Sample Category Title

EURUSD - With the pair continuing to retain its downside pressure, more weakness is envisaged. On the upside, resistance comes in at 1.2350 level with a cut through here opening the door for more upside towards the 1.2400 level. Further up, resistance lies at the 1.2450 level where a break will expose the 1.2500 level. Conversely, support lies at the 1.2250 level where a violation will aim at the 1.2200 level. A break of here will aim at the 1.2150 level. Below here will open the door for more weakness towards the 1.2100. All in all, EURUSD faces further bear threats on correction.

As shown on the daily chart below, the Kiwi / US pair is displaying a potential Inverse Head & Shoulders continuation pattern that has been developing over the past 6 months. Not only does this signify that the correction could be coming to end, but it presents a potential opportunity for significant upside gains.

A sustained break from the neckline resistance at approximately 0.7435 would confirm the breakout and potentially offer a trade with an upside target area of around 0.8000.

Generally speaking, there are a couple of ways a trader could play this setup – by buying a solid breakout of the neckline, or buying the potential re-test of the breakout area.

I’m keeping an eye on this and remain on the sidelines until I see confirmation of the Inverse H&S pattern on the Kiwi.

24 hours of reconciliation

It took all of 24 hours for the results of the rationality test to kick in after traders took time to the read the minutes from Wednesday. Not a heck of a lot has changed in the Feds view. The minutes were far more balanced than the equity market sell-off suggested. The discussions about their inflation target being symmetric indicate that the Feds are less concerned about the updraft from inflationary pressures than current market pricing. Overall there were few if any significant hawkish shift and traders have started to nimbly re-engage the US dollar downside not waiting until Powell’s key Humphrey Hawkins testimony which should clear up more than a few policy concerns.

The Feds will raise interest rates in March on the back of two strong inflation prints post-January meeting, but the market remains comfortably parked in the three rate hike camp for 2018.
This new Fed Chair will be as data dependent as his predecessor so, in reality, no one knows for sure what the Feds will do other than hike somewhere between two and four times in 2018.

Bond Markets

The bond markets continue to trade from a bear market bias, and this is unlikely to change anytime soon given the burdening supply issues which are compounded as the Feds delicately and gingerly pull back on QE largess.

Stock Markets

US equity market rebounded as concerns over rising US interest rates abate. If you were confused by Wednesday 50 pips downside adventure on the S&P post-FOMC minutes, you were not alone. However, until the dust is settled on the Fed policy debate, we should expect more back and forth ahead of Jerome Powells Humphrey Hawkins testimony.

Oil markets

Oil market bid was boosted by DoE inventories which saw a draw of -1.616 million barrels which far better than consensus and more profound than the -.9mn print by the API. While the market continues to communicate concern over rising levels of shale production, this bullish inventory data coupled with a slightly softer USD profile, it’s easy to see why oil prices are finding fresh session highs going into the NY close.

Gold Markets

Gold continues to act as less of a haven hedge and more as a proxy for USD sentiment. Given the greenback is trading within a restricted range as the stage is getting prepared for new Chair Jerome Powell, gold will remain supported by the $ 1324-25 levels given the markets ubiquitous bias to sell the USD. But the topside should also stay in check as most traders will opt to only aggressively re-engage in USD downside after Powell clears the policy airwaves in his Humphrey Hawkins testimony.

The Japanese Yen

No need to jump the gun, today’s CPI data will be a crucial driver in JPY sentiment. Post data comments to follow.

The Euro

Fact of fiction, the Euro remains a point of contention, but topside conviction remains low ahead of the Italian election compounded by softer EU economic data.

The Malaysian Ringgit

The USDMYR landscape is a bit muddled, and this air of uncertainty could extend, more so if opinion on the soft dollar narrative become less reliable. Rising US interest rates and the markets growing sensitivity to local economic data presents some near-term challenges for the Ringgit. Ultimately we believe that US rates are in the process of topping but until we get a definitive signal from the New Fed chair, hopefully, next week, we should expect offshore flows to remain light in the short run.

None the less the Ringgit is getting support from higher oil prices and given we are far removed from the USDJMYR 4.0 danger zone, longer-term investors should continue to look for opportunistic levels to re-engage long MYR posting

The Chinese Yaun

Markets in China return from a week-long holiday only to discover the US has initiated another anti-dumping probe.. This time for rubber bands. Certainly sounds more bark than the bit, but non the less trade war discussion is picking up.

Continue to favour a constructive view on the Yuan given the markets negative USD bias. But he RMB complex will most certainly benefit from expected bond inflows which should accelerate as we move through 2018.

