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News and Events:

NZD holds ground as USD takes off

The New Zealand dollar over performed against all of its G10 peers on Tuesday amid an unexpected jump in inflation expectations. Inflation expectations 2-year ahead rose to 1.92%y/y compared to 1.68% in the December report. Similarly, the 1-year ahead measure climbed to 1.56% from 1.29%. The solid pick-up in commodity prices that was initiated early last year is one of the main reasons behind this substantial shift in expectations. Gross national product growth was also boosted to the upside as the survey respondents now expect a 3.11% expansion in two years’ time compared to 2.75% three months ago.

All in all, the solid growth expectations, combined with higher inflation, considerably reduce the likelihood of another rate cut from the Reserve Bank of New Zealand, which had the result of lifting the currency to $0.7376. However, the broad USD rally that has rattled FX markets this morning has evaporated these gains. The currency pair fell below its US session closing price of 0.7320, sliding as low as 0.7291. We maintain our positive bias on the currency pair as the export driven country should continue to take advantage of the stabilisation in commodity prices. The $0.75 level will nevertheless remain a solid resistance that will require more than a short-term weakness in the dollar.

French elections: Marine Le Pen lays out Frexit plans

The French Election are one this first half of the year’s hot topic. The election will take place the 23rd of April and the outcome remains uncertain since Francois Fillon is having deep issues and the ability of Benoit Hamon, the Socialist candidate, to win is very unlikely. For the time being, Marine Le Pen still top polls and she is trying to drive the debate into the exit of France from the European Union. The French candidate wants a “Frexit” Referendum.

It is true that amid the “Brexit”, the promised nightmare is not happening in the UK and the British economic data are on the rise. The fact that the pound devalued is a strong points for exports and it gave some relief to the BoE.

Benoit Coeuré, the ECB member said lately in an interview, that French people do not want to exit the Eurozone. In the same time, Draghi has mentioned that an exit of the EU is possible if and only if a country pay off its “bill”.

We believe that there is definitely room for further euro weakness in the medium-term. Currency war against the greenback, which Trump considers as overvalued, should accelerate.

Today's Key Issues (time in GMT):

• Dec Industrial Production MoM, last 6,60%, rev 5,10% DKK / 08:00
• Jan Foreign Currency Reserves, exp 646.1b, last 645.3b CHF / 08:00
• Jan Budget Balance, last -75.2b SEK / 08:30
• Jan Halifax House Prices MoM, exp 0,00%, last 1,70%, rev 1,60% GBP / 08:30
• Jan Halifax House Price 3Mths/Year, exp 6,00%, last 6,50% GBP / 08:30
• Istat Releases the Monthly Economic Note EUR / 09:00
• Jan SACCI Business Confidence, last 93,8 ZAR / 09:30
• Jan FGV Inflation IGP-DI MoM, exp 0,48%, last 0,83% BRL / 10:00
• Jan FGV Inflation IGP-DI YoY, exp 6,01%, last 7,18% BRL / 10:00
• Jan Official Reserve Assets, exp 386.0b, last 377.7b RUB / 13:00
• Brazil Central Bank Head Goldfajn Hosts Discussion of Spreads BRL / 13:00
• Dec Trade Balance, exp -$45.0b, last -$45.2b USD / 13:30
• Dec Int'l Merchandise Trade, exp 0.20b, last 0.53b CAD / 13:30
• Dec Building Permits MoM, exp -3,50%, last -0,10% CAD / 13:30
• BOE's Forbes Releases Speech GBP / 14:00
• Dec JOLTS Job Openings, exp 5580, last 5522 USD / 15:00
• Jan Ivey Purchasing Managers Index SA, last 60,8 CAD / 15:00
• Bank of France Governor Villeroy de Galhau Speaks in Florence EUR / 16:30
• ECB's Weidmann Speaks in Mainz EUR / 16:35
• Dec Consumer Credit, exp $20.000b, last $24.532b USD / 20:00
• Jan ANZ Truckometer Heavy MoM, last -0,10% NZD / 21:00

The Risk Today:

EUR/USD's selling pressures have increased. It seems that strong hourly resistance area is given around 1.0800. Hourly support lies at 1.0590 (19/01/2016 low) and 1.0341 (03/01/2017 low). Expected to see continued consolidation. 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 resistance given at 1.2771 (05/10/2016 high). The pair keeps on 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 slowly pushing lower. Hourly resistance is given at 115.62 (19/01/2016 high). The technical structure suggests further downside momentum. as the break of hourly support given at 112.57 (17/01/2017 low) has confirmed bearish pressures. 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 momentum is definitely bearish despite ongoing increase. Key resistance is given at a distance at 1.0344 (15/12/2016 high). We believe that the road is clearly wide-open for further decline. 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.

