Action Insight

With no single party being able to secure over half of the seats in the parliament in last month's election, the right-wing, populist NZ First party has become a kingmaker. Its leader Winston Peters has just announced that his party would form a government with the Labour Party. Kiwi's sell off after the announcement as the outcome has not been quite priced in. NZ First had cooperated with both National and Labour previously (National/ NZ First from 1996 to 1998, and Labour/ NZ First from 2005 to 2008).

Predominantly the most important political event in China, the twice-in-a-decade National Congress of the Chinese Communist Party began on October 18. As a kick start, President Xi delivered a Party Work Report which reviewed the achievements in his first five years and outlined the challenges and goals for the next five years and beyond. Xi outlined his thoughts on the 'new era of socialism with Chinese characteristics' On the economic reform, he suggested further developments in the "advanced manufacturing industry", which includes medium and high end consumption, green and low carbon industry, sharing economy, modern logistics and human capital services. He has also pledged to deepen interest rate and exchange rate reforms, develop a comprehensive financial regulation system and reduce systematic financial risk. These are nothing new as the key aspects of the monetary and fiscal policies have already been lain down at the National Financial Work Conference in July.

Euro tumbles sharply while Yen jumps on as political risks come back to markets. Passing the deadline imposed to Catalan leader Carles Puigdemont, Spanish government said they will "continue with the procedures set out in Article 155 of the Constitution to restore the legality of self-rule in Catalonia." That is, the Spanish Government is going to suspend autonomy of Catalonia.

Japanese Yen and Swiss Franc remain the weakest ones for the week on strong global risk appetite. German DAX closed at new record of 13043.03 yesterday. That was followed by 160.16 pts rise in DOW to 23157.60, and 1.9pts rise in S&P 500 to 2561.26. Both were record highs. US treasury yield followed and closed up 0.041 at 2.339. But that was not followed by Dollar as the greenback reversed earlier gains in late US session. Indeed, Euro is seen to be outperforming Dollar against Swiss Franc and Yen. In other markets, Gold is now back below 1280 after recent recovery hit 1308.4 and lost steam. WTI crude oil is firm at around 52 but struggle to get through 52.86 near term resistance.

Dollar trades generally higher today, except versus Canadian Dollar. But strength of the greenback is rather unconvincing against Euro, Aussie and even Sterling. The more decisive moves are found in USD/CHF and USD/JPY. That should be more likely due to strong risk appetite. German Dax hit new record high at 13094.76 earlier today and is maintaining most of the gains at the time of writing. US futures also point to higher open as DOW would extend recent record runs. Meanwhile, weaker than expected housing data from US also limits greenback's rally . Housing starts dropped to 1.13m in September, below expectation of 1.18m. Building permits also dropped to 1.22m, below expectation of 1.27m. From Canada, manufacturing shipments rose 1.6% mom in August.

Lacking other exciting news, the market was thrilled by the media report that US President Donald Trump was impressed by Stanford University Economic John Taylor at the Fed Chair candidate interview. Bets for Taylor to be the next Fed chair increased, making him one of the top three candidates alongside Jerome Powell and Kevin Warsh. Market reaction to the rise of Taylor was USD strength and an upward shift in the UST yield curve, hinging on hopes that this creator of the Taylor rule would accelerate the pace of rate hike if he has become the Fed' chief. We believe such expectation is a bit too far-fetched.

Dollar is trading as the strongest one for the week. The greenback was lifted by talks that John Taylor is considered a hawk and has impressed US President Donald Trump in Fed chair interview. But momentum in the greenback is rather weak as it struggled to extend gains in late US session. Dollar was also weighed down mildly by falling yields, with 10 year yield closed down -0.09 at 2.298. Sterling is extending this week's decline as markets are reassessing the dovish possibilities of November BoE meeting. Meanwhile, Canadian Dollar rebounded as NAFTA negotiation is extended. UK job data will be the main focus today. Markets will also keep an eye on Chinese Communist Party Congress in Beijing.

