• The December surplus was down slightly from the upwardly revised November surplus of $1.0B and was stronger than the +$0.2B expected within financial markets going into the report.
• December saw exports rising 0.8% though it was more than offset by a 1.0% gain in imports.

The increase in exports was largely the result of energy exports soaring 15.9% in the month. Excluding the energy component, exports were down 2.1%. Within energy all of the increase reflected energy prices rising 16.5% with the volume of energy exports dropping, albeit marginally, by 0.6%. The strength in imports was more broadly based. Encouragingly imports of industrial machinery and equipment were up a very strong 6.4% in the month which provides some tentative optimism of strengthening in business investment. Significant import increases also occurred in the volatile aircraft component (21.8%) and metal and non-metallic mineral products (6.3%). Energy imports provided a surprising offset dropping 11.9% in the month. Import energy prices rose in the month though by a more modest 3.4% relative energy export prices.

Eliminating the impact of price changes the December trade picture was not quite as encouraging. A 1.6% rise in import volumes and a 1.0% decline in real exports both contributed to the real trade surplus dropping to $3.1B (on chained 2007 dollars) from $4.1B in November.

Our Take:

Despite the deterioration in the real trade balance for December, today's report is still indicative of a significant improvement in net trade for the fourth quarter. Though this resulted mainly from imports volumes dropping a marked 15.5% on an annualized basis, a 3.0% rise in exports also made a contribution. This improvement suggests that net exports will add around 4.5 percentage points to annualized Q4 GDP growth. This improvement along with expected solid increases in key expenditure areas such as the 2.5% gain in consumer spending will more than offset an anticipated sizeable drawdown in inventories and keep overall Q4 GDP growth at an above-potential rate of 1.8%. Our forecast assumes this rate of growth will continue through this year supported by broad-based gains among most of the major expenditure areas. This is expected to eventually prompt a tightening by the Bank of Canada though not until next year with the overnight rate holding steady at the current 0.50% in the interim. A key risk to this outlook is the possibility of increased trade protectionism by the U.S. Such would have a dampening impact on exports though business investment would also see some downward pressure.

The US dollar has extended its bounce that began at around the start of the month as the Dollar Index's stay beneath 100 proved to be temporary. Consequently, the EUR/USD, GBP/USD and basically everything else against the dollar has fallen sharply today. However, the dollar's strength is not apparent so much against the perceived safe haven gold, silver and yen. Still, it does look like that, after careful consideration, the market has decided that the dollar should resume its reign as the King of FX. Perhaps it was that strong 227K rise in headline employment for the month of January that triggered this latest bounce in the dollar as it reinforces the view that there will be at least a couple of interest rate rises coming up this year thanks to an improving economy. Elsewhere, central banks have re-iterated their dovish rhetoric, not least the European Central Bank and Reserve Bank of Australia. The Reserve Bank of New Zealand could be next.

Ahead of the RBNZ's monetary policy decision on Wednesday night (Thursday morning NZ time), it looks like the NZD/USD may have topped out. Today's sell-off has been triggered in part by news that the RBNZ's Governor Graeme Wheeler will step down when his term ends in September. Deputy Governor Grant Spencer will replace him for six months after his departure until a permanent successor is appointed in 2018. With the NZ general election coming up at the end of September, the next government will have plenty of time "to make a decision on the appointment of a permanent governor," according to Finance Minister Steven Joyce.

What this probably means in terms of monetary policy is that neither Wheeler nor Spencer - as a caretaker - will probably make any changes to interest rates now, unless something dramatically happens in the economy. Thus, the monetary policy will most likely remain extreme accommodative - by New Zealand's standards anyway. Indeed, although a record low, the current 1.75% official cash rate (OCR) in New Zealand is one of the highest among the developed economies.