'Because last week was a big outside bar, this week might be an inside bar.' – Al Brooks, Brooks Price Action (based on investing.com)

Pair's Outlook

During the early hours of Tuesday's trading session the common European currency fell below the 1.07 mark against the US Dollar, and there were no signs of the fall stopping. The currency exchange rate passed the 20-day SMA at 1.0695, which was the last support level before the 1.0659 level, where the weekly S1 is located at. Due to these factors combined it can be assumed that the pair will fall as low as the just mentioned support level by the end of Tuesday's trading. However, it is most likely that that support level will also stop the decline of the Euro.

Traders' Sentiment

SWFX traders remain bearish regarding the pair, as 52% of trader open positions are short. In the meantime, 57% of trader set up orders are to sell the Euro.

Overnight, the RBA kept its policy stance unchanged, as was widely expected. Overall, the officials maintained an optimistic tone, which was a surprise for us, as they disregarded the latest mixed data out of Australia. They indicated that although GDP growth was negative in Q3, this was due to temporary factors, and a return to reasonable growth is expected in Q4. With regards to the slip in the underlying inflation rate in Q4, the RBA simply indicated that the CPIs were more or less in line with their forecasts, and that even though inflation remains low, it is expected to return to target over time. On the negative side, they reiterated that a rising AUD could complicate economic transitions in the economy and that medium-term risks in the Chinese economy persist, but these comments were not enough to offset their confident view on the domestic economy.

AUD/USD traded higher on the decision after it hit support near 0.7640. Given that the Bank is likely to remain on hold in coming months, we expect the Australian currency to remain supported. The short-term trend is already positive and as such, we would expect a clear break above the 0.7700 territory to open the way for our next resistance of 0.7740. As for the longer-term outlook though, we would like to see a decisive close above 0.7800 before we get confident on larger bullish extensions.

Overnight: New Zealand's 2-year inflation expectations surge

New Zealand's 2-year inflation expectations for Q1 rose to 1.92% from 1.68% previously, data showed overnight. Expectations are now almost at the mid-point of the RBNZ's 1% - 3% target, which in our view greatly diminishes the likelihood for any further action by the Bank in the foreseeable future. Let's not forget how much attention the Bank pays to this indicator. When the figure unexpectedly slipped in Q1 2016, it triggered a surprise rate cut, mainly to ensure that expectations do not become de-anchored from the target.

NZD/USD surged overnight after the 2-year inflation expectations came out and emerged above the resistance (now turned into support) zone of 0.7230 (S1). Now, the pair looks to be headed towards the next obstacle area of 0.7400 (R1). The price structure on the 4-hour chart suggests a short-term uptrend, while the pair is now trading above the prior downside resistance line taken from back at the peak of the 7th of September. As a result, we would expect the bulls to remain in the driver's seat and if they prove strong enough to overcome the 0.7400 (R1) territory, we would expect them to target the next resistance of 0.7440 (R2).

Attention now turns to the RBNZ meeting tomorrow. We expect the Bank to be quite pleased with the progress towards its mandate, as both the Q4 CPI rate and 2-year inflation expectations rose notably, something that could lead to a rather optimistic statement.

Euro takes a hit as political risks loom

The common currency took a hit yesterday while safe havens rallied, as Eurozone's political risks came into the market's focus. In France, the center-right presidential candidate Francois Fillon apologized over payments his family members received for parliamentary work. In our view, this diminishes his chances to win and in turn, increases the probability that the far-right candidate Marine Le Pen is victorious. Le Pen is an outspoken Eurosceptic, who wants to hold a "Frexit" referendum. As such, the possibility of her election represents an existential threat for the European Union, one much greater than Brexit we think, considering that France was among the founding members of the EU and is also a member of the Eurozone.