Gold has posted gains in the Thursday session, erasing the losses seen on Wednesday. In North American trade, the spot price for an ounce of gold is $1331.17, up 0.50% on the day. On the release front, unemployment claims dropped to 222 thousand, well below the estimate of 230 thousand.

Gold prices remain continue to fluctuate. The base metal has lost 1.3% this week, erasing much of last week’s gains. Concerns that strong US numbers could stoke inflation and more rate hikes sparked the recent turbulence in global stock markets. This has triggered volatility in gold, as gold prices are sensitive to moves (or expected moves) in interest rates. The Fed is currently projecting three rate hikes this year, but if inflation continues to move upwards, many analysts are expecting that the Fed could press the rate trigger four, or even five times in 2018.

The Federal Reserve released the minutes of its January meeting, and as expected, the benchmark rate was left unchanged at a rate between 1.25% and 1.50%. The message from policymakers was that further rate hikes could be in the cards, due to strong economic conditions in the US. In the words of the minutes, policymakers “anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further”. At the December meeting, the Fed penciled in three rate hikes in 2018, and there was no reference to a quicker pace of hikes in the January minutes. As for inflation, the minutes did not reveal any concern. Most Fed members were of the opinion that inflation would rise towards the Fed target of 2 percent.

The British pound has posted slight gains in the Thursday session. In North American trade, GBP/USD is trading at 1.3943, up 0.18% on the day. On the release front, British Second Estimate GDP for the fourth quarter remained unchanged at 0.4%, shy of the estimate of 0.5%. Preliminary Business Investment for Q4 dropped to 0.0%, missing the estimate of 0.5%. In the US, unemployment claims dropped to 222 thousand, well below the estimate of 230 thousand.

British GDP for Q4 was a disappointment, but the pound has managed to hold its own against the dollar. GDP was revised downwards to 0.4%, down from 0.5% in the initial estimate. Looking at growth for all of 2017, GDP was revised lower from 1.8% to 1.7%, its worst showing since 2012. The weak readings are being attributed to lower production and weaker consumer spending. Consumers are being squeezed by a weaker British pound as well as high inflation, which is running at a 3% clip, compared to the BoE target of 2%.

The Bank of England has been hinting that it could accelerate the pace of rate hikes, and this was further reinforced on Wednesday, as BoE Chief Economist Andy Haldane said that interest rates might need to climb faster than previously expected, in order to bring down inflation to the BoE’s target of 2 percent. The Bank has been reluctant to raise rates in order to lower inflation, but may be running out of options, as inflation hovers at 3 percent and continues to erode the purchasing power of consumers. The Bank has taken pains to be transparent with the markets, stating recently that the pace of rate hikes could be accelerated and larger hikes than previously forecast could be on the way.

The Japanese yen has recorded considerable gains in the Thursday session. In North American trade, USD/JPY is trading at 107.03, down 0.68% on the day. On the release front, US unemployment claims dropped to 222 thousand, easily beating the estimate of 230 thousand. In Japan, the focus will be on inflation indicators, with the release of National Core CPI and the Services Services Producer Price Index. Both indicators are expected to post gains of 0.8%.

The Federal Reserve released the minutes of its January meeting, and as expected, the benchmark rate was left unchanged at a rate between 1.25% and 1.50%. The message from policymakers was that further rate hikes could be in the cards, due to strong economic conditions in the US. In the words of the minutes, policymakers “anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further”. At the December meeting, the Fed penciled in three rate hikes in 2018, and there was no reference to a quicker pace of hikes in the January minutes. As for inflation, the minutes did not reveal any concern. Most Fed members were of the opinion that inflation would rise towards the Fed target of 2 percent.

The Bank of Japan has been holding a steady course with monetary policy, and we can expect more of the same with the re-election of Governor Harohiko Kuroda to a second 5-year term. The move is also a clear message from the BoJ that it is no rush to make any change to the massive stimulus program, a key component of Abenomics. Kuroda has made it a priority to raise inflation, but this has proven a daunting task, as inflation is still below of the BoJ’s inflation target of 2%. In this period of strong volatility in the currency markets, Kuroda’s re-election may have a calming effect on the markets. The yen has jumped 5.0% in 2018, and if the rise continues, policymakers will have to consider further easing in order to curb the yen’s value and protect the export sector, which has improved due to stronger global demand.

The US dollar retreated Thursday after a week of gains as hawkish talk was brushed aside. The yen was the top performer while the US and Canadian dollars lagged. A new Premium trade will be issued ahead of the Asia Friday trade session. It will be the 3rd index trade.

