Global Markets:

• Asian stock markets: Nikkei up 0.20 %, Shanghai Composite gained 0.30 %, Hang Seng rose 0.10 %, ASX 200 rallied 0.75 %
• Commodities: Gold at $1183 (-0.55 %), Silver at $16.73 (-0.70 %), WTI Oil at $53.80 (+0.05 %), Brent Oil at $56.20 (-0.10 %)
• Rates: US 10 year yield at 2.51, UK 10 year yield at 1.51, German 10 year yield at 0.48

News & Data:

• Japan National CPI (YoY) Dec: 0.3% (est. 0.20%, prev. 0.50%)
• Japan National CPI Ex-Fresh Food (YoY) Dec: -0.2% (est. -0.30%, prev. -0.40%)
• Tokyo CPI (YoY) Jan: 0.1% (est. 0.00%, prev. 0.00%)
• Tokyo CPI Ex-Fresh Food (YoY) Jan: -0.3% (est. -0.40%, prev. -0.60%)
• Australia Export Price Index (QoQ) Q4: 12.4% (est. 12.10%, prev. 3.50%)
• Australia Import Price Index (QoQ) Q4: 0.2% (est. 0.40%, prev. -1.00%)
• Australia PPI (YoY) Q4: 0.7% (prev. 0.50%)
• Australia PPI (QoQ) Q4: 0.5% (prev. 0.30%)
• U.S. new home sales fall; weekly jobless claims rise – RTRS
• Asia shares steady, dollar and oil extend gains on renewed optimism – RTRS

Markets Update:

The US Dollar strengthened overnight, especially against the Yen. USD/JPY opened around 114.40 in Tokyo and rallied to a high of 115.06. The market is expecting the large tax cuts and infrastructure spending that US President Trump promised, and which have driven US stock markets to fresh record highs as well. From a technical perspective, the pair faces strong resistance at 115.50-70, followed by 116.90, while support lies at 114.00.

The Pound had quite a rally this week, but ran out of momentum yesterday. Support is now seen at 1.2540, and a break would signal a retracement back to 1.24. The Euro has come under pressure as well, and a break below the 1.0620 support level would confirm the short-term top at 1.0770 and pave the way for a deeper retracement. The next notable support level would then lie at 1.05.

Gold extended losses in Asia, as the strong dollar and rising equity markets are weighing on the precious metals. Support is noted at $1176, and a break below would switch the technical outlook to bearish.

Upcoming Events:

• 13:30 GMT – US GDP
• 15:00 GMT – US Michigan Consumer Sentiment

Key Points:

• AUDNZD trading within a descending channel.
• Price action nearing lower channel constraint.
• RSI Oscillator enters a reversal zone.

The embattled AUDNZD has been on a largely downward trajectory over the past few months as markets have reacted to deteriorating Australian domestic economic conditions. Subsequently, we have witnessed the pair trading within a relatively tight descending channel that has largely constrained the pair's price action. However, despite the AUDNZD's bearish disposition, the pair is getting ready to rally, albeit in the short term.

Assessing the pair from the technical perspective provides some enticing evidence of a potential setup for a rally. The past few days has seen price action moving steadily towards the lower channel constraint which has been a key reversal zone in past periods. In addition, the RSI Oscillator is nearing oversold territory and there is some historical evidence of some sharp reversals from this level. Subsequently, there is building evidence that we may indeed see a relatively strong bounce for the Australian Dollar in the coming days.

In contrast, the fundamental outlook for the Australian economy is relatively murky at best as the antipodean nation faces diminished growth in the coming few quarters. There is already evidence of an uptick in the unemployment rate as well as slipping inflationary pressures. Although the Australian economy may indeed avoid a technical recession, there is likely to still be plenty of negative aspects that will impact currency valuations in the coming months.

Ultimately, despite their being plenty of reasons to take a bearish view on the pair in the long run, the short term outlook is decidedly more bullish. Subsequently, the most likely scenario for the next few days is one where price action discovers support around the bottom of the channel before moving rapidly higher to challenge the 61.8% retracement level around the 1.0422 mark. The upside target would likely fall around the 1.0554 level, especially considering that there is currently little chance of a break out of the short term channel. Subsequently, keep a close watch on the pair in the early part of next week as it could be setting up to fly, albeit in the short run.

