News and Events:
China sets growth target to 6.5% for 2017
China’s National People’s Congress (NPC) began its annual meeting on Sunday. Li Keqiang, the Premier of the State Council, opened the session with a speech that focused mostly on the economic situation but also on the country’s disastrous air pollution. The annual growth forecast for 2017 was set to 6.5%, which is slightly lower than last year’s forecast of 6.7%. This optimism is a clear sign that China is not ready to accelerate the deleveraging of its economy yet despite mounting concerns about bad banks loan. Indeed, since the financial crisis the world’s second largest economy has been betting massively on debt to keep the economy running at full speed.
The zombification of the Chinese economy will remain one of the hottest topics of 2017. However, the country will also take advantage of a weaker presence of the USA in the area – thanks to Donald Trump’s protectionist stance – which will ensure that China can strengthen its position as a regional leader. USD/CNY was down 0.10% this morning. Nevertheless, on the medium-term, the renminbi was trading with a downward momentum as the currency pair rose from 6.8315 in January to around 6.90 this Monday. We maintain our bearish view on the yuan, with 6.96 as medium-term target.
Yellen confirms rate hike
Fed Chair Yellen’s Friday message all but confirms a rate hike in March (following a string of hawkish Fed comments), barring any unexpected developments. As if the Fed Chief needed any support, Vice-Chair Fischer stated that economic data was strong with no data “coming in badly in the last three months.” The USD weakened marginally as the rate market was already pricing in a near 98% chance of a 25bp March 14-15th hike. Markets are now focused on the steepness of the forward policy path as additional rate hikes are under-priced. Our current view is for an increase in policy rates in March, June and September. The highlight of the US economic data week will be the jobs report on Friday. A solid NFP read above 200k, unemployment rate at 4.7% and wage growth up 2.7% y/y will increase the probability of three rate hikes in 2017 and force USD demand. We do not anticipate that 75bp on tightening will derail the current equity markets rally. However, should the USD rally become too aggressive or Trump’s pro-growth policy fail in congress we could see sudden deceleration in Fed hiking path expectations. For the FX markets, yield differentials will dominate pricing. On this thinking yield-sensitive USDJPY remains a strong candidate for a further rally. Trade will need to discount Trump’s political nonsense (budget plans and ACA reforms are “expected” to be released) and remains forced on economic data. In addition to payroll, we will get factory orders, durable goods (today) and trade balance. Elsewhere, this week’s ECB meeting will be a non-event as policy will remain unchanged and forward guidance will be limited ahead of political uncertainty. EURCHF remains the trade to handle increased European risk.
ECB meeting in focus this week
This Thursday, the ECB will deliver its rates decision with many expecting them to remain unchanged. However, we expect to see several announcements regarding monetary policy. Recent fundamental data has indicated an improvement. Industrial Production growth is also positive (+2% in December) and inflation has surged since the start of the year. Eurozone HCPI is now above the target of 2% according to Eurostat. It is the first time in four years that the central bank’s target has been reached even though core inflation is stalling around 0.9%. We believe that ECB-Fed monetary policy divergence is becoming a reality while a US rate hike next week is now very likely. The ECB for the time remains largely all-in. We recall that from April the ECB will start buying €60bn bonds instead of €80bn until the end of the year. This should not last forever, because of bonds scarcity and the better data. This is why we believe that the ECB should start calling for a new monetary plan for 2018. Lower unemployment data and greater inflation should push policymakers to envisage tightening in the medium-term. At the meeting, political uncertainties should remain at the centre of attention and it is clear that further developments from the French and Dutch elections will prevent the ECB from making changes to this year’s monetary policy.
Today’s Key Issues (time in GMT):
- Feb Markit France Retail PMI, last 53,1 EUR / 09:10
- Feb Markit Italy Retail PMI, last 45,6 EUR / 09:10
- Mar Sentix Investor Confidence, exp 18,5, last 17,4 EUR / 09:30
- BOE Chief Economist Andy Haldane Speaks in London GBP / 09:30
- Central Bank Weekly Economists Survey (Table) BRL / 11:25
- Feb Effective Exchange Rate, last 88,17 TRY / 11:30
- BOE Deputy Governor Hogg Speaks in Lincoln GBP / 11:30
- Feb Markit Brazil PMI Composite, last 44,7 BRL / 13:00
- Feb Markit Brazil PMI Services, last 45,1 BRL / 13:00
- Bank of England Bond Buying Operation GBP / 14:50
- mars.03 Bloomberg Nanos Confidence, last 58,1 CAD / 15:00
- Jan Factory Orders, exp 1,00%, last 1,30% USD / 15:00
- Jan Factory Orders Ex Trans, last 2,10% USD / 15:00
- Jan F Durable Goods Orders, exp 1,00%, last 1,80% USD / 15:00
- Jan F Durables Ex Transportation, exp 0,10%, last -0,20% USD / 15:00
- Jan F Cap Goods Orders Nondef Ex Air, last -0,40% USD / 15:00
- Jan F Cap Goods Ship Nondef Ex Air, last -0,60% USD / 15:00
- mars.05 Trade Balance Weekly BRL / 18:00
- RBNZ Governor Wheeler Speaks in Auckland (Not Public) NZD / 18:00
- Kashkari speaks at NABE conference USD / 20:00
- RBNZ’s Spencer Speaks on Bank Capital Requirements NZD / 22:00
- Feb AiG Perf of Construction Index, last 47,7 AUD / 22:30
- mars.05 ANZ Roy Morgan Weekly Consumer Confidence Index, last 119,1 AUD / 22:30
The Risk Today:
EUR/USD is moving sideways. Hourly resistance is given at 1.0679 (16/02/2017 high). Hourly support at 1.0521 (15/02/2017 low) has been broken. The technical structure suggests deeper consolidation below 1.0600. 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 has broken support given at 1.2254 (19/01/2017 low). Hourly resistance is given at 1.2570 (24/02/2017 high) w). The road is wide-open for further decline. 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 showing limited short-terms buying interest after reversing off base lows. Key resistance is given at 115.62 (19/01/2016 high). The technical structure suggests further weakening towards 112.00. 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 continues to improves after testing 1.0021 support. Hourly resistance is implied by upper bound of the uptrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Expected to see further strengthening. 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.