Sunrise Market Commentary

Daily Forex Fundamentals | Written by KBC Bank | Jul 17 08 07:16 GMT |

US Treasury curve bear steepens on rebounding equities and higher June inflation US Treasuries were sold heavily yesterday, as equities rebounded on a second day of decline in crude prices, Wells Fargo reported strong results and the CPI report showed sharply higher inflation. Today, the performance of equities and crude remain the key driver for Treasuries. European bonds show little trading momentum European bonds pared earlier gains during the US session, as equities staged a powerful rebound and the CPI came out higher than expected. In a daily perspective, the developments on the equity and oil markets will decide the direction of the bond market today. Dollar rebounds as credit tensions ease and oil price drops After stormy times over the previous sessions, the dollar entered calmer waters on Wednesday. The test of the all-time highs in EUR/USD is rejected, at least for now, and the easing of global tensions offers the dollar some breathing space. However, the jury is still out whether a new equilibrium can be found. The Sunrise Headlines US equities rebound sharply led by the financials, consumer discretionary and industrials and closed up around 2.5% on the day. Asian equities are encouraged by Wall Street and eke out moderate to strong gains. Chinese economy slows in Q2 to 10.1% from 10.6% previously on slower export growth and tighter credit. Authorities remain concerned about inflation. US bank shares show biggest surge in 16 years, following strong results at Wells Fargo (that also increases dividend). Investors to shun HBOS rights issue, according to FT, while Barclays share sale closes today leaving some investors with losses. SEC moves to curb short selling, while FBI expands its mortgage probe Japan's business sentiment hits fresh 5-yr low in July (Tankan survey). Crude oil (134.86 $, minus 4.14 $ versus previous close) dropped sharply after US oil inventories are reported higher than expected, but retrace part of the losses later on, keeping crude above first key support. US earnings results, housing starts and Philly Fed key releases today Currencies: Dollar Rebounds As Credit Tensions Ease And Oil Price Drops On Wednesday, some calm returned the markets and this was also the case for EUR/USD trading. For most of the day the pair held a rather tight sideways trading pattern in the 1.59 area. The pair traded slightly above that level in the morning in Europe, but the USD received a better bid as soon as US traders joined the action. The higher US inflation data and better-than-expected US industrial production were also marginally dollar supportive. However, the most significant move of the day occurred after the publication of the US oil inventory data. Inventories were higher than expected and for a second day in a row this triggered a sharp sell-off in oil, which in turn supported the US currency. EUR/USD fell back to the 1.5820 area. In the Q&A session of its appearance before House Financial Services Committee, Mr. Bernanke also addressed the item of currency interventions. He said that dollar strength in the long term will depend on the fundamentals and that it is up to the policymakers to get the fundamentals right. Currency interventions were mentioned as something that should be done rarely, but in disorderly markets some temporary action may be justified. We don't see this as an implicit signal that the Fed is preparing USD interventions. Later in the session the easing of global (credit) tensions helped the dollar to keep its intra-day gains and the pair closed the session at 1.5826, compared to 1.5912 on Tuesday. Overnight, an FT report said that large sovereign wealth funds are scaling back USD exposure, but at least for now the impact on USD trading remains rather limited. Today, European market calendar is empty (except for the non-monetary policy meeting of the ECB). In the US, the housing starts, jobless claims and the Philadelphia Fed survey are scheduled for release. However, over the previous sessions the news headlines regarding the credit crisis, the stock market reaction and the oil price tribulations were the most significant factors for the US currency. With the earnings' season in the US coming into full swing (e.g. J.P. Morgan and Merrill Lunch results today), these factors will continue to play an important role. On Tuesday, the assumption that EUR/USD was capped in a consolidation pattern, confined by the 1.6020 to 1.5285 medium term trading range, was seriously questioned, but the first test of the topside was rejected. Over the previous sessions, the flaring up of credit concerns (GSE's) clearly was a negative for the US currency. However, this was not able to trigger a new up-leg in EUR/USD. It's still early days as to whether to credit storm is over its top, but, if US credit headlines turn less aggressive, markets might conclude that the longer-term economic picture for both the US and Europe is not that different. Both the Fed and the ECB face a similar problem of too high inflation and low/slowing growth and have little room of maneuver to fix this difficult situation. So, we assume that extremely high profile negative news from the US is needed to force a break above the key 1.6020/40 area. Over the previous days, we argued that EUR/USD had to move away from the EUR/USD 1.60 area soon and in a convincing way to avoid to risk of an additional USD stop-loss selling move. The risk is not completely out of the way yet with EUR/USD still less than 200 ticks from the highs, but the dollar has again some breathing space. Regarding the day-to-day tactics, we hold on to approach that courageous dollar optimists may to try to sell EUR/USD on up-ticks hoping that the range holds. Stop-loss protection (e.g. in the 1.6050 area) is still warranted EUR/USD: dollar supported by oil price decline Support stands at 1.5801/00 (MTMA/ST low + Break-up daily). at 1.5769 (Daily Channel bottom/Daily envelope), at 1.5753/51 (Boll Midline/ 38% retracement) and 1.5729 (Break-up) and at 1.5657 (LTMA). Resistance is seen at 1.5960 (Breakdown), at 1.5992 (Boll Top), 1.6018 (Daily envelope), at 1.6040 (All-time high), and at 1.6076 (Daily Channel top), at 