Against the US dollar, the NZD could weaken sharply if today's bounce in the greenback is also sustained. In the US, interest rates are already on the rise. This means that the divergence between monetary policies in the US and NZ is narrowing, which reduces the appeal of the NZD as a carry trade. This is the number one reason why I am fundamentally bearish on the kiwi.

NZD/USD in the process of forming a bearish engulfing reversal pattern?

Meanwhile the NZD/USD is in the process of forming a rather bearish-looking price pattern on its daily chart today: a potential bearish engulfing candlestick. This particular formation often signals a change in the trend: the buyers had dominated the first half of the session, temporarily pushing price above the previous day's range, but they failed to maintain that momentum and before long the sellers took charge to push the market all the way back to below the previous day's low. Now in this case, today's candlestick is obviously not complete yet and we will require a close below 0.7280/5 to make this pattern valid.

Nevertheless, price action looks rather bearish. The false break above 0.7350, the high from last week, clearly shows there wasn't much willingness from the buyers to bid up the kiwi at those elevated levels. The sellers have sensed this weakness and have taken control of price action today. But it remains to be seen if the sellers have conviction in their trade. Will they hold onto their bearish bets or fold, letting the kiwi bounce back? But it is also worth noting that this reversal-looking price formation has taken place around a very important long-term resistance area. As shaded in the chart, this 0.7320-0.7380 range was where the bulk of the last buying phase took place before the sellers took control back in November. It could be that not all the (large) sell orders then were filled before price turned, so today's earlier rally gave the sellers another chance to enter the market (short) at or around their intended entry levels. Or it could be that those who sold in November, took profit at lower levels and are now re-establishing their bearish positions at around the same price levels. Another reason for today's weakness could be profit-taking from the buyers who were wary of a possible sell-off around this important resistance area. Perhaps, it was a combination of all these factors. Whatever the reason, the selling pressure has been evidently strong.

Now, if the NZD/USD goes to on to break the noted 0.7280/5 support level and preferably holds below this area on a closing basis then we could potentially see significant follow-through in selling pressure in the days to come. The next support area where price may head to is around 0.7220-40, which was resistance in the past. Below this range, we have the Fibonacci extension levels and the moving averages as the next bearish objectives, as per the chart.

Meanwhile if the NZD/USD's weakness turns out to be temporary and price subsequently moves north of the 0.7350 resistance level, then in this case it will become likely that the kiwi will aim for the liquidity zone above 0.7485, the most recent swing high, next.

The U.S. trade deficit narrowed to $44.3 billion in December from a $45.7 billion deficit in November. The trade deficit was just slightly better than the consensus expectation.

Exports bounced back (+2.7%) after two months of contraction. The increase was led by capital goods (+7.9% m/m), but industrial supplies (+2.1%), automotive exports (+1.4%) and consumer goods (+0.5%) also saw gains. Export gains were even stronger in real terms (+3.6%).

Imports rose 1.5%, with all major categories posting gains. Most notably, automotive sector imports jumped 5.5%. Goods imports in real terms rose 1.5%.

Key Implications

No major surprises here. Zeroing in on trade volume trends, both exports and imports picked up in the latter half of 2016, after a flat performance earlier in the year. That is very much in line with an acceleration in economic growth both at home and abroad.

For the year as a whole, the trade deficit in goods shrank in 2016 to $750 trillion, and is well below the peak deficits seen in 2006 to 2008 period when oil prices were at a record high. However, the trade surplus in services shrank slightly in 2016, as the strong U.S. dollar led to faster growth in services imports, such as travel. Therefore the overall trade deficit grew slightly in 2016 to $502 trillion, up from $500 trillion in 2015. Again, this is well below the record $762 trillion deficit posted in 2006.

The U.S. dollar has given back most of its post-election gains on a trade-weighted basis, and is now only about a percent higher than its year-ago levels. A strong dollar has been exerting a considerable drag on goods inflation, but that affect will likely start to move into the rear view mirror in the coming months. This will add to strengthening core price pressures in the latter half of the year.