Goldman Sachs grabbed headlines (but not markets) with a note on Thursday suggesting the FOMC could hike rates five times this year and FOMC speakers underscored the strong economy. But bonds weren't impressed and 10-year yields retreated back to 2.92%.

The market dabbled with the hawkish talk before having second thoughts. The yen led the way and USD/JPY dropped to 106.68 from 107.78. The move nearly erased two days of gains and underscored the downtrend in the pair and the struggles of the US dollar more broadly.

Struggling right alongside USD was CAD. Another round of NAFTA talks begins Feb 25 and the market is reluctant to buy the loonie until there is some sense of clarity on the trade deal. In addition, the economy continues to send mixed signals.

Canadian December retail sales dropped 0.8% compared to a flat reading expected. Ex autos was even worse at -1.8% compared to the +0.3% consensus. The loonie initially tumbled but got back on its feet.

Odds of a March BoC hike fell to 9% but the April meeting is at 49%. That's down from 54% before the data but it's still too high. The BOC wants a resolution on NAFTA and wants to see the effects of prior hikes before making another move. A key loonie factor will be inflation data on Friday. The CPI is forecast to rise just 1.5% y/y, down from 1.9% in December but the trend in core numbers will be key as well.

Before that – at 2350 GMT – Japan will also be looking at CPI numbers. Headline inflation is forecast to rise to 1.3% y/y from 1.0% but core is expected to rise just 0.3% y/y.

As the US government looks to raise $258 billion in Treasury auctions this week, the risk from a ballooning US deficit is weighing on investors' minds as concerns grow about the sustainability of the worsening fiscal shortfall in the United States. The prospect of a burgeoning budget deficit comes at a time when the country's trade balance has also been deteriorating in recent months. More worryingly, it is occurring against the backdrop of an economy that is at a late stage in the business cycle with limited spare capacity left to absorb.

These concerns, along with expectations that other central banks around the world will this year start catching up with the Federal Reserve in tightening monetary policy, have been weighing on the US dollar, even as the growth and inflation outlooks improve.

The Republican tax plan, which finally completed its passage through Congress at the end of 2017, may have been a boon for the stock market but appears to have had unintended consequences on the greenback. Investors have been fretting about the $1.5 trillion cost of the tax package over the next decade. Making matters worse, Congress this month approved a $300 billion spending bill over the next two years, further increasing the country's debt burden.

The $300 billion government funding bill triggered the dollar's latest downtrend, which hit a three-year low against a basket of currencies on February 16. It also pushed Treasury yields higher, with the 10-year yield this week hitting a near four-year high of 2.957%. The surge in borrowing costs created panic in equity markets, leading to massive losses in major stock indices on Wall Street and around the world. Although volatility in stocks has eased substantially over the past week, it is unclear whether the late 2017 / early 2018 rally will be able resume anytime soon.

Markets are likely to remain on edge until the March 20-21 FOMC meeting when new Fed Chair Jerome Powell will make his debut post-meeting press conference. Apart from getting the first proper glimpse of Powell's views on monetary policy, investors will also be looking to the Fed's updated economic projections for any adjustments to the expected rate hike path.

The Fed is almost certain to take a more hawkish tone at its next meeting as recent wage growth and CPI data has pointed to an uptick in inflationary pressures. The question is whether the Fed will go as far as raising the number of anticipated rate increases to more than the present three hikes. Powell, who has only been in the job for a few weeks, will have a tough job on his hands as whichever way the Fed decides to respond to the recent developments in economic indicators and the stock market volatility will risk upsetting the markets.

If the Fed tilts towards an overly hawkish view with the intention to counter the fiscal boost with more aggressive monetary tightening, this could drive Treasury yields even higher and frighten investors out of stocks again. But maintaining a cautious stance runs the risk of fuelling the equities rally as well as boosting household spending further. The latter scenario is perhaps what markets should be warier of as high domestic consumption would only add to the rising trade deficit. The US trade shortfall in goods and services hit the highest in nine years in December 2017.

Worsening deficits in the government budget and trade balance have the potential to lead to a dollar crisis. The soaring 'twin' deficits could send alarms about the ability of the US to finance its debt, risking a collapse in the value of the dollar. This could explain why investors have grown increasingly negative on the greenback despite the stronger growth outlook and signs that inflation is beginning to accelerate.

However, when considering the dollar's status as a global reserve currency and the US's self-sufficiency in food and energy, which would limit any dramatic rise in the trade deficit, a currency crisis does not appear very probable. Plus, export-dependent nations such as China and Japan would never support a plunge in the value of the world's most traded currency. A better explanation for the greenback's persisting weakness is the brightening prospect of the world economy.

