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).
Euro weakens broadly today as is trading in red against all other major currencies for the week. The common currency was weighed down by comments from ECB president Mario Draghi that the central bank won't react to recent spike in inflation. Meanwhile, markets are starting to get cautious on political uncertainties. Recent news from France are reminding traders there are two rounds of French presidential election on April 23 and May 7, as well as elections in the Netherlands and Germany. In addition, UK is set to trigger Article 50 for Brexit by the end of March. And there are uncertainties over US president Donald Trump's protectionist policies. Mild risk aversion is lifting the Japanese yen across the board.
The financial markets are lacking clear direction for the moment. DJIA hit new record high at 20155.35 overnight but pared back much gain to close at 20090.29, up only 0.19%. Treasury yields dropped rather notably with 10 year yield closed down -0.024 at 2.389 as recent consolidation extends. Dollar index reached as high as 100.72 but failed to break through 55 day EMA and retreated, currently at 110.40. Dollar's rebound lost momentum as weighed down mildly by dovish comments from a Fed official. Meanwhile, Sterling regained footing after hawkish comments from BoE policy maker. Some more time is needed for the markets to seek clarity on the directions. .
Dollar's rebound gathers some momentum today as dollar index regained 100 handle and hit as high as 100.72 so far. Hawkish comments from Philadelphia Fed president Patrick Harker is seen as a factor supporting the greenback. Meanwhile, weakness in European majors is providing further lift. Technically, GBP/USD leads the way with break of 1.2411 minor support, which is seen as sign of near term reversal. USD/CAD also took out 1.3168 minor resistance which indicates near term bottoming. The near term focus will now turn to 1.0619 in EUR/USD, 1.0043 in USD/CHF and 113.44 in USD/JPY. In other markets, gold retreats mildly after hitting 1237.5 and is back at around 1230 at the time of writing. But there is no clear sign of topping yet and that mildly dampens the case for reversal in Dollar. WTI crude oil is staying in recent range between 50/55.
Dollar recovers mildly today but momentum stays weak. Philadelphia Fed president Patrick Harker said that he's open to a March hike, but markets thought otherwise. Harker noted that he's "supportive of three rate hikes" this year depending on how the economy and policies evolve. And, more importantly, "March should be considered as a potential for another 25 basis point increase". While he said the Fed is not behind the curve now, he wants to "make sure we don't get behind the curve". Meanwhile, fed fund futures are pricing in just 8.9% chance of a March hike, down from prior day's 13.3% and nearly 30% last month. Dollar index continues to hover tight range around 100 handle. Technically, as it's close to key support level between 99.0/99.5. There is prospect of a short term rebound.
As widely anticipated, RBA left its cash rate unchanged at1.5% in February, its first meeting in 2017. Policymakers acknowledged improvement in the global economic outlook. They also retained the view that the domestic economy would growth above-trend. The overall monetary stance is neutral, signaling the central bank is in no hurry to adjust the policy. The market is closely awaiting Governor Philip Lowe's speech on Thursday and RBA's Statement on Monetary Policy (SoMP) on Friday. The SoMP would reveal policymakers' updated economic forecasts. We expect downgrades of both growth and inflation outlooks.
Euro trades mildly softer today in rather quiet markets. Eurozone Sentix investor confidence dropped to 17.4 in February, down from 18.2, but beat expectation of 17.4. Sentix noted in the release that "investors are reacting to Donald Trump's first official acts and see in these a burden for the global economy." Eurozone PMI dropped 0.3 pt to 50.1 in January. German factory orders rose 5.2% mom in December, versus expectation of 0.7% mom. German finance minister Wolfgang Schäuble blamed ECB for making Euro's exchange rate "too low" and monetary polices that are "too loose" for Germany. He said that "when ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany's export surplus.... I promised then not to publicly criticise this [policy] course. But then I don't want to be criticized for the consequences of this policy."
The forex markets are generally staying in tight range today with Dollar, Euro and Aussie trading with a soft tone. Recent developments in the US is prompting some analysts to push back their expectations on Fed's hike this year. According to a Reuters poll of dealers, all 14 respondents expected Fed to stand pat in March meeting too. 12 our of 14 expected Fed to hike 0.25% by the end of second quarter. 10 expected interest rate to hit 1.00-1.25% by the end of the year. But only 2 expected interest rate to hit 1.25-1.50%. That is, the majority is expecting Fed to hike only twice this year.