Daily Pivots: (S1) 1.0707; (P) 1.0747 (R1) 1.0790; More.....

EUR/USD is still staying above 1.0619 minor support and intraday bias remains neutral first. As noted before, choppy rise from 1.0339 is seen as a correction. Hence, in case of another rise, upside should be limited by 1.0872 resistance and bring fall resumption eventually. Break of 1.0619 will argue that the corrective rise is completed and turn bias to the downside for retesting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

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Canada's trade balance remained in surplus territory for a second consecutive month in December, although it narrowed slightly to $923 million (from an upwardly revised $1B in November). Exports rose 0.8%, slightly behind the 1.0% gain in imports. In real terms, exports slipped 1.4% while imports were up 0.4%.

The gain in exports was driven by energy products (+16%), which reached the highest level in two years as a result of higher prices. Providing some offset were declines in motor vehicles and parts (-5%), and metal ores and non-metallic mineral products (-13%) which gave back some of the massive gains recorded in November.

Higher imports were underpinned by a 22% jump in the highly-volatile aircraft and other transportation equipment, industrial machinery (+6%), and metal and non-metallic mineral products (+6%). Meanwhile, imports of energy products slid 12% on the month.

Canada's trade surplus with the U.S. narrowed to $4.4B in December (from $4.7B), as the rise in imports (1.3%) outpaced the increase in exports (+0.2%). Canada's trade deficit with the rest of the world narrowed to $3.5B (previously $3.7B) as exports jumped 2.6% and imports were up by a more modest 0.5% during the month.

Key Implications

Despite the pull back in export volumes in December, net trade will nonetheless contribute to economic growth during the fourth quarter, which is likely to come in slightly above 2%.

Going forward, exports are expected to gain some momentum, with US demand expected to remain healthy and the loonie unlikely to move much from its recent mid-70 US cent range. However, with NAFTA renegotiations being a key priority for President Trump, the overall outlook for trade has been clouded. But, while the risks are certainly tilted to the downside, it will likely take some time before any potential measures are put into action.

As such, we expect the Bank of Canada to remain on hold as it continues to assess any impact from forthcoming policies enacted by the new administration.

Daily Pivots: (S1) 0.9886; (P) 0.9924; (R1) 0.9944; More.....

USD/CHF's recovery from 0.9860 extends higher today but stays below 1.0043 minor resistance. Intraday bias remains neutral first. As long as 1.0043 holds, deeper decline is expected. Current fall from 1.0342 is seen as the third leg of the pattern from 1.0327. Below 0.9860 will target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0043 will indicate short term bottoming and turn bias back to the upside.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expecting the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359, after the consolidation completes.

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Daily Pivots: (S1) 111.30; (P) 112.04; (R1) 112.46; More...

No change in USD/JPY's outlook. The choppy decline from 118.65 could extend lower. But such decline is seen as a correction. Hence, we'd expect strong support from 38.2% retracement of 98.97 to 118.65 at 111.13 to contain downside and bring rebound. Above 113.44 minor resistance will turn bias neutral first. Break of 115.36 resistance will argue that such correction is finished and turn bias to the upside for 118.65 high.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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USD/CAD has posted strong gains in the Tuesday session, continuing the gains which marked the Monday session. Currently, the pair is trading at 1.3170. On the release front, Canada's trade surplus rose to C$0.9 billion, short of the estimate of C$1.2 billion. Canadian Building Permits dropped 6.6%, worse than the forecast of -3.5%. Later, in the day, Canada releases Ivey PMI, which is expected to post a strong reading of 58.3. In the US, the trade deficit narrowed to $44.3 billion, beating the forecast of $45.0 billion. On the employment front, JOLTS Jobs Openings is expected to improve to 5.56 million.

