US equities pared back some gains overnight on profit taking after a strong run. DJIA closed down -112.58 pts, or -0.53%, at 21002.97. S&P 500 dropped -14.04 pts, or -0.59%, to close at 2381.92. Treasury yields, on the other hand, extended the rally with 10 year yield hitting at high as 2.505 before closing at 2.489. 30 year yield hit as high as 3.101 before closing at 3.082. While yields staged a strong rebound this week, it should be noted that both 10 year and 30 year yield are still bounded in medium term range set since December.

Dollar index reached as high as 102.26, extending the rebound from 99.23. The dollar index is now back defending 102 handle. While further rise is expected in the index, it should also be noted that it's staying well below January's high at 103.82. In the currency markets, Dollar is set to end the week as the strongest major currencies. However, firm breaks of 1.0493 support in EUR/USD and 114.94 resistance in USD/JPY are still needed to confirm underlying momentum in the greenback.

Fed Powell: Case for hike has "come together"

Speculations on March hike by Fed continued to heat up. Fed fund futures are pricing in 75.3% chance of it, up from prior day's 66.4, and more than double of last week's pricing. Fed governor Jerome Powell said yesterday's that "the case for a rate increase in March has come together." Another Fed governor Lael Brainard, who's seen as a known dove, also said earlier this week that "Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path". A main focus today is Fed chair Janet Yellen's speech at 1800 GMT, which could solidify Dollar's strong weekly close. Fed's vice Chair Stanley Fischer and Chicago Fed president Charles Evans will also speak today.

Japan CPI ticked up in January

Released from Japan, National CPI core rose to 0.1% yoy in January, up from -0.2% yoy, above expectation of 0.0% yoy. That's also the first uptick in 11 months. Tokyo CPI core, however, dropped -0.3% yoy in February, unchanged from prior month's reading, and missed expectation of -0.2% yoy. The jump in National CPI core is seen mostly as a recent of energy prices. There is still no clear evidence of momentum in underlying inflation, including wages. And, the reading is still far below BoJ's 2% target. It's difficult for BoJ to start scaling back the massive monetary stimulus any time soon. Unemployment rate dropped 0.1% to 3.0% in January. Household spending dropped -1.2% yoy

Elsewhere, Germany will release retial sales today, while Eurozone will release PMI services final and retail sales. UK will release PMI services. US will release ISM non-manufacturing.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3340; (P) 1.3371; (R1) 1.3419; More...

USD/CAD's rise from 1.2968 continues and reaches as high as 1.3401 so far. As noted before, pull back from 1.3598 has completed at 1.2968 already. Further rise is now expected as long as 1.3209 resistance turned support holds. Firm break of 1.3387 should pave the way to 1.3598 high. Also, break there will extend the larger rally from 1.2460 towards next fibonacci level at 1.3838. On the downside, though, below 1.3209 will turn bias back to the downside for 1.2968 support instead.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. The second leg is likely still in progress and could target 61.8% retracement of 1.4689 to 1.2460 at 1.3838. We'd look for reversal signal there to start the third leg. Break of 1.2968 wold at least bring at retest of 1.2460 low. However, sustained trading above 1.3838 would pave the way to retest 1.4689 high.

Economic Indicators Update

STOCKS

Sharp fall seen in almost indices but this could be temporary. Shanghai, Dax and Dow could recover to extend further gains by next week while we need confirmed price action from Nifty for further direction.

Dow (21002.97, -0.53%) had broken above the 21000 resistance level but has come down now to trade lower. In case the index comes back below 21000, it would be difficult to continue the rally just now and we could see some correction towards 20750-20500 before a bounce is seen. Else, while above 21000, there is an upside potential towards 21300 and higher in the near to medium term. Note immediate support is seen near 20750.

Dax (12059.57, -0.06%) is almost stable but could rise some more towards 12100-12170 levels before seeing some dip. But also note that immediate resistance is visible on the daily candles which if hold, could prevent an immediate rise above 12090. Watch price action near current levels.

Nikkei (19538.15, -0.14%) is trading above 19480 and while that holds we may expect a stable movement within 19480-19750 region. On a medium term, the index may resolve on the upside.

Shanghai (3211.34, -0.58%) has fallen sharply, breaking the immediate uptrend in the daily candles. We may not expect a fall below 3175. A bounce in the early next week is possible taking it back towards 3250.