EUR/JPY tumbled yesterday breaking three support (now turned into resistance) barriers in a row. Now the rate is trading below the psychological figure of 120.00 (R1) and looks to be headed towards the 119.50 (S1) barrier. Given that the pair is trading within a downside channel since the 27th of January, we would consider the short-term trend to be negative. A clear dip below 119.50 (S1) is possible to open the way for the next support territory of 118.70 (S2).

Without trying to predict how French citizens will finally vote, we expect the period ahead of the actual election in April to be marked by heightened uncertainty, and we believe that investors are likely to concentrate more on incoming polls in coming weeks. If Le Pen is seen as increasingly more likely to win as we approach the election, we could see investors pricing in greater risk of European disintegration, something that may weigh further on the euro and may support safe haven assets.

Today's highlights:

During the European day, we get a lot of second tier indicators. In Germany, industrial production data for December is coming out, while from the UK, we get the Halifax house price index for January.

In the US, the trade balance for December is expected to show that the nation's trade deficit narrowed, albeit slightly. The JOLTS survey for the same month is due out as well, and expectations are for an increase in the number of job openings.

From Canada, we get the Ivey PMI for January, though no forecast is currently available. Our own view is that the Ivey index is likely to have risen, something supported by the nation's Markit manufacturing PMI for the month, which showed the fastest growth in the sector since late 2014. Something like that could bring the Loonie under renewed buying interest. We also get the trade balance for December.

We have only one speaker on today's schedule: ECB Governing Council member Jens Weidman.

'Sterling is stuck in a range. It's very cheap on most measures, but then real yields are very low and the current account deficit is very big.' – Societe Generale (based on PoundSterlingLive)

Pair's Outlook

The GBP/USD currency pair weakened for the third consecutive time on Monday, but managed to remain above the immediate support cluster. Even though this cluster keeps providing strong support today, the Sterling still remains on the back foot. As a result, the Cable is expected to close in the red zone again; however, a full-blown breach of the immediate demand area is unlikely. The Pound is expected to stabilise somewhere between 1.2430 and 1.2415, unless fundamental data turns into Sterling's favour. Meanwhile, technical indicators are unable to confirm either scenario, as they retain mixed signals.

Traders' Sentiment

Market sentiment remains moderately bullish, being that 60% of all open positions are now long (previously 59%). The share of sell orders edged higher again, namely from 56 to 57%.

'Dollar confidence and positioning is being eroded by erratic policy emissions from the White House. USD has retraced 45% of the Trump rally, but we believe risk-reward favors a deeper setback to USD vs. those pairs that have lagged, most notably JPY.' – J.P. Morgan (based on Market Watch)

Pair's Outlook

The Japanese Yen managed to outperform the American Dollar on Monday, ultimately adding 76 pips during the day, with the immediate demand area limiting the losses. The successfully close above the 111.50 mark suggests the USD/JPY pair could rebound today, even though technical studies are unable to confirm this possibility. There are no solid resistances in close proximity to the spot price, implying the pair could keep recovering until the 113.00 level is reached within the next two days. On the other hand, Monday's decline caused the strong psychological support around 112.60/50 to be pierced, which can now lead to more weakness, with the main target being 110.30.

Traders' Sentiment

Today 59% of traders are long the US Dollar (previously 58%), whereas the portion of buy orders inched up from 61 to 62%.

'Participants still look to play on the long side. However, we may see profit-taking push the metal towards the 100-day moving average at $1,220.25.' – Sam Laughlin, MKS PAMP Group (based on Reuters)

Pair's Outlook

On Tuesday morning the yellow metal's price declined, and the decline in the price can be explained by using not only technical but also fundamental analysis. From a fundamental perspective, profit taking occurred due to large jump, which occurred on Monday. Meanwhile, from a technical perspective it can be seen that the bullion's price jumped out of the borders set by the Bollinger bands and encountered the weekly R1. Due to that reason the commodity price is declining, and it is most likely to retreat to the 1,220 levels, where the next notable support cluster is located at.

Traders' Sentiment

SWFX traders are neutral on the metal, as 50% of trader open positions are long. In the meantime, 60% of trader set up pending commands are to buy the metal.

