ECB Minutes In Focus, Risk Rally Continues

News and Events:

USD unable to hold ground as yields ease

Despite the release of mostly upbeat economic data from the US yesterday, the greenback was unable to lock-in the gains and quickly reversed momentum. EUR/USD eased to 1.0521 as January’s headline inflation surged to 2.5%y/y versus 2.4% expected and 2.1% in December. Similarly, the core measure, which excludes the most volatile components, rose to 2.3%y/y versus 2.1% expected. Still on the bright side, after slowing during the four previous month, core retail sales jumped 0.7%m/m, while the market was expecting a reading of 0.3%. Retail sales were quite disappointing in the last quarter of 2016 and raised questions about the health of the US economy as personal consumption remains the number one driver of the world’s largest economy. The January figures bode well for the first quarter of 2017, should the trend continue.

On a less positive note, industrial production printed well below the median forecast as it contracted 0.3%m/m in January, while the market was expecting a flat reading. In addition, the December figure was downwardly revised to 0.6% from 0.8% initially estimated. This data contrasts sharply with the recent survey that suggested an upbeat mood in the manufacturing industry. Indeed, the manufacturing PMI together with the ISM manufacturing has been on solid footing since the end of the September quarter last year. This strong divergence suggests that the sector needs more than Trump’s boundless optimism to lift its head above the water.

On the technical side, the dollar index failed to break the 101.45-53 strong resistance area (50dma and Fibonacci 50% on January debasement) and has since then broke the 38.2% level. However, the index is still trading with a positive momentum as a break of the 99 level area is needed to confirm a trend reversal.

ECB minutes in focus

Early this afternoon, the ECB will release its account of the monetary policy meeting that was held on the 19th of January in Frankfurt.

Usually ECB minutes do not reveal much but today we hope to gain some insight on the current QE programme as well as on the diverging views amongst policymakers. Indeed, views on European uncertainties are definitely strong even though those same uncertainties are clearly helping the ECB by lowering the single currency’s value.

We will also closely monitor inflation expectation development which is now running at 1.1% and is expected to rise towards 1.4% at the end of the year. The ECB is very conservative in its approach as it intends to see inflation rise towards the 2% target by 2020. In any case, Eurozone reflation will be the yardstick of the ECB’s monetary policy this year.

Stay vigilant during risk rally

Market participants can feel the unleashed “animal spirit” driving global stock prices higher. For five consecutive days the financial world has been blasting news of stock prices new all-time highs. US P/E estimates have expanded to accommodate higher EPS on Trump tax reforms. While solid corporate earnings, (70% of US names have beat forecasts), provide clear justification for the broad-based optimism, it’s hard to find an asset not improving as even safe-haven gold is finding buyers to $1237, preparing to test the $1245 range high. However, we remain slightly concerned over the current round of exuberance. First is our negative expectation from the Trump administration. Despite bi-partisan support for tax reforms Trump’s divisive nature could easily derail the positive pro-growth policy. Trump’s first 30 day have been plagued by mis-management and bad decisions, a trend unlikely to change given his “bull in a china shop” personality. Secondly, risk measures in Europe are quietly hinting at rising worries. EURCHF 3-month vol and risk reversal have spiked in recent days and have yet to normalize. The short-term spread between German and peripheral countries are re-widening. Despite the optimistic European data, the exception being the disappointing GDP read, the sell-off in all bonds not German hints of creeping uncertainty. Clearly the primary sources are the rapidly approaching Dutch and French elections. Spreads between German and French 10-year yields are now at the widest level since 2012. Given our current doubt we would remain short EURCHF heading into this period of US and European political insecurity. In addition we see short EURPLN as a solid strategy heading into the Dutch parliamentary elections at Geert Wilders of the populist Freedom Party still holds the lead.

Today’s Key Issues (time in GMT):

• Jan Unemployment Rate, exp 7,30%, last 6,50% SEK / 08:30
• Jan Unemployment Rate Trend, last 6,90% SEK / 08:30
• Jan Unemployment Rate SA, exp 6,80%, last 6,90% SEK / 08:30
• Dec Trade Balance EU, last 235m, rev 222m EUR / 09:00
• Dec Trade Balance Total, last 4203m, rev 4190m EUR / 09:00
• Feb 15 FGV CPI IPC-S, exp 0,52%, last 0,61% BRL / 10:00
• Dec Economic Activity MoM, exp -0,20%, last 0,20% BRL / 10:30
• Dec Economic Activity YoY, exp -1,65%, last -2,02% BRL / 10:30
• Feb 10 Foreigners Net Bond Invest, last $170m TRY / 11:30
• Feb 10 Foreigners Net Stock Invest, last $349m TRY / 11:30
• Fed’s Fischer Speaks in interview on Bloomberg TV USD / 11:30
• ECB account of the monetary policy meeting EUR / 12:30
• Feb 10 Gold and Forex Reserve, last 394.1b RUB / 13:00
• EU’s Moscovici, ECB’s Nowotny on panel in Vienna EUR / 13:00
• Jan Housing Starts, exp 1226k, last 1226k USD / 13:30
• Jan Housing Starts MoM, exp 0,00%, last 11,30% USD / 13:30
• Jan Building Permits, exp 1230k, last 1210k, rev 1228k USD / 13:30
• Jan Building Permits MoM, exp 0,20%, last -0,20%, rev 1,30% USD / 13:30
• Feb 11 Initial Jobless Claims, exp 245k, last 234k USD / 13:30
• Feb 4 Continuing Claims, exp 2050k, last 2078k USD / 13:30
• Feb Philadelphia Fed Business Outlook, exp 18, last 23,6 USD / 13:30
• ECB’s Coeure Speaks in Maastricht EUR / 14:00
• Feb 12 Bloomberg Consumer Comfort, last 47,2 USD / 14:45
• Feb Bloomberg Economic Expectations, last 56 USD / 14:45
• Fed’s Williams Speaks About Fintech in San Francisco USD / 20:10
• Jan BusinessNZ Manufacturing PMI, last 54,5 NZD / 21:30
• 4Q Retail Sales Ex Inflation QoQ, exp 1,00%, last 0,90% NZD / 21:45
• Jan Industrial Production YoY, exp 3,00%, last 3,20% RUB / 23:00
• Jan Tax Collections, exp 137290m, last 127607m BRL / 23:00

The Risk Today:

EUR/USD‘s selling pressures continue despite ongoing consolidation after the pair has broken strong hourly support given at 1.0581 (16/01/2016 low). The road is wide open towards support at 1.0454 (11/01/2017 low). Expected to see continued decrease. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is still trading below strong resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should back bouncing lower towards support given at 1.2254 (19/01/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY is pushing higher after its increase from support given at 111.36 (28/11/2016 low). However, bearish pressures arise around hourly resistance given at 115.62 (19/01/2016 high). The technical structure suggests that the medium-term momentum is bearish. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF‘s short-term bullish momentum is pausing after the breakout of the downtrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Nonetheless, we believe that the road is nonetheless clearly wide-open for further decline if the pair gets back below parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.