Dollar strengthens broadly today on report that Stanford University John Taylor impressed President Donald Trump in his Fed chair interview. Taylor is famous for his so called Taylor rules and he is seen by some as a hawkish candidate as a Fed chair. However, it should be noted that Taylor recently said that rules shouldn't be used as a "way to tie central bankers' hands." Instead, "there are reasons to run policy with a strategy." . Meanwhile, chance of former Fed Governor Kevin Warsh is fading. Trump will interview current Fed chair Janet Yellen on Thursday. White House economic advisor Gary Cohn and Fed Governor Jerome Powell are among the candidates for the job.

The RBA minutes for the October meeting reaffirmed the market that the central bank is in no hurry to increase interest rates. Policymakers stressed that rate hikes, or other kinds of monetary policy normalization, in other major economies do not necessarily imply that the RBA would follow suit anytime soon. The RBA remained upbeat in the domestic economic outlook, staying confident in the employment market conditions. Yet, it was still weary of subdued inflation. As usual, the central bank continued to warn of the strength in Australian dollar.

Dollar trades mildly higher this week even though momentum is relatively week. US equities extended the record runs, with DOW, S&P 500 and NASDAQ closing at new records overnight. Treasury yields also recovered mildly. But there is little support to the greenback yet. The forex markets are generally mixed in consolidative mode, except that some extra weakness is seen in Euro, due to political jitters. Meanwhile, Australia Dollar is trading a touch softer after RBA minutes. Sterling, on the other hand, is firm as markets await inflation data from UK.

Dollar is trading mixed in spite of up beat US economic data and hawkish Fedspeaks. Empire state manufacturing index jumped to 30.2 in October, up from 24.4 and beat expectation of 20.7. That's also the highest level in three years. Boston Fed President Eric Rosengren sounded rather hawkish in an interview. He mentioned that Fed will need to hike interest rate December, and then three to four times "over the course of next year". He pointed out that unemployment rate, current at 4.2%, could drop below 4% when the economy is overheating. And in that case, Fed "might have to overshoot" interest rate to a level higher than expected in a healthy economy.

The forex markets open the week rather steadily. Sterling is trying to extend last week's late rally but is held below Friday's high for the moment. It will be a big week for the Pound with inflation, employment and sales data featured. Meanwhile, UK Prime Minister Theresa May is trying her last effort to break that deadlock in Brexit negotiation ahead of the crucial EU summit on October 19. Dollar, on the other hand, is mildly firmer, recovering some of the post CPI loss.

It has been a rather volatile week. We were partly correct in expecting strong impact from politics on the markets. But the reactions to central bank news and economic data surprised us. Dollar was clearly weighed down by FOMC minutes and CPI miss and ended as the weakest one. Meanwhile, Euro reversed early gains and ended mixed on rumors about ECB's tapering plan. There was practical no impacts from US President Donald Trump, North Korea and not even Catalonia. Markets also ignored UK Prime Minister Theresa May. Nonetheless, politics did play a role in the extraordinary volatile in Sterling, which ended as the strongest one. Aussie and Kiwi followed as boosted by China data.

Dollar is under selling pressure again in early US session after weaker than expected inflation data. Headline CPI rose 0.5% mom, 2.2% yoy in Septembers, up from 0.4% mom, 1.9% yoy in August, but missed expectation of 0.6% mom, 2.3% yoy. Core CPI rose 0.1% mom, 1.7% yoy, comparing to August's 0.2% mom, 1.7% yoy. More importantly, core CPI missed consensus of 0.2% mom, 1.8% yoy. Retail sales came in slightly better than expected and rose 1.6% in September. Ex auto-sales rose 1.0%. Dollar was sold off earlier this week after FOMC minutes showed policymakers are concerned with sluggishness in inflation. It's resuming that selloff now and that should keep Dollar as the weakest one for the week.

