Sunrise Market Commentary
Rates: US 10-yr yield closing in on 2.3% support
Today’s eco calendar won’t inspire trading, suggesting sentiment-driven action. If yesterday’s risk aversion persists, the US 10-yr yield could eventually test key 2.3% support, the lower bound of the 2.3%/2.64% trading range. We don’t anticipate a move lower given the Fed’s intention to normalize policy (rate hikes and run-off Fed’s balance sheet).
Currencies: Dollar shows no clear trend, but USD/JPY nears key support
The dollar stabilized against the euro yesterday, but the decline in US yields weighed on USD/JPY. The pair nears the key 110 support area. Will the US currency lose further interest rate support. Today’s data probably won’t be decisive yet. The recent short squeeze of sterling shows tentative signs for running into resistance.
The Sunrise Headlines
- US equities eventually closed between flat (Dow) and -0.30% (Nasdaq) after reversing part of the initial losses. Overnight, Asian stock markets lose ground as well with Japan underperforming and China & India closed.
- Car sales unexpectedly slid in March, heightening concerns about bloated dealer stocks and pricing pressure in an industry that has been central to US economic growth. It delivers a sluggish start to the spring selling season.
- South Africa’s credit rating was downgraded to junk status for the first time in almost two decades amid an accelerating drumbeat of calls for President Jacob Zuma to step down. USD/ZAR moved north of 13.75
- Australia kept interest rates unchanged at 1.5%, remaining in a form of policy paralysis as housing is too hot to allow an easing and the economy lacks the strength to absorb a tightening.
- The Fed could begin shrinking its portfolio of bonds as soon as this year, Philly Fed Harker said, adding his voice to a growing number of colleagues warning they could promptly wind down a crisis-era policy.
- The ECB estimates that Banca Popolare di Vicenza and Veneto Banca need about €6.4B to bolster their balance sheets, and considers the two struggling Italian lenders to be solvent, according to people familiar with the matter.
- Today’s eco calendar only contains US trade balance and EMU retail sales. The Austrian debt agency sells bonds. ECB Draghi and Fed Tarullo are scheduled to speak, but the ECB chairman presents the new €50 euro note.
Currencies: Dollar Shows No Clear Trend, But USD/JPY Nears Key Support
Decline in US yields weighs on the US dollar
On Monday, trading in the major dollar cross rates started the new quarter on a slow footing. EUR/USD retested last week’s lows, but no break occurred. The US manufacturing ISM was OK, but didn’t help the US currency. On the contrary, US bond yields declined during the US session, pressuring the dollar. Especially USD/JPY was hurt. A decline in equities and oil was also a USD negative. The pair closed the session at 110.90 (from 111.39). EUR/USD finished the session at 1.0670 (1.0652 on Friday).
Overnight,several Asian markets are closed. The cautious risk-off start to the quarter in the US and the rise of the yen are causing 1%+ losses for Japanese equities. The yen extends yesterday’s rebound. USD/JPY drops to the mid 110 area. EUR/USD shows no clear trend. Euro weakness and USD softness are keeping each other in balance. EUR/USD hovers in the 1.0665/70 area. The Reserve bank of Australia kept its policy rate unchanged at 1.5%. It warns on growth in household borrowing. At the same time, the Bank indicates that wage growth and inflation remain low. It applauds the Aussie decline since 2013. A rise could complicate the economic adjustment. AUD/USD dropped from 0.76+ area to the 0.7575.
Today, the volatile EMU retail sales are expected to rise 0.5% M/M and 1% Y/Y, but the report is most often ignored. In the US, the February trade balance and the factory orders are up for release. The trade deficit is expected to have declined to $44.5B from 48.5B. Technical factors might be in play. We don’t expect a big reaction. The factory orders include the more volatile durable orders that have already been published. Regarding central bankers, speeches from Draghi and Tarullo won’t be important
Last week, the US reflation trade regained traction and supported a comeback of the dollar. Fed speakers also confirmed that further policy normalization is to be expected throughout 2017. At the same time, the euro faced headwinds as rumours questioned the case for early ECB policy normalization. The move was reinforced by very soft EMU inflation data. However, the price action at the end of last week and yesterday suggests that the rise of the dollar as no strong legs. US yields also remain on a downward trajectory .
Of late, we advocated that the dollar needs very strong data to gain more ST term. This assessment remains valid and especially applies to USD/JPY. The pair struggles not to fall to/below the recent lows in the 110 area. The red alert is again on! We keep a close eye on US yields nearing key support levels. For EUR/USD, the repositioning away from early ECB normalization s has been worked out. We maintain a cautious EUR/USD negative bias, but the decline might slow. We don’t see a case for big EUR/USD gains if sentiment on risk would stay risk-off. From a technical point of view, USD/JPY temporary regained the 111.36/60 previous range bottom, but it couldn’t be sustained. A decline below 110 would signal more trouble ahead. EUR/USD extensively tested the topside of the MT range, but the test was rejected last 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: correction slows as USD rebound is running out of steam
EUR/GBP
Sterling short squeeze is slowing
Yesterday, sterling drifted of off Friday’s correction top against the euro and the dollar after a solid performance last week. The UK manufacturing PMI declined from 54.5 to 54.2. The report didn’t change the UK eco picture, but helped to block the recent short-covering rally of sterling. EUR/GBP rebounded to the mid 0.85 area and closed the session at 0.8545. Cable drifted back to the 1.25 area even as the dollar wasn’t in really good shape. The pair closed the session at 1.2486. Yesterday’s price action is a first indication that the sterling short-squeeze ran its course.
Today, the eco calendar only contains the UK construction PMI. A stabilisation at 52.5 is expected. This morning, the sterling remains in the defensive. Both cable and GBP/EUR are ceding ground. Is uncertainty on Brexit again becoming a factor of importance for GBP trading? Mid-March, sterling found a better bid. Substantially higher than expected UK inflation and a more hawkish tone from the BoE supported sterling. We changed our short-term bias on EUR/GBP from positive to neutral. Last week’s decline of the euro reinforced the EUR/GBP downside momentum. Further consolidation in the MT sideways range might be on the cards. The decline below the 0.8592 previous break-up suggests that a full retracement to the 0.8402 range bottom is possible. However, the pair shows tentative signs of a ST bottoming out process. Longer term, Brexitcomplications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after recent higher inflation data
EUR/GBP: sterling short-squeeze shows tentative signs of easing