Dollar spiked higher after much stronger than expected headline non-farm payroll number. But the greenback quickly retreated back into established range after looking at the details. NFP showed 227k growth in the job market in January versus expectation of 175k, up from prior month's 157k. However, unemployment rate rose 0.1% to 4.8%, above expectation of 4.7%. The bigger disappointment is seen in wage growth. Average hourly earnings rose 0.1% mom in January, much lower than expectation of 0.3% mom. Dollar is set to end the week as the second weakest major currency, next to Sterling.
Dollar trades mildly higher in Asian session today but remains the second weakest major currency for the week, next to Sterling. Main focus is turning to employment data from US. Markets are expecting non-farm payroll report to show 175k growth in January while unemployment rate would be unchanged at 4.7%. Average hourly earnings are expected to grow 0.3% mom. Looking at other employment related data, ADP report showed 246k growth in January, much stronger than December's 151k. Four week moving average of initial jobless claims dropped 10k to 248k during the period. Employment component of ISM manufacturing surged to 56.1, up from 52.8. Conference board consumer confidence, however, dropped to 111.8, down from 113.3. Overall, other employment data points to a strong NFP report today. But the question is, based on current market sentiment, it's unsure if Dollar will respond positively to a set of good numbers.
BOE voted unanimously (9-0) to leave the Bank rate unchanged at 0.25% and the asset purchases program at 435B pound for UK gilts and 10B pound for non-financial GBP investment-grade corporate bonds. The members revised the growth forecasts significantly higher but left the inflation outlook largely unchanged. The latter was mainly due to the judgment that the labor slack was more than previously expected. Despite stronger growth outlook, Governor Mark Carney warned of the uncertainty over Brexit, cautioning that "there will be twists and turns along the way". While he reiterated that "we can see scenarios in either direction" for policy, we expect BOE to leave the monetary policy and the QE program unchanged at least in the first half of the year.
Sterling tumbles sharply today even though BoE upgraded growth forecasts in the quarterly Inflation Report. The central bank kept key interest rate unchanged at 0.25% and held the asset purchase target at GBP 435b, as widely expected. The central bank maintained a neutral stance and noted that "monetary policy can response, in either direction". Also, it noted that some policy makers are "closer to those limits" referring to the tolerance of overshooting the 2% inflation target. In the latest projections, BoE forecasts inflation to average 2.7% in 2017, 2.6% in 2018 and 2.4% in 2019, November forecast of 2.8% in 2017, 2.7% in 2018 and 2.5% in 2019. Growth is projected to be 2.0% in 2017, 1.6% in 2018, 1.7% in 2019, comparing to November's forecast of 1.4% in 2017 and 1.5% in 2018, 1.6% in 2019. Sterling bulls are clearly dissatisfied with the announcement as the pound weakens notably against Euro and Yen..
Dollar's decline extended overnight after Fed left interest rates unchanged as widely expected. The dollar index reaches as low as 99.42 so far is is pressing 99.43 key near term support level. Markets continued to pare back expectation on Fed higher. Fed fund futures are pricing in 17.7% chance of March hike an 69.0% only. Nonetheless, treasury yield was steady with 10 year yield closed up 0.023 to 2.474. Stocks also stabilized with DJIA closed up slightly by 26.85 pts, or 0.14%, at 19890.94. S&P 500 rose 0.68 pts, or 0.03%, to close at 2279.55. In the currency markets, Dollar remains the weakest major currency this week. On the other hand Yen stays the strongest , followed closely by Aussie and Loonie. In other markets, Gold rides on Dollar weakness and surges to as high as 1210.2 so far today, and is set to take on 1220.1 resistance. WTI crude oil stays in familiar range and hovers around 53.5.
FOMC voted unanimously to leave its policy rate within a target range of 0.50-0.75%. The outcome had been widely anticipated as the Fed just adopted rate hike of +25 bps in December. Only minor changes were seen in the accompanying statement. In short, policymakers retained the stance that future interest rate change would be 'data dependent'. They also reiterated that economic conditions will evolve in a manner that will warrant only gradual increases in the federal fund rate'. The market has only priced in 2 rate hikes this year, although the December dot plot signaled there might be 3. CME’s 30-day Fed fund futures suggested a 17.7% chance of rate hike in March, down from 20.3% prior to FOMC meeting. Yet, they priced in a 38.8% chance in May, compared with 37.7% the day before the meeting.
Dollar remains generally weak today after a rather weak recovery attempt. And, much better than expected ADP job data seems providing little inspiration. FOMC rate decision will be the main focus today but would likely be a non-event. Firstly, there practically no chance for Fed to adjust monetary policy at today's meeting. Secondly, after some hawkish Fedspeaks back in January, there were a little speculation of a March hike. And Fed could make use of today's statement to signal this.