Nifty (8899.75, -0.51%) made an intra-day high of 8992 before sharply coming off from there to close below 8900. If the index is unable to break above 9000 just now, we could continue to expect a sharp fall from current levels. Else, a confirmed and sustained move above 9000 is necessary to turn bullish just now.

COMMODITIES

Recent strength in Dollar index (102.08) has impacted negatively across all the commodities. Gold (1232) has broken its pivot at 1247 of its entire trading range of 1215-1274. Immediate support is at 1230 and from there it may correct a little towards 1244. A close below 1230 could be trend reversal.

Silver (17.76) is also trading below its crucial support of 18 and hovering around its long term trend line resistance of 17.60. We have US Fed Chair Yellen speech at 11.30 pm IST, which may add some more clarity towards the future price action of Dollar Index and other commodities as well.

Copper (2.67)is also holding its crucial support of 2.60. Defiantly the bullish momentum become weak and a possibility of a decline towards 2.60 levels can’t be ruled out. US ISM Non Manufacturing PMI report will be published at 8.30 pm IST may add some more clarity.

Brent (56.59) was almost unchanged within its recent price range of 54.20-57.5 but WTI (55.76) has fallen yesterday and trading just above its crucial support at 55.45. A close below that could open up much lower levels towards 51.

FOREX

The surging probability of a rate hike in the 14-15 Mar’17 Fed meet (seen at 75% now) is keeping the Dollar firm against the other currencies though Rupee is guided primarily by the domestic factors and looking forward to the State elections result due next Saturday, 11th Mar’17. The Yellen speech tonight can affect the short term sentiment.

Dollar Index (102.07) has broken above 102.00 signaling strength and now may rise to the near term target/resistance of 103.00-20 with 101.75 providing support in the near term.

Euro (1.0522) is bouncing from the support of 1.05 levels in line with expectations but unless a break above 1.0600-20 is seen in the near term, the bears remain in control with the downside possibilities of 1.040-1.035 open.

Dollar-Yen (114.25) has been helped by the rise in Nikkei (Check the Equities section) and may test the near term resistances of 115.00-116.00 in the coming sessions after a break above the interim resistance of 114.60.

Pound (1.2272) has taken a pause at the lower levels after the sharp fall this week. Further consolidation may be seen near the interim support 1.2200 before it declines further towards 1.2100-2085 levels.

Aussie (0.7553), contrary to expectations, has sharply fallen below 0.7600 levels and may test the near term support zone 0.7520-00 levels before any interim pause can be seen but in this downleg, lower levels of 0.7450 are expected before any considerable bounce emerges.

Dollar-Rupee (66.71) may end the last session of the week in the range of 66.60-90 with minor chances of seeing either 66.50 or 67.00.

INTEREST RATES

Markets await Yellen's speech tonight. News states the probability of a March rate hike has increased to 75% compared to the previous 40%.

The German-US 2Yr (-2.17%) had shown slight bounce yesterday but has continued to fall thereafter. Overall the trend is downwards and the yield differential may fall towards -2.20% indicating that the fall in Euro may not be over yet.

The US-UK 10Yr (-1.29%) is down by 1bps and unless it sees a bounce from current levels, we could expect some more room on the downside for Pound.

The US yields are trading higher. The 30yr (3.08%) has almost reached to test crucial resistance at 3.10% which if holds could bring in some correction. The 10Yr (2.49%) and the 5Yr(2.03%) are headed higher and could rise some more in the near term.

The German yields continue to rise. The 5Yr (-0.47%), 10Yr (0.31%) and the 30Yr (1.12%) are trading higher today.

EURUSD - The pair continues to retain its downside pressure as more weakness looks to occur in the days ahead. On the upside, resistance comes in at 1.0600 level with a cut through here opening the door for more upside towards the 1.0650 level. Further up, resistance lies at the 1.0700 level where a break will expose the 1.0750 level. Conversely, support lies at the 1.0500 level where a violation will aim at the 1.0450 level. A break of here will aim at the 1.0400 level. Its daily RSI is bearish and pointing lower supporting this view. All in all, EURUSD faces further downside pressure short term.

Doves in the Hawks Nest

The Fed Rate Hike balloon has successfully been floated, and the market has continued to reprice the March rate hike probability fuelled by the dove of doves, Lael Brainard, who came out 'Hawks-a-blazing' at exactly the appropriate time. One of the conventional ways of trying to anecdotally determine the proclivity for FOMC members to vote on monetary policy decisions is known as the dove-hawk scale, with Brainard flying the dove's coup, she has tipped the scales in overwhelming favour of a rate hike as the market now views March as a fait accompli.

