Action Insight

Dollar strengthens against European majors and Canadian Dollar today. But the greenback weakens against commodity currencies and Yen. Focus is turning to FOMC minutes. The minutes could reveal that FOMC members are more comfortable on the path of growth and inflation. But there's probably nothing new other than that. In particular, some FOMC members have openly noted that fiscal policies, due to the lack of details, were not taken into account in their decisions and projections. We'd view the March FOMC meeting, with new economic projections, as a much more important one. Released in US session, Canada retail sales dropped -0.5% mom in December. Ex-auto sales dropped -0.3% mom.

US indices closed at new record highs again as led by defense and energy sectors. In particular, WTI crude oil surged to as high as 54.68 and is showing sign of range breakout. That helped lift DJIA up 118.95 or 0.58% to close at 20743.00. S&P 500 gained 14.22 pts or 0.60% to close at 2365.38. NASDAQ also rose 27.37 pts or 0.47% to close at 5865.95. Dollar index was lifted by hawkish comments from Fed officials and reached as high as 101.60. However, the index lost momentum ahead of 101.76 near term resistance.

Dollar surges broadly today as US markets are back from holiday. There is finally some support from hawkish Fedspeaks. Philadelphia Fed president Patrick Harker is quoted today saying that he would "not take March off the table" for rate hike. He maintained that three hikes this year is "appropriate" depending on developments. Cleveland Fed president Loretta Mester said the trend in inflation is "moving up". And, she's "comfortable" that inflation is moving towards Fed's target. And, it the economy keep on with the currency way, she's "comfortable" for a rate hike at this point. Technically, EUR/USD is heading back to 1.0520 temporary low and break would drag the pair lower. That would correspond to 101.60 resistance in dollar index.

RBA minutes for the February meeting contained little news. Indeed, it reinforced our view that the central bank would leave the monetary policy unchanged for the rest of the year. The market currently prices in further rate cut this year, followed by rate hike in 2018. The central bank acknowledged the -0.5% GDP contraction in 3Q16. While attributing most of the weakness to temporary factors including 'disruptions to coal supply and bad weather', policymakers also warned that 'slower growth in consumption had also been a factor'. However, they assured that such weakness should not have continued into 4Q16. On the growth outlook, the central bank suggested that 'GDP growth was expected to pick up to around +3% in year-ended terms later in 2017, and to remain above estimates of potential growth over the rest of the forecast period'

Aussie stays in right range against the greenback despite the relatively update RBA minutes. The minutes showed that the central bank expected recovery in the global economy to list resources exports. And, "the higher terms of trade represented a boost to national income, which provided some upside risks to the domestic forecasts." 2017 is forecast to be a good year with 3% GDP growth, "above estimates of potential growth over the rest of the forecast period." Outside of mining, RBA expected that the rise in building approvals over the last year suggested that "non-residential building construction would contribute to GDP growth towards the latter part of the forecast period." In addition, RBA also predicted that "recent pick-up in global inflationary pressures could flow through to domestic inflation by more than expected". Meanwhile, RBA sounded more confident that "Chinese growth would remain resilient in 2017." But it also warned that "China continued to be one of the main sources of uncertainty for the Australian economy."

In PBOC's latest set money report, China's new renminbi loans rose to RMB 2.03 trillion in January. However, it came in below consensus of RMB 2.44 trillion and RMB 2.5 trillion the same period last year. Although it is usual for new loans to be high earlier in a year as banks front-load their loans for profit maximization, the January figure missed expectations as lending to non-bank financial institutions fell for the month. Outstanding renminbi loans growth decelerated to +12.6% y/y, from +13.5% in December. Medium and long term corporate bank lending, a barometer of corporate sector demand, increased +43.4% y/y to RMB 1.52 trillion, whilst medium- and long-term household loans, mainly mortgage loans, rose to a record high of RMB 0.63 trillion. This suggests that PBOC's recent tightening measures have yet to feed through the housing market. We believe a few months' data would be needed to see the effectiveness of these measures.

The forex markets are generally staying in range as another week starts. FOMC minutes will be the main focus of the week. Recent comments from Fed officials were generally hawkish, maintaining the general view of three rate hikes this year. And there are some comments that raised the probability of a March hike mildly. The markets will look into the minutes of January 31 - February 1 meeting to confirm that it's a consensus among FOMC minutes. Meanwhile, it's generally expressed that fiscal policies were not taken into account in Fed's last projections, due to lack of details available. US president Donald Trump has promised to deliver "phenomenal" tax reforms within two or three weeks. And it's about time for Trump to deliver. And the announcement of Trump's tax overhaul could overwhelm the markets.

While US equities surged to new record high last week, other markets didn't follow. Dollar ended mixed in spite of a chorus of hawkish comments from Fed officials, including chair Janet Yellen. A batch of stronger than expected data also provided little support to the greenback. Instead, Dollar was dragged down by treasury yields, which failed to break out from recent range and reversed during the week. Political uncertainties could be a major factor in triggering safe haven flows to US bonds. And such sentiment could also be seen in the broad based weakness in Euro, which closed as the second weakest major currency next to Sterling. Swiss Franc decouple from Euro and Sterling and ended as the second strongest currency. And overall risk aversion on European situation could be the factor in driving up the Japanese Yen, which ended as the strongest major currency.

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.