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When the ECB drops a hint of tightening it's like a drop of blood in a shark tank, as the market showed on Thursday. NZD and EUR were the top performers while the US dollar lagged. Japanese current account data will close out the week. A 3rd EUR trade has been issued to the Premium Insights.

The ECB minutes offered a small hint about what's coming next, referring to the area's 'expansion' rather than its continued 'recovery' but that was all it took to send the euro to 1.2050 from 1.1940. In recent press conferences, Draghi has taken pains to keep the currency from jumping but the minutes offered more colour about the 'continued robust and increasingly self-sustaining economic expansion' as policymakers contemplate what to do next.

The market is extremely one-sided with net euro longs at the most extreme on record but even this week's three-day, 170-pip decline wasn't enough to shake out any longs.

The stability got a hand from the continued struggles of the US dollar. An extremely strong 30-year bond auction Thursday weighed on the dollar along with a miss on PPI. Friday features the CPI and retail sales reports. Both will be critical for the US dollar and the Fed deciding what to do next.

First, Japanese current account numbers will be released at 2305 GMT. Don't expect a significant market reaction. Instead, watch out for continued reports about bond buying, trade and Bitcoin exchanges.

STOCKS

Global stocks are all stable without any sharp movement just now.

Dow (25574.73, +0.81%) has come off from immediate resistance on the daily candles but the upside may not be over yet. A test of 25200-25000 is possible before again moving up towards 25400-25600 levels in the medium term. Overall Dow is in an uptrend and is likely to continue.

Dax (13202.90, -0.59%) was almost stable yesterday. While the resistance near 13400 holds strong, the index is likely to come off towards 13000 in the near term.

Nikkei (23697.46, -0.05%) came off slightly to test 23600. Near term looks bearish with enough room on the downside towards 23200 and lower.

Shanghai (3429.21, +0.11%) is almost stable just now. Upside possibility of testing 3440 remains open for the near term.

Nifty (10651.20, +0.18%) is testing immediate support near 10600 and while that holds, it is likely to see another upmove towards 10700-10750 in the near term. Sensex (34503.49, +0.20%) has support at 34250 and while that holds, the index looks positive towards 34750.

COMMODITIES

Brent (69.30) tested 70.05 yesterday before coming off to close at slightly lower levels. While resistance at 70 holds, the price could trade sideways for some sessions and come off towards 68 before trying to attempt another rise. A break above 70, if seen and sustains could indicate further sharp upmove towards 71.00-71.50 (less preferred just now)

WTI (63.65) is trading above support at 63 and while that holds, the price could move up towards 65 in the coming sessions.

Gold (1326) has risen above the 1320-1310 region possibly initiating a fresh upmove towards 1340 or higher in the near term. Ner term looks bullish.

Silver (17.08) is holding below resistance near 17.30 and is likely to consolidate within 17.30-16.70 region for sometime. Note that 17.30 is an important long term resistance.

Copper (3.2375) is trapped above 3.20 and is trading in narrow movements within 3.20-3.30 region. An initial attempt to 3.30 is possible but on a medium term, we may expect a fall towards 3.20-3.15 levels.

FOREX

Keep an eye on the Euro-Yen (133.30). It saw a low just below 133 yesterday. Although it can bounce a bit towards 133.70-90 in the near term, there are increasing chances that it might eventually break below the crucial Support at 133. It would then target 130 in the medium term.

Such a dip in the Euro-Yen would be triggered/ accompanied by a fall in Dollar-Yen (111.44) over the coming days. These two together could try and pull the Euro (1.1960) below 1.19.

To prevent that from happening, the Euro needs to convincingly rise past 1.20 over today-tomorrow. While the potential is still there and it did, in fact, bounce from 1.19 to above 1.20 yesterday, it's failure to sustain that bounce is a little puzzling. We need to watch this carefully over today-tomorrow.

The Chinese Yuan (USDCNY = 6.5054) strengthened a goodish bit yesterday on news that Chinese officials are recommending a halt/ reduction in the purchase of US Bonds. Let us see whether the USDCNY breaks below 6.49 today or moves back up today. A bounce/ rise is a little more probable.