In the absence of any policy clarity from the US administration, the FOMC will continue to be the dominant dollar driver. The market is left pondering if the hawkish lean from the voting dove members is a signal that the Fed will accelerate the pace of tightening after March, which could add to further dollar strength over the near term.

Australian Dollar

Against another wave of broader USD buying, the commodity currencies have finally responded. The AUD was handicapped by yesterday's downside miss in domestic trade balance data which likely fuelled downside momentum, as the .7560 region was tested overnight. Even though the global growth theme remains intact, it 's hard to stand in front of a USD freight train, especially when clear-cut interest rate divergence drives the move.

Investors were comfortable in the 76 zone, content to build lazy longs. Now that positioning is a bit cleaner after a run of stop losses below .7600, we are monitoring this current area, but demand so far has been fleeting which suggests we may push lower in the near term before demand re-emerges.

Oil prices continued to be weighed down due to concern that record US crude inventories will more than offset benefits from OPEC production cuts. WTI dropped from $53.42/barrel to $52.55/b.

Yen

USDJPY is dominating speculative flows in G10. The pair ripped higher, as dealers flipped their USDJPY short term view on a dime when the Fed rate hike rhetoric gathered steam. USDJPY remains well supported above 114, as buying interest continues to be very steady, and the top side is clearly the path of least resistance. The 114.82 level than a clear break of 115 is needed to confirm the uptrend remains intact.

EM Asia

EM currencies have been suffering from the Fed repricing. Regionally there was heavy buying after USDJPY ripped higher on the Hawkish Fed rhetoric. Before that, positioning was rather neutral in EM Asia as there was no clear-cut consensus up until the Fed floated the Rate hike balloon. Dealers are now jockeying for some top side dollar hedges, but EM Asia is far from down for the count. The global growth story line remains intact as is the reflationary trade.

To end the week, we take a quick look at a 4 hourly level in the Loonie.

We haven't featured USD/CAD on the blog for a while, so lets take a look at this major level on the 4 hourly that jumps out at us and put the pair in play.

USD/CAD 4 Hourly:

As you can see, the Loonie has shot back up to test resistance at swing highs from a month ago. Just look at how hard and fast price rejected out of the level that last time!

Is something similar on the cards again this time around?

Canadian real GDP grew 2.6% (quarter-on-quarter, at an annual rate) in the fourth quarter. With the year's data now in hand, Statistics Canada estimates that the Canadian economy expanded by 1.4% in 2016. In nominal terms, fourth quarter growth was 7.0% (resulting in an expansion of 2.0% over 2016 as a whole).

Leading overall growth was net trade, with imports pulling back 13.5%, as an imported oil production module fell out of the data. Exports recorded a modest gain (+1.3%), continuing their momentum from the previous quarter.

On the domestic front, it was all about the consumer, as household spending rose 2.6%, supported by a healthy bounce-back in durable goods spending (+8.1%) after two quarters of contraction. Residential structure investment was also strong, up 4.8% on gains in new construction and renovations.

It was a different story for business investment. Machinery and equipment investment disappointed expectations, falling 10.3% on a pullback in the industrial machinery and equipment subcategory. Non-residential structures investment fell 21.7% as the one-off gains in the third quarter were reversed.

Monthly GDP for December came in at a healthy clip, up 0.3% month-on-month. The goods-producing side of the economy was up 0.5% as a return to seasonal weather helped the utilities sector, and construction activity remained healthy for a second month in a row. On the service side of the economy (+0.2%), weak retail trade figures (-1.0%) were offset by solid gains among wholesalers (+1.2%), professional services (+0.5%), and others as only 2 of the 15 major industries declined.

Key Implications

There are worse ways to end a year. Canadians opened their wallets both at stores and construction offices, delivering a solid fourth quarter economic performance. That said, the fly in the ointment continues to be business investment. While some of the pullback in this sector is related to the installation of a sizeable module for the Hebron oil project in the previous quarter, other areas of business investment disappointed, with continued weakness in machinery and equipment investment, as well as intellectual property products (which includes mineral exploration).

Cautious optimism remains warranted. The solid December monthly GDP figure points to good momentum heading into 2017, while rises in Canadian rig counts suggest that investment in the oil and gas sector may be starting to bottom out. All told, despite undiminished external risks to the outlook, we continue to expect a healthier pace of growth in 2017 and 2018.