'All recent data point to a very strong start for 2017 in Germany and in the euro area after a very good fourth quarter'. - Julian Trahorsch, Landesbank Baden-Wuerttemberg

Germany factory orders rose markedly in the last month of 2016, driven by a sharp increase in demand for investment goods, official figures revealed on Monday. According to the Economy Ministry, German industrial orders advanced at seasonally adjusted rate of 5.2% in December, following the preceding month's downwardly revised fall of 3.6% and surpassing market analysts' expectations for an increase of 0.6%. The December pace was the strongest since July 2014. On an annual basis, factory orders grew 8.1% in December. Monday's data provided evidence that economic growth accelerated in the final quarter of 2016 after climbing just 0.2% in the Q3 of 2016. The Q4 2017 GDP data is scheduled to be released on February 2014. The majority of analysts suggest the economy expanded at a 0.5% pace during the Q4. However, their long-term forecasts are less optimistic in large due to the upcoming German federal elections. Yesterday's data also showed export orders climbed 10% month-over-month in December, driven by a 19.5% increase in demand for capital goods from the Euro zone. Meanwhile, domestic orders advanced 6.7% during the same period. On a quarterly basis, factory orders grew 4.3% in the Q4. After the release, the Euro extended its losses, falling to 1.0746 against the US Dollar.

'With this in mind we expect that the RBNZ will keep the OCR unchanged this Thursday when it releases its February Monetary Policy Statement. We also expect that they will retain the neutral stance of its November statement'. - Westpac

New Zealand's inflation expectations advanced markedly in the first quarter of 2017, the latest quarterly survey revealed on Tuesday. In a report, the Reserve Bank of New Zealand said two-year inflation expectations climbed to 1.92% in the first quarter, the highest level since 2014, from 1.68% in the preceding quarter. However, inflation is expected to remain below the Central bank's inflationary target of 2%. The survey also showed that one-year inflation expectations that are less important for the Bank's monetary policy advanced to 1.56% from 1.29% in the previous quarter. Inflation expectations are closely followed by the RNBZ, as they provide advance knowledge of future inflation. Inflation expectations remained low over the past several years amid low headline inflation. Nevertheless, Tuesday's promising data combined with December's rise in headline inflation above 1% suggest that inflation might actually improve in the upcoming months. However, analysts say that inflation is unlikely to return to 2% in the near term. Moreover, rapid population growth and the economy's productive capacity put pressure on economic growth. After the release, the New Zealand Dollar rose from 67.90 to 68.72 against the Euro, from 58.65 to 59.02 against the British Pound.

'This is very clearly a message from a central bank that does not want to cut interest rates any further'. - Paul Bloxham, HSBC

As markets expected, Australia's Central bank left its key interest rates unchanged at a record low of 1.5% at the end of its monetary policy meeting on Tuesday and signaled it would keep the rates on hold for a considerable period. According to the Reserve Bank of Australia's latest forecasts, the economy is expected to expand at an annualized pace of 3% over the next several years, while inflation is likely to rise above the Central bank's 2% inflationary target already this year. In the final quarter of 2017, Australian inflation rose 1.5% year-over-year, missing forecasts and staying below the RBA's 2% target. Since the world's major central banks are unlikely to ease their monetary policies in the near term, analysts suggest that the RBA would follow the exact same pattern. Moreover, some analysts say that the Central bank is likely to keep its interest rates steady until 2018. After the release, the Aussie rose against other major currencies, climbing against the Greenback from 0.7637 ahead of the release to 0.7675. Tuesday's statement also pointed to the inconsistent housing market trends, saying that while some regions see sharp increases in prices, others experience subdued price growth. A report released by CoreLogic last week showed prices in capital advanced 10.7% in 2016 after climbing 7.4% in the preceding year.

The Aussie dollar eased on stronger greenback today, following repeated rejection under 0.7700 barrier.

Risk of reversal is increasing as daily RSI / slow Stochastic emerge from overbought territory and generate negative signal.

Dips for now hold above initial supports at 0.7607/02 (former high / daily Tenkan-sen) but firm break lower would be a signal of correction.

Rising daily 20SMA (currently at 0.7560) should ideally contain to keep intact pivots at 0.7510 (higher base) and 0.7489 (200 SMA / Fibo 38.2% of 0.7159/0.7694 rally).

Break below the latter is needed to confirm reversal.

Res: 0.7679, 0.7694, 0.7730, 0.7776
Sup: 0.7602, 0.7560, 0.7510, 0.7489