Currencies: Payrolls to decide on next directional move of the dollar

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1 Rates: Bar for payrolls too high after the intense sell-off? The sell off in US Treasuries accelerated this week and the bar for today s payrolls is high (200k consensus, decline in unemployment rate and pick up in wages). Therefore, we think that there is room for profit taking ahead of the weekend with afterwards consolidation into Wednesday s Fed meeting. We hold our sell on upticks approach. Currencies: Payrolls to decide on next directional move of the dollar The dollar recently showed a mixed picture with EUR/USD drifting sideways, but USD/JPY clearing first resistance on higher core bond yields. Today, markets already expect a strong payrolls report. Will the report contain enough positive news to trigger further broad based USD gains? Calendar Headlines US stock markets ended the pre payrolls session unchanged yesterday. Overnight, Asian equity markets trade mostly positive with Japan outperforming on the back of a weaker yen (+1.5%). S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP Poland s Tusk has been re elected president of the EC in the face of bitter opposition from his own country s government. His re election heads off the prospect of a EU leadership crisis as it prepares for the Brexit negotiation. China's corporate debt levels are excessively high, the head of its central bank said, as policymakers grow increasingly concerned about the risks from a rapid build up in debt and an overheating housing market. South Korea s president was ejected from office by the country s Constitutional Court, following her impeachment and suspension over accusations that she helped a friend win bribes from several South Korean conglomerates. Senior Saudi energy officials told top independent US oil firms in a closed door meeting this week that they should not assume OPEC would extend output curbs to offset rising production from US shale fields, two sources told Reuters. EU and IMF negotiators said that they will continue talks next week with Greece in a bid to broker a deal on reforms that Athens must undertake to unlock the next stages of its international bailout programme. Today s eco calendar contains UK industrial production data, but all attention turns to the US payrolls report. Consensus expects a strong report (200k) with a decline of the unemployment rate (4.7%) and a pick up in wages (to 2.8% Y/Y) P. 1

2 Rates Draghi hints at end of easing cycle: Sell off continues German curve shift upwards US yield resistance under test Little moves in peripheral spreads US yield 1d 2 1,38 0,02 5 2,14 0, ,61 0, ,19 0,03 DE yield 1d 2 0,85 0,01 5 0,38 0, ,43 0, ,27 0,08 Yesterday, global bonds lost ground as ECB president Draghi admitted that EMU deflation risk had diminished, suggesting that the ECB s easing cycle might hit a turning point once QE ends. A second straight decline of oil prices, to the lowest levels since the end of last year, US eco data (higher import prices; slightly bigger rebound in weekly claims) and a near average US T bond auction had no impact. In a daily perspective, the German yield curve shifted 2.4 bps (2 yr) to 5 bps (5 10 yr) higher. The European 5 yr swap rate broke above 0.22% resistance and reached the highest level since early The 10 yr swap rate tested similar resistance at 0.86%. Changes on the US yield curve varied between +2.6 bps (2 yr) and +4.3 bps (5 10 yr). On intra EMU bond markets, 10 yr yield spread changes versus Germany were insignificant with Spain and Greece slightly outperforming ( 3 and 5 bps). The ECB kept its monetary policy unchanged. Several signals suggested that the ECB welcomes positive underlying growth and inflation dynamics and chances of additional easing diminished (see KBC Flash). First, the central bank continues to expect interest rates to remain at present or lower levels for an extended period of time, but Draghi admitted that there was a cursory debate on dropping the reference to potential lower rates. Second, the ECB omitted one sentence from its statement to signal that there is no longer a sense of urgency to take action prompted by the risk of deflation. Draghi repeated nevertheless that the asset purchase programme ( 60B/month starting from April) will run until there is a sustained pick up in inflation and could be adjusted in size or duration if needed. Third, the central bank upgraded growth and inflation forecasts in 2017 and 2018 while keeping them unchanged in Risks for the growth outlook remain on the downside, but became less pronounced. New inflation projections were higher for 2017/18 and stable at 1.7% for However, the central bank argues that underlying CPI remains subdued and looks through the pick up in headline inflation. Wage growth is key for inflation, Draghi added. Finally, nobody on the council thought it was necessary to mention a renewal of the liquidity providing TLTRO s. Bund future (black) & EuroStoxx (orange) (intraday): Bonds sell off and equities gain on Draghi s message EU 10 yr swap rate tests the cycle highs after Draghi s optimistic comments US payrolls Day!! Strong payrolls, but strong enough to satisfy markets? Wage component also key February payrolls are the key and only release of importance today. The market expects a 200K net job gain (following a strong 227K in January) and a decline in the unemployment rate to 4.7% from 4.8%. Very importantly, after wage growth (AHE) disappointed in January with a 0.1% M/M and 2.5% Y/Y increase, consensus now expects a rebound to 0.3% M/M and 2.8% Y/Y, suggesting that P. 2

