Action Insight

Sterling comes under much selling pressure today after disappointing data. Retail sales unexpectedly dropped -0.3% mom in January versus expectation of 1.0% rise. The pound is set to end the week as the weakest major currency after a string of weak data. That includes the CPI miss released on Tuesday and wage growth miss released on Wednesday. These data dampened speculations of a BoE rate hike by year end. In addition to that, the impact of Sterling's depreciation since last year's Brexit referendum appears to be fading. And there are a lot of uncertainties ahead as prime minister Theresa May would trigger Article 50 for Brexit by the end of next month.

SNB's sight deposits added +3.81B franc, or +0.71%, to 539B franc, in the week ended February 8. This marks the biggest increase since November when the central bank intervened in the aftermath of Donald Trump's victory. The move this time was, again, to curb the strength of the franc with EURUSD breaking below the support level of 1.0676/84 in late January. There are several reasons that have triggered the recent EURCHF selloff: intensifying political risks associated with upcoming elections in the Eurozone, rising of Swiss bonds yields alongside German ones, and concerns over US' accusation of currency manipulation. We retain our forecast that EURCHF would weaken further. While SNB's intervention would continue, the central bank is likely more tolerable over modest franc appreciation given better domestic economic developments

The reversal in treasury yield dragged down the greenback again overnight. 10 year yield closed down -0.052 to 2.450 while 30 yield yield dropped -0040 to close at 3.051. The dollar index is now back at 100.50 after hitting as high as 101.76 earlier this week. Dollar is now trading as the third weakest major currency. The Japanese yen remains the weakest one on strong risk appetite. New Zealand dollar followed after weaker than expected economic data. On the other hand, Swiss Franc is the strongest major currency this week, partly due to political uncertainties in Eurozone and UK. In other markets, Gold rides on renewed weakness in dollar and is back pressing 1240. WTI crude oil is extending recent sideway trading.

Dollar stays generally weak in early US session and receives no support from another round of solid economic data. Initial jobless claims rose 5k to 239k in the week ended February 11. But that was better than expectation of 245k. Continuing claims dropped 3k to 2.08m in the week ended February 4. Housing starts dropped -2.6% mom to 1.25m in January, above expectation of 1.23m. Building permits rose 4.6% mom to 1.29m, above expectation of 1.23m. Meanwhile, Philly Fed survey jumped sharply to 43.3 in February. The greenback weakens against all major currencies except Aussie and Kiwi today. Meanwhile Dollar trading down versus against all others except Euro and Yen. Recent hawkish comments from Fed provide little support. It seems that Dollar traders are more worried about the uncertainties over fiscal policies.

USDJPY's rally since early February indicates that the correction from the 2016-peak (118.66) made on December 15 is ended at 111.57 on February 7. We remain bullish over the currency pair (i.e. expecting Japanese yen to weaken against US dollar). As we mentioned in our January report, reflation trade, driven by US President Donald Trump's pro-growth policy, such as infrastructural spending, tax cut and deregulations, has driven USD's rally against major currencies since Trump's victory. Hopes that the measures would drive US growth and inflation have lifted speculations on Fed funds rate hikes this year, sending Treasury yields and USD higher. Meanwhile, BOJ's yield curve targeting policy, announced in September last year, would keep the 10-year JGB yields close to 0%. These would help accelerate divergence of Japanese yields from those in the US, pressuring Japanese yen. Recent developments appear to have reinforced such conviction.

Dollar jumped overnight on a string of solid economic data but quickly reversed. There were a chorus of hawkish comments from Fed officials. But those comments provided no support to the greenback. In the background, stocks extended recent record record with major indices showing upside acceleration. Treasury yields also strengthened even though both 10-year and 30-year yield are bounded in recent range. Fed fund futures are pricing in 26.6% chance of a March hike and 74% chance of hike by June. That was up from prior day's pricing of 17.7% and 68.0% respectively. The lack of sustained buying in Dollar with positive development elsewhere is worth noting. We can't find any convincing reason for the sluggishness in the greenback yet. But it's likely that Dollar will head lower before going up again.

Dollar rides on a bunch of strong economic data and surges broadly. CPI rose 0.6% mom, 2.5% yoy in January, above consensus of 0.3% mom, 2.3% yoy. The headline annual consumer inflation rate was the highest since March 2012. Meanwhile, headline retail sales rose 0.4% in January versus expectation of 0.1%. Ex-auto sales rose 0.8% versus expectation of 0.4%. Empire state manufacturing index also jumped to 18.7, up from 6.5 and beat expectation of 7. The dollar index jumps to as high as 101.76 so far. The development affirms the case for the index to retest January high at 103.82. The greenback has now turned into the strongest major currency for the week while Japanese yen remains the weakest.