President Donald Trump has just started his term, but he continues to create controversy and his protectionist rhetoric is not endearing him to the markets. Moreover, the lack of an economic policy from the new administration is a major source of concern and the the post-election euphoria which sent the markets higher has dissipated. The Federal Reserve, which had trumpeted that it was planning a series of hikes in 2017 (sound familiar?), was more cautious in its recent rate statement and is expected to adopt a wait-and-see attitude in the coming months. If the economy continues to grow, there is a strong likelihood of another rate hike in the first half of 2017, which is bullish for the dollar. On the other hand, if Trump makes good on his promises to "make America first" and implement protectionist policies, the greenback could lose ground against major currencies.

Donald Trump's promise of "America First" includes revisiting the NAFTA trade agreement, which has been an anchor of the US-Canada trade relationship for over 20 years. Trump didn't mince words last week when describing NAFTA, saying that "NAFTA has been a catastrophe for our country. It's been a catastrophe for our workers and our jobs and our companies." Although Trump is unlikely to unravel the agreement, his protectionist stance could spell trouble for the Canadian economy. With 70% of Canadian exports headed for the US, changes to NAFTA could unnerve the markets and weaken the Canadian dollar.

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.

Philly Fed Harker Open to March Hike

Yesterday, Philadelphia Fed president Patrick Harker said that he's open to a March hike. 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". Nonetheless, it should be noted that fed fund futures are pricing in less than 10% chance of a March hike, much lower than nearly 30% last month. More evidence is needed to support the case for a March hike.

European Majors Soft on Draghi and France

European majors are weighed down by dovish comments from ECB president Mario Draghi and political developments. French conservative presidential candidate Francois Fillon was called to quit the run after the scandal of employing his wife and children as parliamentary aides. Meanwhile, Another Canadian National Front threatened to exit Eurozone. The news reminded traders of the political uncertainties in Eurozone this year. That includes elections in the Netherlands and Germany. And even there could be another election in Italy too.

It's reported that IMF are getting concerned with Greece's bailout program, as shown in the annual review of Greek economy published today. The positive side of the report is that most IMF executives agreed that Greece is on track for hitting fiscal surplus of 1.5% of GDP. And, no more further fiscal consolidation is needed at this time. However, "some Directors had different views on the fiscal path and debt sustainability."

ECB president Mario Draghi faced the European Parliament's committee on economic affairs late yesterday. He noted that the central bank would not react to temporary spike in inflation. He emphasized that "our monetary policy strategy prescribes that we should not react to individual data points and short-lived increases in inflation". And, underlying inflation pressures "remain very subdued" reflecting "largely weak domestic cost pressures. There were speculations that ECB could start tapering as headline inflation, recorded at 1.8% in January, would exceed 2% target soon. And Draghi's comments tamed such speculations.

Aussie Higher as RBA Maintained Neutral Stance

Aussie is generally firmer today after RBA stands pat and maintained a neutral stance. As widely anticipated, RBA left its cash rate unchanged at 1.50% at 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. More in RBA Sees Contraction In 3Q16 As Temporary, Maintains Neutral Stance

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2430; (P) 1.2464; (R1) 1.2501; More...

The break of 1.2411 minor support suggests that rebound from 1.1986 has completed at 1.2705 already. And, the whole consolidation pattern from 1.1946 low is possibly finished too. Intraday bias is turned back to the downside for retesting 1.1946 low. On the upside, above 1.2486 minor resistance will turn bias back to the upside. In case rebound from 1.1986 extends, we'd still expect strong resistance from 1.2774 resistance to limit upside.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

Economic Indicators Update

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Daily Pivots: (S1) 1.2430; (P) 1.2464; (R1) 1.2501; More...

The break of 1.2411 minor support suggests that rebound from 1.1986 has completed at 1.2705 already. And, the whole consolidation pattern from 1.1946 low is possibly finished too. Intraday bias is turned back to the downside for retesting 1.1946 low. On the upside, above 1.2486 minor resistance will turn bias back to the upside. In case rebound from 1.1986 extends, we'd still expect strong resistance from 1.2774 resistance to limit upside.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

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