Historically, the US currency tends to depreciate when other economies are doing well. The dollar has a tendency to rise against other currencies when their economies are underperforming due to the safe-haven appeal of US Treasuries and other dollar-denominated assets. This could be one reason why the dollar appreciated sharply during 2014-2016 as the US economy stood out for being among the few healthy ones in the G20 while growth in Japan and the Eurozone stuttered. Moving into 2017, growth in the US remained strong but other economies started to regain momentum, reducing the US's relative attractiveness.

Another likely contributor to the dollar bearishness is uncertainty related to the Trump administration. Donald Trump's presidency may have brought in large tax cuts and economic optimism, but his administration has also spawned concerns about trade protectionism and doubts about the official strong dollar policy, as well as the constant uncertainty about the ongoing Mueller investigation into possible Russian collusion with Trump's election campaign team.

The aforementioned tie in with the dollar index's downtrend, which started at the beginning of 2017. But even if we were to assume that the twin deficits argument is not a major factor for the recent acceleration in the year-long dollar sell off, the potential risk from a surging national debt burden should not be downplayed. The debt-to-GDP ratio is already above 100% (having crossed above it in 2012) and the budget deficit in 2017 rose to 3.4% in 2017. Apart from being one of the highest among advanced economies, a deficit of 3.4% after eight years of economic expansion and an unemployment rate of 4.1% is very unusual.

The US budget deficit normally has a positive correlation with the unemployment rate as the government's finances worsen when the jobless rate rises, and they improve when the number of unemployed falls. But this relationship appears to have been broken since 2015, with the deficit moving back up again after dropping from the excessive levels seen during the financial crisis, while the unemployment rate has continued to fall. This highlights the significance of how out of sync the rising deficit potentially is at this stage of the economic cycle. Just to put it into another perspective, a recent report by Moody's put the proportion of US government revenue used to service the debt at 8.1%, second only to Italy. This is projected to increase to 21.4% by 2027, signalling a ticking time bomb in the future, if not for the next few years.

AUDUSD has reversed back down again after finding resistance at the 0.7990 resistance level achieved last week. Also, the price slipped below the 23.6% Fibonacci retracement level at 0.7826 of the up-leg with the low of 0.6820 and the high of 0.8100 in the medium-term timeframe during yesterday's session.

The downside pressure seems to be stronger, while the technical indicators are endorsing the bearish scenario. From the technical point of view, in the short-term timeframe, the stochastic oscillator is approaching the oversold territory, while the MACD oscillator is moving slightly lower below the zero line. Additionally, the 20-day simple moving average is ready to post a bearish crossover with the 40-day SMA, indicating bearish pressure.

If the price remains below the 23.6% Fibonacci mark could, it could extend the losses towards the 0.7730 – 0.7755 support level. If the aforementioned area breached could open the way for the 38.2% Fibonacci level near 0.7635.

In the event of an upside movement, the next resistance to have in mind is the 0.7990 barrier. It is worth mentioning that AUDUSD has been developing within an ascending move since January 2016 and tested several times the diagonal line without slipping below it.

Highlights:

• Retail sales fell 0.8% in both nominal and volume terms in December. The decline wasn't exactly broadly-based with 6 of 11 subsectors recording declines.
• Sales at electronics and appliance stores fell 9% after a double digit gain in November that reflected Black Friday sales as well as a new product launch.
• E-commerce sales were up just 4% from a year ago in December, though for 2017 as a whole online retailers saw a 30% jump in sales.
• Today's data provides the last partials for December GDP, which we expect rose by 0.1%. That remains consistent with our forecast for annualized growth of 1.9% in Q4/17.

Our Take:

Retail sales fell by 0.8% in December to retrace about half of the increase seen in the previous two months. That has become a familiar pattern with holiday sales also being pulled forward in 2015 and 2016—a trend the seasonal adjustment process has been slow to catch up with. For the quarter as a whole, retail sales volumes were up an annualized 3.8%, supporting our forecast for consumer spending to have increased by slightly more than 2% in Q4/17. While still a healthy increase, that would be down from average gains of 4% in the prior four quarters. We think Q4's more moderate pace of consumer spending will continue in 2018 as higher interest rates and slower employment growth leave households with a bit less spending money, even as rising wages provide some offset. Along with slower demand growth, retailers continue to face cost pressures, including higher minimum wages in some provinces, as well as increased competition from online sellers. 2017 was a strong year for the sector with sales volumes rising at their fastest pace since 2004, but we doubt the feat will be repeated this year.