Much volatility was seen in Sterling in the past 24 hours on news regarding Brexit. British Pound suffered steep selling yesterday on news that the fifth round of Brexit negotiations ended with "deadlocks" on the issue of the divorce bill. Nonetheless, Sterling was quickly popped up by reports that UK could get a 2-year Brexit extension. A German newspaper Handelsblatt quoted unnamed source that EU could give that extension to UK under the conditions that the latter will fullfil all obligations as a member country. However, UK will be required to give up its voting rights. If it's true, more time will be allowed for business and citizens of both UK and EU to adjust to the changes.

China's trade surplus surprisingly narrowed to a 6-month low of US$28.5B in September, from US$42B a month ago. The market had anticipated a milder drop to US$39.5B. Growth in exports improved to 8.1% y/y from 5.5% in August, while growth imports accelerated significantly to +18.7% from July's +13.3%. Notwithstanding a disappointing headline, the report continued to paint a healthy picture on China's economic outlook. A stronger-than-expected imports growth underpinned domestic economic strength. Exports growth, despite missing consensus, still picked up from the same period last year. More importantly, a narrowing trade surplus could tame the US' complaint of China's currency manipulation. This should help the government maintain a stable and modestly strong renminbi as CCP's 19th national congress approaches.

Dollar rebounds in early US session as boosted by solid economic data. Initial jobless claims dropped 15k to 243k in the week ended October 7, as impacts of hurricanes faded. That's also notably better than expectation of 253k. Four week moving average of initial claims also dropped 9.5k to 257.5k. Continuing claims dropped 32k to 1.89m, hitting lowest in 44 years since 1973. Headline PPI rose 0.4% mom, 2.6% yoy in September, up from 0.2% mom and 2.4% yoy in August, met expectations. Core CPPI rose 0.4% mom and 2.2% yoy, up from 0.1% mom and 2.0% in August, and beat expectation of 0.2% mom, 2.0% yoy. The set of data helps greenback regains some of yesterday's post FOMC minutes losses.

US equities surged to new records while Dollar was pressured as markets perceived FOMC minutes released as slightly dovish ones. DOW rose 42.21 pts or 0.18% to close at 22872.89. S&P 500 rose 4.6 pts or 0.18% to close at 2555.24. Both were new record highs. 10 year yield was flat though at 2.345. Dollar index dipped to as low as 92.89 and breach of 92.94 near term support now suggests more downside in near term. Gold hits as high as 1297.9 in Asian session and is set to take on 1300 handle, comparing to last week's low at 1262.8. That is consistent with Dollar's weakness this week. Meanwhile, Sterling and Euro remain the strongest ones for the week so far, Yen trails behind Dollar as the second weakest.

The FOMC minutes for the September meeting anchored the Fed's stance to hike policy rate for one more time this year. While the views on economic growth developments remained broadly unchanged from previous meetings, the members appeared more concerned over the inflation outlook. The minutes included detailed discussions on the impacts hurricanes Harvey, Irma, and Maria. Yet, they were expected to have limited impacts on US growth and inflation. The market has priced in almost 90% chance of a rate hike in December. The bet shows little change after the release of the minutes.

Dollar stays generally weak today as markets await September FOMC minutes. The key takeaway of that FOMC meeting was that policymakers stick to the plan to raise interest rate one more time this year. And they projected to hike three more times next year. Markets pricing for December hike jumped sharply since then. Fed fund futures are implying 93.1% odds for that. Core inflation projection for 2017 and 2018 were revised slightly lower. But core inflation forecasts for 2019 and 2020 were kept unchanged. The accompanying statement and economic projections suggested that Fed was not too concerned with recent slowdown in core inflation. And that was being reflected in the overall tone of comments of Fed officials so far. Markets will look into more details on how comfortable the policy makers are on inflation outlook. But overall, we're not expecting anything revealing from the minutes.