Asian markets were captured by a global risk-off correction yesterday. However, the spill-overs to the interest rate and FX markets were modest. The dollar held up well despite the decline in core/US yields. Risk sentiment improved slightly in US trading and lifted USD/JPY a bit further off the intraday lows. The pair closed at 112.29 (from 112.60). EUR/USD finished at 1.1796 (from 1.1826).
Asian equities still show a diffuse picture overnight. Japan outperforms with gains of 1% +. China and Korea underperform. The profit taking move of the previous sessions slows, but there is no big story to start a clear directional move/rebound. USD/JPY trades in the mid 112 area. The pair lost only limited ground in yesterday’s risk-off correction. BoJ governor Kuroda in a speech said that the shape of the yield curve could change depending on the economy, inflation or factors in the financial system.
There was no market reaction. EUR/USD stabilizes in the 1.18 area. At 93.60, the trade-weighted dollar (DXY) holds near the highest level in 2 weeks. The Aussie dollar lost further ground as the trade surplus narrowed much more than expected in October. AUD/USD reversed its recent rebound and trades again in the mid 0.75 area.
There are only second tier eco data in the EMU and the US today. The details of the final EMU Q3 GDP are interesting but outdated and no market movers. This also applies for production data from EMU countries. US jobless claims are expected to stabilize at 240k. Markets will count down to tomorrow’s payrolls. Investors will also keep an eye on the US tax bill debate and look out whether the US can avoid a partial government shut-down. Markets are not really worried on this issue.
Earlier this week, there were tentative signs that the dollar was receiving support from the protracted rise in ST US yields (2-y US yield rising above 1.8%). Markets are gradually moving in the direction of the Fed guidance (dot-plot). For now, it didn’t help the dollar that much, but maybe it helped to provide a floor for the US currency as USD shorts are becoming expensive. This process might be aborted if global markets fall prey to an outright risk-off correction or if tomorrow’s payrolls would disappoint. Even so, we have the impression that the topside in EUR/USD is becoming tougher. EUR/USD might stay below the 1.1961/1.20 area ahead of next week’s Fed meeting, unless there comes high profile negative news from the US.
The day-to-day USD momentum is not too bad. Of late USD/JPY was quite sensitive to interest rates/differentials rather than to the gyrations in equity markets. Even so, the pair remains more vulnerable in case of risk-off.
From a technical point of view: EUR/USD set a post-ECB low mid-November, but the dollar momentum wasn’t strong enough. EUR/USD settled in a directionless sideways consolidation pattern in the 1.18/19 area. A return below 1.1713 would signal that the rebound in EUR/USD is aborted. For now, there is no clear technical signal. USD/JPY’s momentum deteriorated early November, dropping below the 111.65 neckline. No aggressive follow-through selling occurred though. Last week the pair succeeded a nice rebound, calling off the downside alert. The pair hovers again in the 110.84/114.73 consolidation range. We amended our ST bias from negative to neutral.
Binary Brexit risk paralyses sterling trading
There were again plenty of headlines on Brexit and on UK politics yesterday. They brought little evidence that a deal could be reached anytime soon. However, the impact on sterling trading was modest. EUR/GBP settled north of 0.88, but no important technical level was broken. The pair closed the session at 0.8808 (from 0.8797). Cable declined back below the 1.34 barrier, but part of this move was due to cable mirroring the intraday decline of EUR/USD. The pair closed at 1.3393. So, sterling held up quite well, suggesting that markets still see a decent change of a last minute solution ahead of next week’s EU summit.
The UK eco calendar only contains the Halifax house prices today, but this is no market mover. Brexit headlines/rumours will continue to drive GBP trading. UK PM May is said to prepare a new proposal on the issue of the Irish boarder. However, it is far from sure than a solution acceptable for all parties will be found today. So, more directionless trading in the major sterling cross rates might be on the cards. Investors will probably abstain from setting up new directional bets as long as the binary Brexit risk isn’t out of the way.
MT view/technical picture: A BoE driven sterling rebound ran into resistance early last month. Sterling declined again as markets anticipated that the rate cycle would be very gradual and limited. EUR/GBP trades in a 0.8733/0.9033 consolidation range. Brexit headlines cause day-to-day gyrations. We changed our ST bias on EUR/GBP from positive to neutral mid-November. The 0.9015/33 area might be tough to break short-term. In case of more positive news on Brexit, return action to the 0.8733 (or below) level is possible ST.
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.