Key Points:

• RBNZ will need to raise rates to combat rising inflationary pressures.
• Inflation will largely stem from a tightening job market.
• CPI data suggests we may already have entered a high inflation period.

After being trapped in a low-interest rate environment for such an extended period, talk of real normalisation can, at times, seem more like wishful thinking than anything else. However, for one country at least, the data is beginning to put pressure on its central bank to finally begin the process of lifting rates back to historic norms. Specifically, New Zealand could see a slew of hikes moving forward as the RBNZ attempts to keep inflation in check and within its mandated band.

First and foremost, the question has to be asked, are inflationary pressures really building? In short, yes they are and there are a number of key drivers which are contributing to this uptick. Primarily however, blame can be laid at the feet of a tightening job market as, at 4.9%, unemployment is below the widely accepted natural rate for the country. As a result of this low unemployment rate, wage inflation is almost certain to be on the rise this year and general inflation should follow suit.

In addition to wage inflation, the property bubble in the nation’s largest city will be contributing to overall inflationary pressures. Specifically, rental prices have skyrocketed by around 7.1% over the past 12 months due to the lack of housing supply. What’s more, the mere presence of the bubble provides an incentive for the RBNZ to step in with some hikes as increasing rates would help to cool off the red hot property market.

Regardless of what is causing inflation to spike, the fact remains that we are already beginning to see the start of this period of higher inflation as was made quite clear in the latest CPI results. Coming in at 1.3% q/q, the figure was in stark contrast to the historically low inflation seen across the ditch in Australia which took most of the market by surprise. Further upticks of this magnitude will see the nation’s inflation rate move above the 3% upper limit targeted by the RBNZ which will necessitate at least a 25bps hike in the OCR.

Ultimately, we will have to wait and see whether or not the central bank will take this first move towards seeing rates back to their normal levels. However, faced with strong GDP growth of 3.5% y/y, recovering dairy prices, robust retail sales, and the other factors mentioned above, the RBNZ will be fairly loath to keep rates on hold. As a result, keep an eye on the February OCR announcement as it could be the first step in a road towards normalised rates.

Daily Pivots: (S1) 1.3055; (P) 1.3092; (R1) 1.3133; More...

Intraday bias in USD/CAD stays neutral for the moment. At this point, we're still slightly favoring the case that consolidation pattern from 1.3588 is completed with three waves down to 1.3017. Above 1.3387 will target 1.3598 resistance. Break there will extend the whole choppy rise from 1.2460 to next fibonacci level at 1.3838. However, break of 1.3017 will indicate completion of rise from 1.2460 and turn outlook bearish.

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 still in progress and could target 61.8% retracement of 1.4689 to 1.2460 at 1.3838. As rise from 1.2460 is seen as a corrective move, we'd look for reversal signal above 1.3838. Meanwhile, break of 1.3017 will likely start the third leg to 1.2460 and below.

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Daily Pivots: (S1) 0.7507; (P) 0.7546; (R1) 0.7570; More...

Intraday bias in AUD/USD is neutral with a temporary top at 0.7608. Above 0.7608 will extend the rise from 0.7158. But we'd expect upside to be limited by 0.7777/7833 resistance zone to bring near term reversal. On the downside, break of 0.7448 will indicate that rebound from 0.7158 is completed and turn bias back to the downside for 0.7144 key support level.

In the bigger picture, AUD/USD is staying inside long term falling channel and it's likely that the down trend from 1.1079 is still in progress. Break of 0.6826 low will confirm this bearish case. We'll be looking for bottoming sign again as it approaches 0.6008 key support level. Meanwhile, sustained break of 0.7833 resistance will be a strong sign of medium term reversal.

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Daily Pivots: (S1) 1.0636; (P) 1.0701 (R1) 1.0744; More.....

Intraday bias in EUR/USD stays neutral for the moment. As noted before, choppy rise from 1.0339 is seen as a corrective move. Break of 1.0588 minor support will argue that it's completed and turn bias back to the downside for 1.0339 support. In case of another rise, upside should be limited by 1.0872 resistance.

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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Daily Pivots: (S1) 1.2540; (P) 1.2607; (R1) 1.2657; More...

