KBC Market Research Desk
KBC Bank
Dollar rebounds as global sentiment improves
On Monday, global market extended Friday’s risk-on rebound as Chinese markets opened in a constructive way after the Lunar New year holidays. Initially, the rebound was mainly visible in equities. The dollar gained traction later in the session. ECB president Draghi reiterated the bank’s readiness to the ease policy further if low import prices or a distortion in the monetary transmission mechanism would entail downside risks to price stability. However, we doubt that the comments from Draghi were the driver behind the EUR/USD decline. USD/JPY rebounded at the same time. EUR/USD closed the session at 1.1156 from 1.1256. USD/JPY closed at 114.60 (from 113.25)
This morning, the investor sentiment remained constructive across Asian markets. Japanese equities show additional gains of 1.5% after yesterday’s impressive rebound. Chinese indices outperform with gains of over 3%. Chinese markets are supported by very strong January credit growth figures. Part of the growth in yuan lending might be due to corporates switching USD funding to yuan financing. However, it may also support the real economy. The PBOC fixed the yuan marginally weaker at USD/CNY 6.5130. Both the on-shore (6.5140) and the off-shore yuan (6.5163) are correction lower after yesterday’s sharp rebound. Oil and oil-related assets also rebound on planned talks between the Saudi and Russian oil minister on the oil market. Brent oil rebounds to the $34.75 area. Oil and commodity related currencies like the Canadian dollar (USD/CAD at 1.3760) and the Aussie dollar (AUD/USD at 0.7165) are also well bid. USD/JPY is gaining a few more ticks and trades in the 114.70 area. EUR/USD is little changed and trades around 1.1150.
Today, in Germany, the ZEW investor sentiment is forecast to have weakened further, from 10.2 to 0. We see downside risks following the turmoil on financial markets. The US Empire State index is expected to rebound to -10.5 after a sharp drop in January. We see risks for an upward surprise. The NAHB housing market index is expected to stay unchanged at 60 in February.. At the margin they, may be slightly supportive for the dollar. Sentiment on risk might also remain moderately positive. US equities still have some catching up to do in the wake of yesterday’s rebound. Markets will also ponder the impact of ECB’s Draghi’s comments as he said the ECB will take into account the efficacy of the monetary transmission mechanism when deciding on monetary policy. We started the week with a cautiously USD positive bias. For EUR/USD, the 1.1060/70 support area is the first target. We hold on to that view.
From a technical point of view, EUR/USD broke above the 1.1060/1.1124 resistance area (15 Dec top: 62% retracement). This was USD negative. The short-term correction high stands at 1.1376. Next important resistance kicks in at 1.1495.We see some short-term topping out process in EUR/USD. USD/JPY dropped below the key 115.98 pre-BOJ low. Japanese officials warned on potential action and this put a short-term floor. Even so, the pair remains vulnerable if global tensions resurface. We doubt that the time is ripe for a sustained USD/JPY rebound. Any rally might run into resistance quite soon. The 115.98 previous low is a first technical reference.
Sterling shows mixed picture. Brexit debate lingers
On Monday, sterling trading was order-driven and technical in nature. EUR/GBP lost some ground, but the decline was moderate. Cable drifted back south below the 1.45 big figure as the dollar was slightly better bid across the board. There were plenty of headlines/analysis on the negotiations between the EU and the UK ahead of the EU summit later this week. However, the impact on sterling was limited. EUR/GBP closed the session at 0.7726 (from 0.7762 on Friday). Cable closed the session at 1.4435 (from 1.4505).
Today, the UK price data will be published. The headline CPI is expected at -0.7% M/M to be up 0.3% Y/Y. Core inflation is expected at 1.3% Y/Y (from 1.4% Y/Y).After this month’s Policy decision and inflation report, a BoE rate hike is delayed ‘sine die’, even as BOE governor Carney said that he still expects the next rate move to be a rate hike. The headline CPI is mainly driven by the sharp swings in the oil price. The core inflation is expected quite soft. So, maybe there are slight upside risks. Even so, today’s price data probably won’t have a big impact on sterling unless there is a really big surprise. Tomorrow’s labour data (especially wage growth ) will probably be more important as a driver for sterling. Even more, the data will be overshadowed by the UK/EU negotiations. Uncertainty on the outcome will prevent a sustained sterling rebound. We stay cautious on further sterling gains untill there is more clarity on this issue.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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