1.6182 (Weekly envelope) The pair is again in neutral territory. USD/JPY On Wednesday, USD/JPY trading showed two faces. In Asia and early in European trade, the yen extended its gains supported ongoing credit woes and a poor open at the European stock markets. However, after the Wells Fargo results and even more after the sharp drop in oil prices the sentiment turned again more dollar positive and USD/JPY recouped the losses. However, given the sharp decline in oil prices and the decent performance of the US equity markets, the rebound in USD/JPY was not really convincing. The pair closed the session at 105.15, compared to 104.72 on Tuesday. Overnight, USD/JPY even drifted slightly lower again. Headlines on sovereign wealth funds reducing dollar holdings might have played a role. The gains of the Nikkei (and other Asian stock markets) are also not really spectacular if compared to the move yesterday evening in the US. In China, slowing growth could become an 'excuse' for Chinese authorities to slow the recent appreciation of the yuan. Looking at the charts, the turmoil on global markets caused USD/JPY (and EUR/JPY) to drop below first important support levels. USD/JPY fell below the 104.99 level, painting a short-term double top pattern on the charts. The jury is still out as to whether this break will be confirmed (USD/JPY hovers in the 105-area this morning). The signals from the most obvious drivers for USD/JPY (oil and stocks) are not that clear yet. For now we still have a slight preference for some further follow-through price action to the downside in USD/JPY. The first target of the short-term double top pattern is at 102.23. USD/JPY: 104.99 support broken. Support stands at 104.68 (Boll Bottom), at 103.77/68 (ST low/38% retracement), at 102.70/55 (Reaction lows), at 102.23 (Target double bottom). Resistance comes in at 105.38/41 (STMA/Daily envelope), at 105.46 (Break-down), at 106.02/21 (Breakdown/ MTMA), at 106.81 (ST high), at 106.91/08 (Break-down/weekly envelope). The pair is in oversold territory EUR/GBP On Wednesday, EUR/GBP was again traded in a very narrow range. The sterling made a step backward after the publication of a slightly weaker than expected UK labour market report, with EUR/GBP setting intraday highs in the 0.7955 area after the release. However, later in the session global euro selling spilling over from EUR/USD dragged EUR/GBP lower again. The pair closed the session at 0.7916, slightly lower form the 0.7933 close on Tuesday. Today, the UK calendar is empty. Since mid April, EUR/GBP developed a very uninspiring consolidation pattern (0.7766/0.8098). We turned neutral on EUR/GBP as the pair shows no trading momentum at all. An attempt to move higher early this month again ran into resistance and also at the end of last week and early this week a test of the key 0.8033/34 area was rejected. EUR/GBP is now again in the middle of the long-standing trading pattern. So, the short-term alert on sterling is again called off. In a longer term perspective we hold on to our sterling skeptic attitude. EUR/GBP: again in the middle of the sideways range. Support comes in at 0.7906/00 (ST low/07 July low), at 0.7885/82 (MTBU/daily envelope), at 0.7868/61 (01 July/Boll bottom) and at 0.7847/31 (MT reaction lows). Resistance stands at 0.7934/45 (Daily envelope/MTMA), at 0.7955/68 (Reaction high), 0.7995 (Boll top), at 0.8022 (ST Reaction high), at 0.8033/34 (Reaction highs), at 0.8051 (Reaction high) and at 0.8098 (Alltime high). The pair is again in neutral territory. News US: Inflation surges in June. The June CPI report disappointed, as it showed that inflationary pressures remain ubiquitous. The headline CPI surged higher by 1.1% M/M and 5% Y/Y, largely exceeding expectations for a 0.7% M/M. It is the largest increase since May 1991. Energy rose a strong 6.6% M/M (24.7% Y/Y), but also food up 0.7% M/M (5.2% Y/Y) contributed to the steep rise in headline inflation. Core CPI, which excludes energy and food, was up 0.3% M/M and 2.4% Y/Y following 2.3% Y/Y previously. Core CPI behaved better in the past year, but didn't decline either, which is disappointing given the slow growth in previous quarters. In the core CPI, housing costs increased 0.5% M/M (3.5% Y/Y) for the second month in a row. Besides transportation (3.8% M/M) and tobacco (1.5% M/M), also education costs (0.5% M/m) increased strongly. The report confirms Bernanke's concerns at his testimony that upside inflation risks remain important, even as the Fed expects that slower growth translates in lower inflation pressures in 2009/10. June industrial production topped expectations as it rose by 0.5% M/M following a 0.2% M/M drop in May. Expectations were for a more modest 0.1% M/M. The upward surprise was due to the weather-related utility output that jumped 2.1% M/M. The more important cyclical manufacturing output rose 0.2% M/M after a 0.1% M/M drop in May and is down 0.6% Y/Y, which also exceeded expectations, as a sharp decline in aggregate hours worked for the month suggested a weaker outcome. The third monthly Y/Y decline nevertheless shows that conditions in the sector remain challenging. Mining was up 1.1% M/M. The NAHB survey on building sentiment showed a further worsening of homebuilders' sentiment. The headline index dropped another 2 points in July to a new alltime low of only 16. It was the third consecutive drop and the deterioration was broadly based and touched all three sub-indices (current & future sales and traffic). The survey suggests that there are no signs of a bottoming in the housing sector. Other: Deterioration UK labour market keeps wage growth limited In the UK, the labour market showed further signs of deterioration, as the jobless claims rose for the fifth month in a row by 15.5K in June, the highest monthly increase since the early 90s. At the same time, earnings growth remained fairly subdued. As such, it appears so far that the deterioration of the labour market will prevent employees from securing large wage increases. This should reassure the Bank of England that the current spike in inflation will remain temporary and that it won't have to raise rates to quell inflation, which could throw the UK economy into a severe recession. Download entire Sunrise Market Commentary