US equities jumped overnight and extended the record run as Fed chair Janet Yellen sounded optimistic on the economic outlook. DJIA rose 92.25 pts or 0.45% to 20504.41. S&P 500 rose 9.33 pts or 0.40% to 2337.58. NASDAQ rose 18.61 pts or 0.32% to 5782.57. All three major indices closed at new records highs. Notable strength was also seen in treasury yields as 10 year yield rose 0.036 to 2.470. 30 year yield rose 0.028 to 3.062. But other TNX and TYX are still bounded in recent range. Dollar index extended recent rebound to as high as 101.38 and is now trading at around 101.20. In the currency markets, the Japanese yen remains the weakest major currency for the week on strong risk appetite. Euro closely follows on worries over political situation in Europe. Dollar is trading in black against all majors except Canadian.

Investors viewed Fed Chair Janet Yellen's testimony before the Senate Banking Committee as modestly hawkish. As such, expectations for a March rate hike rose modestly while Treasury yields climbed higher. While reiterating that all meetings are 'live' for a rate hike, Yellen warned that waiting too long to remove accommodation would be unwise'. Meanwhile, she cautioned over the uncertainty over the economic policy under Donald Trump's administration. Yellen emphasized the Fed's monetary policy stance is not based on 'speculations' about fiscal policy. The economy's 'solid progress' is what is 'driving the policy decisions'.

Dollar trades generally softer, in particular against commodity currencies today. Some attribute Dollar's weakness to news of resignation of US president Donald Trump's national security advisor Michael Flynn. The developments since Trump came to office raised some doubts on whether his administration is able to push through his expansive policies. But for the time being, Fed chair Janet Yellen's testimony to the Senate is the main focus. Markets will look for hints of the chance of a March hike. Also, Yellen's speech will be scrutinized for her view on Fed's projection of three hike this year. But overall, Yellen would likely sound noncommittal. And the real test for Dollar would be on the economic projections to be released in Fed's March meeting. Released from US, PPI rose 0.6% mom, 1.6% yoy in January. PPI core rose 0.4% mom, 1.2% yoy. Both are above market expectations.

US stocks extended the record run overnight as Trump trade remained in force. DJIA closed up 142.79 pts or 0.70% at 20412.16. S&P 500 rose 12.15 pts, or 0.52% to end at 2328.25. NASDAQ gained 29.83 pts or 0.52% to 5763.96. All three indices closed at record highs. Treasury yields also increased mildly but stayed in familiar range. 10 year yield rose 0.025 to end at 2.434. Dollar followed higher with the index hitting 101.11 and breached 101.02 resistance. But there is no sustainable momentum above this resistance yet. In the currency markets, Yen remains the weakest major currency on risk appetite. Euro follows as the second weakest on worries over political situations in Europe. The economic calendar is very busy today but main focus will be on Fed chair Janet Yellen's semiannual testimony to the Senate.

Euro recovered broadly today as EU raised both growth and inflation forecast. Meanwhile, the Japanese Yen stays the weakest one on solid risk appetite. EU raised growth forecast for both EU and Eurozone in its Winter forecast released today. For EU growth is projected to be 1.8% in 2017 and 2018, up from November estimate of 1.6% and 1.8%. For Eurozone, growth is projected to be 1.6% in 2017 and 1.8% in 2018, up from November estimate of 1.5% and 1.7%. Inflation is also expected to pick up. For EU, inflation is projected to rise for 0.3% in 2016 to 1.8% in 2017 drop back to 1.7% in 2018. For Eurozone, inflation is expected to rise from 0.2% in 2016 to 1.7% in 2017 and drop back to 1.4% in 2018.

Risk appetite extends to Asian markets, following the records close in US last week. At the time of writing, Japan Nikkei is trading up 98 pts or 0.5%, HK HSI is up 120 pts or 0.5%. Yen trades broadly lower on risk appetite, together with Swiss Franc. On the other hand, Sterling and Dollar are trading mildly higher. In other markets, Gold dips back to 1230 on Dollar strength and it looks like recent pull back from 1246.6 would extend lower. WTI crude oil is still bounded in range of 50.8/55.3, without any direction. Released in Asian session, Japan Q4 GDP rose 0.2% qoq, below expectation of 0.3% qoq. GDP deflator dropped -0.1% yoy, above expectation of -0.2% yoy.