Intraday bias in GBP/USD is turned neutral with a temporary top in place at 1.2673. Rise from 1.1986 is seen as the third leg of the consolidation pattern from 1.1946. Break of 1.2414 support will indicate that it's completed and turn bias to the downside for retesting 1.1946 low. In case of another rise, upside should be limited by 1.2774 to limit upside and bring down trend resumption eventually.

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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Daily Pivots: (S1) 0.9971; (P) 0.9999; (R1) 1.0029; More.....

Intraday bias in USD/CHF remains neutral for consolidation above 0.9958 temporary low. With 1.0121 minor resistance intact, deeper decline is still expected. As noted before, rise from 0.9443 has completed at 1.0342 already, after failing to sustain above 1.0327 key resistance. Fall from there would now target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0121 resistance is needed to indicate short term bottoming. Otherwise, near term outlook will stay bearish in case of recovery.

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 expect the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

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Daily Pivots: (S1) 113.42; (P) 114.13; (R1) 115.23; More...

USD/JPY's recovery from 112.51 continues but stays below 115.61 resistance. Intraday bias remains neutral at this point. No change in the view that choppy fall from 118.65 is a corrective move. Break of 115.61 will indicate that it's completed and will turn bias to the upside for retesting 118.65 resistance. Break will resume whole rise from 98.97 and target 125.85 key resistance. Below 112.51 will extend the decline but downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 to complete the correction and bring rebound.

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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Yen falls broadly today on news that BoJ boosted JGB purchases. The move is seen as an act under the so called yield curve control to cap surge in yields, which touched 11 month highs earlier this week. The central bank said today that it would buy JPY 450b of JGBs with maturity of more than five to 10 years. That's nearly 10% above the prior size of JPY 410b. Released from Japan, national CPI core improved to -0.2% yoy in December, up from -0.4% yoy and above expectation of -0.3% yoy. Tokyo CPI core rose to -0.3% yoy in January, up from -0.6% yoy, and above expectation of -0.4% yoy. The set of inflation data showed mild improvement to inflation outlook. But it's still far from hitting BoJ's 2% target. Technically, yen is staying in consolidation against Dollar, Euro and Sterling for the moment in spite of the selloff in the past two days.

In US, equities ended mixed after hitting new intraday record highs. DJIA gained 32.4 pts, or 0.16% to close at 20100.91, a record high. But S&P 500 closed down -1.69 pts, or -0.07%, at 2296.68. NASDAQ lost -1.16 pts, or -0.02%, to close at 5655.18. President Donald Trump's spokesman said that Trump would push to impose 20% tax of imports from Mexico to pay for a border wall along the southern border of the US. Mexican president Enrique Peña Nieto responded by cancelling the meeting with Trump. Form Fed chair Ben Bernanke said that there is no need to "rush" the process of reducing the size of its massive balance sheet. He emphasized that "the case for deferring action until short-term rates are meaningfully higher remains at least as strong as it was when the FOMC's strategy was first devised."

Talking about exiting QE, Bundesbank head Jens Weidmann said that "economic outlook at the beginning of the year is quite positive and the inflation rate is gradually approaching to the ECB's definition of price stability." And, "if this price development is sustainable, the prerequisite for the withdrawal from the loose monetary policy is created."ECB executive board member Yves Mersch said that "once inflation is sustainably back to our objective, monetary policy will normalize." Dutch central bank head Klaas Knot noted that "the tail risk of a deflationary spiral is no longer imminent, removing one important rationale for large-scale asset purchases." Meanwhile, Forward Eonia bank-to-bank rates imply that there is 50% chance of ECB rate hike by January 2018.

Elsewhere, Australia PPI rose 0.7% qoq, 0.7% yoy in Q4. Import price rose 0.2% qoq in Q4. German import price, Eurozone M3 will be released in European session. But main focus will be on US Q4 GDP and durable goods orders to be released in US session.

USD/JPY Daily Outlook

Daily Pivots: (S1) 113.42; (P) 114.13; (R1) 115.23; More...

USD/JPY's recovery from 112.51 continues but stays below 115.61 resistance. Intraday bias remains neutral at this point. No change in the view that choppy fall from 118.65 is a corrective move. Break of 115.61 will indicate that it's completed and will turn bias to the upside for retesting 118.65 resistance. Break will resume whole rise from 98.97 and target 125.85 key resistance. Below 112.51 will extend the decline but downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 to complete the correction and bring rebound.

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.

Economic Indicators Update

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