3 the admittedly slow upward trend in wages remains intact. All pointers, including a stellar ADP report, flag a very strong payrolls report. We put the risks to the upside of consensus, but warn that the median of the forecasters that put in their numbers after the ADP report is considerable higher at around 230K. Given the recent sell off, this figure may be more valuable to weigh the actual outcome in market terms. This puts the bar of course quite high. Similarly important are the average hourly earnings. While we side with the market consensus for a good rebound in February, any shortfall may impact the market reaction. We bet on a strong report, but the biggest (temporary) market reaction could occur in case of a disappointment. Of course, even then the expected March rate hike will not be in danger. Bar for payrolls too high after the intense sell-off? R2 164,40 1d R1 163,12 BUND 159,67 0,83 S1 159,52 S2 158,28 Overnight, most Asian stock markets trade slightly positive with Japan outperforming on the back of a weaker yen. The US Note future and Brent crude trade stable, but the Bund will probably open lower compared to yesterday s official close. Today, it s all about the payrolls. US yields (2y, 5y) broke above or tested (10y, 30y) the cycle highs set in December last year on the back of strong data and hawkish repositioning following Fed speak. The sell off in US Treasuries accelerated this week and the bar for today is high (200k consensus, decline in unemployment rate and pick up in wages). Therefore, we think that there is room for profit taking ahead of the weekend with afterwards consolidation into Wednesday s Fed meeting. The Fed may revise its median rate projection upward from % to %, implying three more rate hikes after March, but as it isn t obvious how many governors will post a number, giving some retirements early April, uncertainty on the median dot for 2017 is high. A rise in the 2018/19 median dot is more likely. Therefore, we hold our sell on upticks approach (bond prices) and position for a sustained break of yields above the cycle highs next week. The Bund sold off yesterday after the ECB meeting. ECB Draghi suggested that the ECB has the intention to start a discussion on when and how the ECB might begin the process of exiting its current extraordinary easy monetary policy. His comments comfort our call that another calibration of the ECB s QE programme will happen in H Therefore, we have a long term bearish view on Bunds as well. Technically, the German 10 yr yield moves at a rapid pace from the 0.2% lower bound of the sideways range towards the 0.5% upper bound. German Bund: Sell off intensifies as Draghi hints at future end ultraeasy policy US Note future: Rising probability March rate hike pulls US Treasuries lower. Bar for payrolls too high and short covering into the weekend? P. 3

4 Currencies Payrolls to decide on next directional USD move EUR/USD and USD/JPY both profit from the rise in core bond yields R2 1,1145 1d R1 1,0874 EUR/USD 1,0589 0,0054 S1 1,0341 S2 1,0000 Yen in the defensive across the board PBOC governor advocates yuan stability US payrolls to be key for next directional USD move Strong report is expected, but enough positive news to support further USD gains The ECB s press conference directed trading in the major euro and dollar cross rates on Thursday. ECB s Draghi reiterated that ample policy stimulation is needed, but also said that there was no urgency anymore to take further action. TLTRO s won t be prolonged. European yields and the euro rebounded on these headlines. EUR/USD jumped temporary north of 1.06 and closed the day at (from on Wednesday). USD/JPY was also supported by the rise in core (USD/European) yields and an ongoing constructive equity sentiment. The pair finished the session at So, the test of the 115 resistance continued. Overnight, there are plenty of headlines on a Korean Court decision to remove the Korean President from power, but the direct impact on global markets is limited. The global reflation trade continues. Especially core bond yields maintain their uptrend. Asian equities mostly show modest losses. Japan is again the exception as equities profit from a further, broad based decline of the yen. USD/JPY finally cleared the /115 resistance and trades currently in the area. EUR/JPY also succeeded a nice break higher (122.26). EUR/USD hovers in the 1.06 area. PBOC governor Zhou indicated that the yuan exchange rate could remain relatively stable this year. Zhou also said that the a decline in the high amount of China FX reserves is not bad. Today, the focus for global trading is on the US payrolls. With US interest markets at key technical levels, the report might decide on a new upleg in rates (cf fixed income part of this report) and in the dollar. Almost all recently published US data, including Wednesday s ADP report, point to a strong payrolls report. With , the consensus already assumes quite some good news. Aside from job growth, we also keep a close eye at the wage growth data (AHE expected to rise from 2.5% Y/Y to 2.8% Y/Y). An upward surprise in this measure might be at least as important for markets (and for the Fed) than strong payrolls growth. Even as the consensus is already quite high, we see chances for strong report. If so, the dollar might resume its uptrend. Of late USD/JPY profited most from higher core/us bond yields is the next short term resistance (range top). Recent gains of the dollar against the euro were less convincing. Even so, in case of strong payrolls, broad based USD strength will prevail. EUR/USD remains the first important support. A soft payrolls report might trigger some further USD consolidation. However, with the Fed already stepping up its normalisation EUR/USD: USD fails to extend gains against the euro. Will the payrolls be storng enough for a new USD up leg USD/JPY: braking above the resistance. Will payrolls push the pair beyond / range top? P. 4