US stocks soared to new record high last week on resurgence of talk of president Donald Trump's expansive policies. In particular, bulls regained control after Trump said he would announce "phenomenal" tax reforms within two or three weeks. DJIA closed the week up 197.9 pts, or 0.99% at 20269.37. S&P 500 gained 18.7 pts or 0.81% for the week to close at 2316.10. NASDAQ rose 67.4 pts or 1.19% to close at 5734.13. All three major indices closed at record highs. The developments helped lift treasury yield from intra-week selloff. 10 year yield closed at 2.409 after dipping to 2.325, comparing to prior week's close at 2.491. Dollar was given a boost and ended as the second strongest major currency, next to Sterling. The Dollar index closed at 100.71, up from prior week's close at 99.73. Fed chair Janet Yellen's testimony to Congress will be a major focus this week. But Trump's tweets and any economy-related announcements will be the things that move markets.

PBOC's move earlier this month to increase interest rates for its standard Open Market Operations (OMO) and Standing Lending Facility (SLF) has sparked speculations of monetary tightening. On February 3, the central bank announced to raise interest rates of 7-, 14- and 28-day reverse repos by +10bps each to 2.35%, 2.5% and 2.65% respectively. At the same, the overnight SLF rate was lifted to 3.1% from 2.75% previously. It was also reported that SLF rates for those banks that fail Macro-prudential Assessment (MPA) requirements is increased by +100 bps.

Canadian dollar are lifted by solid job data and strength in oil prices today. The Canadian job market expanded by 48.3k in January, much better than expectation of 0.0k. Unemployment rate also dropped 0.1% to 6.8%. Meanwhile WTI crude oil is gaining 1.7% at the time of writing and is pressing 54 handle. It's possible that WTI is heading to retest recent resistance at 55.24 based on current momentum. On the other hand, the greenback is also strong, except versus Aussie and Loonie. Trump trades as back in force and Donald Trump said he will deliver a "phenomenal" tax overhaul within two or three weeks. From US, import price index rose 0.4% in January.

US equities' up trend resumed overnight with all three major indices closed at new record highs. Sentiments were lifted by news that US president Donald Trump will deliver a "phenomenal" plan to overhaul taxes on business without "two or three weeks". DJIA jumped 118.06 pts, or 0.59%, to close at 118.06. S&P 500 rose 13.2 pts, or 0.58%, to close at 2307.87. NASDAQ rose 32.73 pts, or 0.58%, to close at 5715.18. Treasury yields followed with 10 year yield gained 0.044 to close at 2.395. 30 year yield rose 0.050 to close at 3.011. Dollar also strengthened some what but the dollar index lost momentum after hitting 100.73, limited by 55 day EMA (now at 100.66). In the currency markets, Yen is the biggest loser for the day and with USD/JPY, EUR/JPY and GBP/JPY took out minor resistance level, suggesting more upside.

Dollar trades mixed in early US session despite positive job data. Initial jobless claims dropped 12k to 234k in the week ended February 4, below expectation of 250k. Four week moving average dropped to 244.25, lowest since 1973. Continuing claims rose 15k to 2.08m in the week ended January 28. Also released in US session, Dollar index is hovering in tight range around 100.32 at the time of writing. Near term outlook is mixed. On the negative side, it's still struggling below 55 day EMA (now at 100.65). On the positive side, daily MACD crossed above signal line. We'd maintain that there is prospect of a rebound after getting firm support from 100 handle.

As expected, RBNZ left the OCR unchanged at 1.75%, following three rate cuts in 2016. The policy statement has changed to a more neutral tone from an accommodative one previously. Yet, the central bank's rate hike forecasts stay at a slower pace than what the market has priced in. Policymakers acknowledged that economic growth has 'increased as expected and is steadily drawing on spare resources'. The outlook remain s positive. It also acknowledged the return of headline CPI to the target band, and judged it would gradually move to the midpoint of the band. We expect the OCR would stay unchanged for the rest of the year.

New Zealand Dollar weakens after RBNZ left the Official Cash Rate (OCR) unchanged at 1.75%. More importantly, the central bank adopted a more dovish outlook for the OCR. RBNZ now forecast interest rate to stay at around 1.8% through June 2019 and move up to 2.0% in 2020. The markets were nearly pricing in full chance of a rate hike by November this year. But after the release, such pricing dropped to around 50%. Meanwhile, RBNZ trimmed inflation forecast too. Inflation is projected to be at 1.5% this year, soften to 1.3% at the start of 2018 and then climb back to 2% by mid-2019. Technically, NZD/USD dips through 0.7240 support which now indicates near term reversal. Near term outlook in NZD/USD is now turned bearish for 55 day EMA (now at 0.7150).