigh. They were reinforced by a sharp decline in German and Spanish inflation. EUR/USD finally even dropped below the 1.07 big figure as the dollar gained momentum later in the session. EUR/USD finished the session at 1.0674 (from 1.0766 on Wednesday). The rise of USD/JPY was initially modest, but accelerated later, supported by higher US yields. The pair finished the day at 111.92 (from 111.04).
Overnight, Asian equities are trading mixed with Japan and China outperforming. Japanese eco data were mixed with the headline February CPI slightly higher than expected at 0.3% Y/Y. As usual the data had hardly any impact on yen-trading. USD/JPY tries to regain the 112 barrier as the dollar remains well bid. The US currency is further supported by hawkish comments Fed’s Dudley yesterday evening. China PMI data were strong (manufacturing PMI 51.8; nonmanufacturing PMI 55.1). EUR/USD hovers near yesterday’s lows (1.0675 area).
Today, the EMU CPI flash estimate and the German labour market data will be published. In the US, PCE deflators, personal spending and income data, Chicago PMI and final Michigan consumer confidence are scheduled for release. The consensus for the EMU CPI still stands at 1.8% for the headline and 0.8% for the core. A very soft figure should already be discounted after yesterday’s low readings in Germany and Spain. Even so, a sharp decline of the EMU inflation data shouldn’t help the euro. In the US we keep an eye at the PCE deflators (headline expected at 2.1% Y/Y, core at 1.7%). A rise north of 2.0% might cause more talk on the Fed meeting its targets. The Chicago PMI is expected slightly softer at 56.9, but should remain at a reasonable high level. Sentiment on the dollar improved earlier this week as the US reflation trade regained momentum after a very strong US consumer confidence. US Fed speakers also confirmed that further policy normalization is to be expected throughout 2017. At the same time, the euro faced headwinds as market rumours questioned the scenario of early ECB policy normalization. The move was reinforced by very soft EMU inflation data. Part of this repositioning should be discounted now. Even so, some underperformance of Treasuries versus Bunds is still likely, widening the interest rate differential in favour of the dollar. A cautious EUR/USD sell-on-upticks approach can be reconsidered. The day-to-day momentum of USD/JPY also improved. However, further gains might be capped if the equity rebound would slow. We stay cautious on the USD/JPY upside potential
From a technical point of view, USD/JPY regained the 111.36/60 previous range bottom. This called off the imminent downside alert in this cross rate. For now, we maintain a neutral bias. EUR/USD extensively tested the topside of the MT range, but the test was rejected earlier this week. The 1.0874/1.0906 area now looks a solid resistance. EUR/USD might return lower in the previous 1.0875/1.05 trading range.
EUR/USD: combination of USD rebound and euro softness is pushing EUR/USD back lower in the established trading range .
EUR/GBP
Post-Brexit sterling short-squeeze continues
For now, the start of the ‘official’ Brexit procedure didn’t cause any negative sentiment on the UK currency, on the contrary. The relative political calm in the Brexit-process triggered a further squeeze of GBP shorts. At the same time, the euro was under pressure as the market adapted positions for a prolonged period of easy ECB policy. This combination pushed EUR/GBP sharply lower yesterday. The pair tumbled below 0.86 and closed the session at 0.8562 (from 0.8658). The short-squeeze of sterling against the dollar was less aggressive, especially as the dollar gained momentum later in the session. Cable finished the session at 1.2468 (from 1.2435).
Overnight, Gfk Consumer confidence stabilised at -6 (-7) was expected. Sterling remained well bid in Asia this morning, but the pace of the rebound is slowing. Later today, the third and final reading of the UK Q4 GDP and the Q4 current account deficit will be released. These data are a bit old dated. Even so, a sharp decline of the current account deficit is expected from -£25.5 B to £16.0B. In the current sterling positive momentum, a good figure could still cause some further unwinding of GBP shorts.
Two weeks ago, sterling found a better bid after the early March decline. Substantially higher than expected UK inflation and a more hawkish tone from the BoE put a decent floor for sterling short-term. We changed our short-term bias on EUR/GBP from positive to neutral. Further consolidation in the MT sideways range might be on the cards. The return below the 0.8592 previous break-up even suggests that a full retracement to the 0.8402 range bottom is possible. Longer term, Brexit-complications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after this months’ higher inflation data.
EUR/GBP: euro decline and sterling short-squeeze are pushing EUR/GBP lower in the established trading range