5 process, any USD correction still should be modest and shouldn t question the MT USD uptrend yet. The correction top might come under test. We still assume EUR/USD /74 will be difficult to regain. A sell EUR/USD on upticks remains favoured. R2 0,8881 1d R1 0,8854 EUR/GBP 0,8709 0,0045 S1 0,8592 S2 0,8304 EUR/GBP clearing the 0.87 big figure On Thursday, sterling trading was driven by global factors and technical considerations. Especially the intraday swings of EUR/USD were important. A first new test of the 0.87 area was rejected, but a broad based euro rebound during the ECB s press conference caused EUR/GBP to fill offers just north of However, a sustained break didn t occur. EUR/GBP closed the session at (from ). Cable showed no clear trend as the dollar remain also rather well bid. The pair closed the session at (from ). Today, the UK production data, construction output, the trade balance and the monthly NIESR GDP estimate will be published. January production is expected to fall back on the monthly basis after strong growth in December. The trade deficit is expected to stabilise at a high level. Of late, sterling became a bit more sensitive to signs of a deceleration of the post Brexit boom. A big deviation from consensus in the trade balance probably has most potential to move sterling. Even so, we don t expect today s data to change the broader picture. There will also be plenty of headlines on the Brexit strategy of both the EU and the UK from the EU summit in Brussels. Last but not least, the global market reaction to the payrolls will also affect sterling. In the past, a decline of EUR/USD often also triggered losses in EUR/GBP. We have the impression that this effect is becoming less pronounced short term. Sterling sentiment softened of late. The euro was in better shape at the end of last week, helping EUR/GBP to break the resistance, which improved the short term EUR/GBP picture. We don t expect a sustained EUR/USD rebound, but a combination of temporary euro consolidation and ongoing sterling softness might trigger some further ST EUR/GBP gains. The break north of reinforced the ST positive momentum. The correction top is the next key resistance. EUR/GBP uptrend continues Jan top is next key resistance GBP/USD downside pressure persists P. 5

6 Calendar P. 6

7 10 year td 1d 2 year td 1d Stocks td 1d US 2,61 0,04 US 1,38 0,02 DOW 20858,19 2,46 DE 0,43 0,06 DE 0,85 0,01 NASDAQ 5838,807 1,26 BE 0,93 0,06 BE 0,53 0,01 NIKKEI 19604,61 286,03 UK 1,23 0,01 UK 0,11 0,02 DAX 11978,39 11,08 JP 0,09 0,01 JP 0,26 0,01 DJ euro ,89 20,27 IRS EUR USD GBP EUR 1d 2d USD td 1d 3y 0,02 1,95 0,70 Eonia 0,3530 0,0000 5y 0,27 2,24 0,87 Euribor 1 0,3720 0,0010 Libor 1 0,8578 0, y 0,88 2,57 1,25 Euribor 3 0,3290 0,0000 Libor 3 1,1090 0,0028 Euribor 6 0,2410 0,0000 Libor 6 1,4210 0,0006 Currencies td 1d Currencies td 1d Commodities td 1d EUR/USD 1,0589 0,0054 EUR/JPY 122,2 1,63 CRB 183,22 1,83 USD/JPY 115,41 0,96 EUR/GBP 0,8709 0,0045 Gold 1197,40 7,30 GBP/USD 1,2158 0,0002 EUR/CHF 1,0724 0,0025 Brent 52,55 0,98 AUD/USD 0,7524 0,0007 EUR/SEK 9,5758 0,0337 USD/CAD 1,3501 0,0008 EUR/NOK 9,1095 0,1100 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Mathias van der Jeugt Institutional Desk Dublin Research France Austin Hughes London Shawn Britton Singapore Prague Research (CSOB) Jan Cermak Prague Jan Bures Petr Baca Bratislava Research (CSOB) Marek Gabris Bratislava Budapest Research David Nemeth Budapest ALL OUR REPORTS ARE AVAILABLE ON 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. P. 7