Despite today's GDP report coming in ahead of their expectations, it is likely to have little impact on the Bank of Canada's interest rate path. As emphasized in yesterday's communique (see our commentary), underlying inflationary pressures are weak, reflecting still sizeable slack in the Canadian economy that, in our view, will take some time to be absorbed. This means that even with solid growth numbers, significant upward pressure on inflation is not likely to materialize. At the same time, the current levels of the Canadian dollar and longer-term borrowing rates are not helpful. All of these factors point to a Bank that is likely to remain on hold for some time to come.

• The Q4 increase was greater than the 2.0% expected going into the report and followed an upwardly revised 3.8% increase in Q3 (previously reported as 3.5%).
• December GDP rose a solid 0.3% that was in line with expectations though it followed an upwardly revised 0.5% increase in November (0.4% previously).

Activity in the fourth quarter received a significant boost from consumer spending rising 2.6% with a solid increase in the durables component reflecting auto sales being at record highs. Spending in the quarter was helped by wages and salaries rising 5.6%. This income boost was also likely a factor sending residential investment up a strong 4.8%. Government spending was up 2.1% which reversed the 1.9% decline in Q3. A main offset to these increases was a 17.4% plummet in non-residential investment that occurred despite indications of profits rising 28.8%. The modest increase in capital expenditures in 2017 reported early this week provided little evidence these profits are being used to finance any future investment. As expected, net exports were a sizeable 5.2 ppt. add to Q4 GDP growth though this largely reflected a 13.5% plummet in imports. Exports rose a modest 1.3%. The quarter saw a sizeable drawdown in inventories that subtracted 2.8 ppt. from growth.

Our Take:

The Q4 growth rate implies a strengthening pace of activity after the wide swings in the second and third quarters which saw an average increase of 1.3%. As well the Q4 growth rate surpassed the 1.5% increase that the Bank of Canada projected in its January forecast. The central bank acknowledged in Wednesday's policy statement the likelihood of Q4 growth coming in stronger than expected though maintained the economy was performing generally in line with their expectations of sustained above-potential growth. The composition of quarterly growth and the monthly detail both augur well for above average growth continuing in Q1. As long as this growth profile is confirmed in the data over the near term, the central bank is expected to maintain the current overnight rate of 0.50%. Our forecast does assume that the attendant absorption of economic slack will eventually return the Bank of Canada to tightening mode though not until the second quarter of next year. Also contributing to the delay in tightening in the near term are the downside risks to growth should the Trump Administration opt for protectionist trade measures. This factor was likely a main element of the Bank of Canada reference to "significant uncertainties" in Wednesday's policy statement that was a factor in leaving the overnight rate unchanged.

Daily Pivots: (S1) 1.2246; (P) 1.2325; (R1) 1.2371; More...

GBP/USD's fall continues today and intraday bias remains on the downside for 1.1946/86 support zone. The consolidation pattern from 1.1946 has possibly completed at 1.2705 too. Break of 1.1946 will confirm our bearish view and resume the larger down trend. Nonetheless, on the upside, above 1.2478 minor resistance will delay the bearish case and turn bias neutral first.

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.

Daily Pivots: (S1) 1.0550; (P) 1.0590 (R1) 1.0616; More.....

EUR/USD is still bounded in range of 1.0493/0678 and intraday bias remains neutral first. With 1.0678 minor resistance intact, deeper decline is still expected. We're viewing fall from 1.0828 as resuming the larger down trend. Below 1.0493 will target 1.0339 low first. Break will confirm our bearish view and target parity. However, break of 1.0678 will dampen our view and turn focus back to 1.0828 resistance instead.

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.

Daily Pivots: (S1) 1.0051; (P) 1.0089; (R1) 1.0127; More.....

USD/CHF is staying below 1.0140 resistance and intraday bias remains neutral at this point. With 0.9966 support intact, further rise is expected. Above 1.0140 will turn bias to the upside and target a test on 1.0342 resistance. Based on neutral medium term outlook, we'd be cautious on topping at around 1.0342. Meanwhile, break of 0.9966 will indicate completion of the rebound from 0.9860. And intraday bias will be turned back to the downside for 0.9860.

In the bigger picture, prior rejection from 1.0327 resistance argues that USD/CHF is staying in a medium term sideway pattern. In any case, decisive break of 1.0342 resistance is needed to confirm underlying strength. Otherwise, we'll stay neutral in the pair first. In case of another fall, we'd expect strong support from 0.9443/9548 support zone. Meanwhile firm break of 1.0342 will target 38.2% retracement of 1.8305 to 0.7065 at 1.1359.