Sunrise Market Commentary
- Rates: Strong payrolls should weigh on US Treasuries
All eyes are on the US payrolls today. Consensus expects a strong net job creation of 180k with risks even on the upside of expectations. The unemployment rate will remain near cycle lows while earnings might also be higher than expected. This mix is unequivocally negative for US Treasuries. - Currencies: Payrolls to change fortunes in favour of the dollar?
Yesterday, the dollar was slightly in the defensive in the wake of a soft Fed statement and as risk sentiment remained cautious. Today, focus turns to the US payrolls. We see risks for an above consensus labour market report. If so, it might help to put a floor for the recent USD correction
The Sunrise Headlines
- US stock markets traded choppy near opening levels ahead of today’s payrolls. Overnight, Asian stock markets trade mixed as well with China slightly underperforming after a 5-day Lunar NY holiday.
- China’s central bank surprised financial markets by raising short-term interest rates on the first day back from a long holiday, in a further sign that it is slowly moving to a tighter policy bias as the economy shows signs of steadying.
- Growth in China’s manufacturing sector slowed markedly at the start of the year as the flow of new business slowed despite a boost in export orders, according to the Caixin-Markit manufacturing PMI (decline from 51.9 to 51.0).
- Amazon disclosed a weaker-than-expected 22% rise in quarterly sales, along with a disappointing revenue outlook, sending the e-commerce heavyweight’s shares down in after-hours trading.
- US defence secretary Mattis warned Pyongyang that Washington would respond to the use of nuclear weapons with “effective and overwhelming” force, days after the White House launched a comprehensive review of North Korea policy.
- Japanese government bond yields and the yen have swung wildly in morning trade after the Bank of Japan bought more bonds than expected in its market operations.
- Romania faced some of the biggest anti-government demonstrations since the fall of communist leader Ceausescu. At least 200k people demonstrated against an emergency decreed that opponents say hinders the fight against corruption
- Today’s main events are US payrolls, non-manufacturing ISM and a speech by Fed governors Evans. The EMU (final) and UK services PMI’s will also be released.
Currencies: Payrolls To Change Fortunes In Favour Of The Dollar?
Will payrolls change USD fortunes for the better?
Yesterday, there were few important eco data in the US and Europe. So, Wednesday evening’s relatively soft Fed statement and a cautious global market sentiment drove USD trading. Both elements were slightly negative for the dollar. EUR/USD set a new ST correction top north of 1.08, but finished the session off the intraday highs at 1.0759. USD/JPY tested the recent low of 112.08, but a break didn’t occur as investors await today’s key US payrolls report.
Overnight, Asian markets show a mixed picture as Chinese investors return from the Lunar New Year holidays. Most Asian equities trade mixed. Japan outperformance as USD/JPY rebounds of yesterday’s low. The BOJ caused some intraday volatility with the execution of its bond buying programme. Japanese yields end the yen jumped temporary higher, but this was countered by a successful fixed rate unlimited buying operation of 5-to10 year government bonds. The yen finally weakened further. USD/JPY trades currently just north of the 113 big figure. At the same time, the dollar is slightly better bid compared to yesterday. EUR/USD trades in the 1.0755 area.
Today, the US payrolls will be the key feature for USD trading. The market expects 180K net January payrolls growth. The unemployment rate is expected unchanged at 4.7%. Average hourly earnings are expected at a strong 0.3% M/M and 2.8% Y/Y. In December, it was even stronger at 0.4% M/M and 2.9% Y/Y, the cycle high. Based on other recent data evidence (ISM, ADP , claims) and technical factors, we see risks for stronger than expected payrolls growth. Regarding the unemployment rate, we side with the consensus. Regarding wages (AHE) we have no reasons to distance us from consensus, but are cautious as many states raised the minimum wage, sometimes quite substantially. Earlier this week, the dollar rebounded intraday after the strong ADP report/manufacturing ISM. So, despite rising uncertainty on the impact of Trump’s policy, strong key US data might support the dollar as they could finally push the Fed to take a next step in its normalisation process. We see a decent chance that today’s payrolls might be USD supportive. If so, the dollar might drift further away from the key support of USD/JPY 112.06/08 and the EUR/USD 1.0874 resistance. Trump-driven (USD) uncertainty might temporary move a bit to the background.
Global context. The USD rally due to the Trump reflation trade petered out of late. Even more, Trump politics/communication is becoming a sources of global uncertainty that weighs on the dollar, at least temporary. EUR/USD broke a minor resistance at 1.0775. Next resistance is coming in at 1.0874. The day-to-day USD momentum has become more fragile. A return above EUR/USD 1.0874 would question the short-term USD positive outlook. At some point, the absolute interest rate support should provide a USD floor. We wait for technical signals that the USD correction has run its course. Today’s payrolls, if strong, might provide such a signal. USD/JPY is trading well off the post-Trump highs (118.60/66). The recent rebound off the lows (112.08) wasn’t convincing. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is the next key support.
EUR/USD: dollar to profit from a strong payrolls report
EUR/GBP
Sterling developing a topping out process?
Yesterday, EUR/GBP drifted higher going into the BoE’s policy announcement. The BoE left its policy rate unchanged and didn’t expand the APP. The BoE acknowledged the ongoing resilience of the UK economy and raised its growth forecasts. At the same time, the BoE basically maintained its inflation forecast. Some members indicated that the inflation overshoot is coming a little closer to its limits. Even so, the BoE still sees substantial risks from the Brexit process. An early rate hike isn’t on the cards. This absence of potential additional interest rate support in the near to medium term hammered sterling. EUR/GBP jumped temporary back above the 0.86 barrier, but closed the session at 0.8588. Cable lost well over 1 big figure and closed the session at 1.2527.
Today, the UK services PMI is expected to ease slightly from 56.2 to 55.8. We don’t have as strong reason to take a different view from the consensus. Of late, UK eco data showed decent resilience. That said, after yesterday’s soft BoE assessment on inflation, sterling might again become a bit more sensitive to negative eco news or turbulence from the Brexit process. Of course, later in the session, the overall USD swings in the dollar will also affect the sterling cross rates. After yesterday’s rebound, EUR/GBP 0.8450 support looks again a bit better protected. We look for confirmation that a bottoming process is coming in place. The price action in cable at least suggests that further sterling gains against the dollar won’t be easy.
EUR/GBP: 0.8450 support better protected after soft BoE policy assessment
