Rates: More of the same
Global core bonds traded in a narrow sideways range for a third straight day. Central bank meetings and major US eco releases later this week put a lid on trading. Today, Italy's Supreme Court is expected to decide whether to uphold the conviction of Berlusconi for tax fraud. This might impact BTP's.
Currencies: Dollar looking to find a bottom
The recent decline of the dollar slowed, both against the euro and the yen. However, investors stay in a wait-and-see mode ahead of the US Q2 GDP release and the Fed policy decision, both expected tomorrow. A sustained rebound of the dollar is probably not possible unless these events are out of the way.
The Sunrise Headlines
In an uneventful session on Monday, US Equities slid lower, led by financials and energy shares. This morning however, Asian shares trade in positive territory after the Chinese central bank injected funds into the market.
The Bank of Italy is quietly inspecting the finances of some of the country's top lenders, the Wall Street Journal reports, after increasing worries among regulators and bank executives about the health of some of the country's lenders.
ECB policymakers have agreed to publish the rules under which euro zone national banks can provide Emergency Liquidity Assistance to lenders, a German newspaper reported, but the ECB declined to comment.
This morning, China's central bank injected funds into money markets via open market operations, for the first time since February after short-term money rates had risen steadily in recent weeks.
The International Monetary Fund approved yesterday a further €1.7 billion in funds for Greece after completing the fourth review of the country's bailout programme. Lagarde added that urgent steps need to be taken to address concerns about the privatisation programme and to improve its effectiveness.
Australia's central bank governor Stevens said inflation would be no bar to cut interest rates further and added that they have not reached the limits of monetary policy to stimulate. Stevens' comments, suggesting the Australian central bank could cut rates further, pushed the Aussie dollar sharply lower this morning.
Today, the eco calendar heats up with the German CPI inflation data, the European Commission confidence indicators, Spanish Q2 GDP and US Conference Board's consumer confidence. The Fed will start its two-day FOMC meeting and the Italian Supreme Court will start its final hearing on Berlusconi's tax fraud.
Currencies: Dollar Looking To Find A Bottom
EUR/USD
On Monday, the decline of the dollar slowed, but there was no trigger for a clear directional move. Trading in the major cross rates was in a wait-and-see mode ahead of the key data releases and central bank meetings.
Intraday, there was little news to give trading directional guidance. USD/JPY remained under moderate pressure in Asia, but the decline of the dollar slowed in Europe. EUR/USD drifted off the recent highs near 1.33, but a first move lower could not be sustained. Around noon, the pair changed again hands in the 1.3290 area, testing the recent highs again, while USD/JPY set new correction lows. In the US session, sentiment on the dollar improved slightly. There was no directional price action on core bond markets, but at the margin, yield differentials turned slightly supportive for the dollar. The US currency tried to build a short-term base, both against the euro and the yen, but a sustained USD rebound was not possible as investors stayed cautious ahead of the Q2 US GDP release and the Fed policy decision, both expected for Wednesday. EUR/USD closed the session at 1.3262, compared to 1.3279 on Friday.
Overnight, eco data in Japan were mostly below consensus (production, households spending). The yen is coming off recent highs, supporting Japanese equities. Other Asian equity markets show also moderate gains. EUR/USD is holding near yesterday's closing levels. In a speech, RBA governor Stevens left the door wide open for additional monetary easing. He also said that the recent decline in the exchange rate make sense from an economic point of view and a further decline over time would be no major surprise. The market understood the signal quite well: the AUD nosedived. AUD/USD dropped more than one big figure and is changing hands well below 0.91.
Today, the calendar is better filled. In Europe, the confidence indicators from European commission, Spanish Q2 GDP and the German inflation data will be published. We expect confidence to improve further. The Spanish GDP should be in line with the market consensus (-0.1% Q/Q). It is still in negative territory, but a return to growth in the second half looks likely. The eco data might be slightly supportive for the euro. In the US, the CS house prices and the consumer confidence will be published. Consumer confidence is expected to stabilize, but an upward surprise is possible. The data are interesting, but Investors will stay cautious on the dollar ahead of an anticipated weak Q2 GDP report and the Fed's policy decision, both tomorrow. The Fed will probably give no concrete hints on the timing of the tapering of asset purchases. In this context, other eco data like the ISM or the payrolls will decide whether the current dollar weakness can be reversed or not. The last 24 hours the downside pressure on the dollar eased. Even so, we don't see a trigger for a sustained comeback of the US currency untill tomorrow's events are out of the way.
From a technical point of view, early July, EUR/USD approached the key support area (1.2746 = low of 2013; and 1.2662 = Nov 2012 low) amid dollar overbought conditions. The trade-weighted dollar was also struggling to sustain above the key 84.50 area. The dollar was captured by a sharp correction. The pace of the correction slowed, but the decline continued throughout the month and EUR/USD broke above an important ST resistance area 1.3254/64 (reaction High/76%, retracement). This break opens the possibility for a full retracement to the 1.3417 reaction top. This was not our preferred scenario
So, look out for more convincing signs of a USD bottoming out process before adding USD long exposure.
In a longer term perspective, global markets entered calmer waters and this is also true for the EUR/USD cross rate. The interest rate markets have reacted to indications from the Fed that interest rates will stay low for long. So, further gains of the dollar will have to come from strong US eco data which will affect the timing and the pace of the reduction of bond buying, the other FOMC tool. The news flow from Europe improved of late, but risks are still ahead and the Fed will lead the ECB in reducing policy stimulation. We don't see a strong case for a sustained rally of EUR/USD, but the short-term sentiment on the dollar remains fragile.
EUR/GBP
On Monday, there was very little to report on EUR/GBP trading. The pair initially held a tight range in the 0.8620/40 area. The UK money supply and lending data were mixed and had not impact on EUR/GBP. The CBI reported sales jumped from 1 to 17, well above the consensus, but there was again no reaction from sterling. EUR/GBP remained close to the 0.8630 pivot. Later in the session, cable underperformed EUR/USD as the dollar gained some ground across the board, pushing EUR/GBP a few ticks higher. We didn't see a clear factor for this sterling underperformance. EUR/GBP closed the session at 0.8647, compared to 0.8631 on Friday.
Today, the Lloyds Business barometer is the only data series on the UK calendar. So, more technical trading ahead of Thursday's BoE meeting and end of month hedging might set the tone. The day-to-day momentum turned less positive on sterling but we don't expect a major setback. The 0.8711 resistance still look quite safe for now.
In a medium term perspective, investors will ponder the exact content of the forward guidance of the BoE and of its impact on markets. However, after the July Minutes, it is clear that additional asset purchases have become less likely. This should put a floor under sterling. Sterling might become more sensitive to positive eco news. It will be interesting to see the reaction function of the UK currency in this new environment.
We have the impression that the retest of the EUR/GBP 0.87 level was an exhaustion move and thus that the topside is better protected. There might be quite some volatility in the run-up to this week's MPC meeting. We changed our short-term bias for EUR/GBP and sell EUR/GBP into strength.
IMOH, Clement I.
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