As expected, the Pound (1.3507) is relatively calm amidst the volatility in other currencies and is likely to remain so for some more days.

Contrary to our expectation of a dip to 0.7750, the Aussie (0.7875) did not even fall below 0.7800 and has, in fact, risen strongly today morning. This seems to be fresh strength that could pull the Aussie up towards 0.7950-8000 this time.

As expected, Dollar-Rupee (63.60) found Resistance just above 63.80 and can dip to 63.50-45 today. Direction after that is unclear.

INTEREST RATES

Global bond markets could well be entering a bearish phase with higher crude prices raising inflation and consequently, investors’ expectations for higher yields.

The US 10Yr (2.5495%) reached highs near 2.588% with news of China’s reluctance to buy US bonds coming in. We could now expect the 10 Yr yields to consolidate near 2.55% for sometime before targeting 2.62% on the upside, seen as resistance on short term charts. US 30 Yr (2.8928%) could move up to resistance near 2.94% on the short term chart and stay below that level for few days before attempting another rise. Expectations of higher inflation being reflected in the CPI data release (due tomorrow) seems to have been already factored into the rise in yields recently. However, we still need to see if some surprises could push the yields further up.

Japanese 10 Yr Yield (0.075%) dipped from yesterday’s levels around 0.088%, where we see resistance on the short term charts. This resistance could hold for the time being.

The German 10 Yr Bund Yield (0.543%) is testing resistance on the medium term chart and could dip from here. The German-US 10 Yr Yield Spread (-2.0095%) has gone up appreciably from yesterday and might attempt a test of resistance near -1.9% on the long term chart in the coming sessions.

GBPUSD - The pair faces further downside pressure as it retains its corrective pullback threats. Support lies at the 1.3450 level where a break will turn attention to the 1.3400 level. Further down, support lies at the 1.3350 level. Below here will set the stage for more weakness towards the 1.3300 level. Conversely, resistance stands at the 1.3500 levels with a turn above here allowing more strength to build up towards the 1.3550 level. Further out, resistance resides at the 1.3600 level followed by the 1.3650 level. On the whole, GBPUSD looks to weaken further on correction

Headline nonsense

The advent of headline reading robots is changing the marketplace and likely causing capital market traders to react first and check later( fact-finding ) for fear of missing out. So with the volumes of spurious headlines over the last 24-48 hours, the challenges now facing traders in the age of information overload is assessing the wheat from the chaff when it comes to ” fake news.” But unfortunately, these factious headlines are becoming all to commonplace in 2018.

Oil

Brent climbed to the critical $70 per barrel for the first time since 2014 and Oil is having its usual far-reaching influence on cross-asset markets as Wall Street soars to new record territory

The market was caught a bit short when Suhail al-Mazrouei, UAE energy minister and current OPEC president, said Thursday that OPEC remains “committed to maintaining strong compliance.” which spurred a wave of short covering rather than topside buying.

By all appearances at the future open, the market is showing signs of finally succumbing to that anticipated correction.

Gold

Gold put in another strong showing after the Hawkish ECB minutes weighed on USD sentiment. But there appears to be a broader move afoot as the USDJPY zeroed in on the critical 111 level amidst BoJ tapering speculation.

Indeed, the weaker dollar narrative amidst increased demand for equity market hedges suggests the near-term outlook for Gold is glittering.

G-10

The Euro

The Euro exploded higher after a hawkish glean from the ECB minutes caught trader flat-footed as most had shallow expectations from the release. But as usual when it comes to Mario and gang its best to expect the unexpected especially when fissures within the ECB board are starting to appear.

As usual, traders couldn’t help but trip over themselves getting topside exposure at the thought of catching a significant policy shift. The Euro Bulls are now banking on a possible change in ECB language as early as March.

Of course, this feels like ” Deja Vu all over again ” as traders consider the merits of parlaying the minutes versus another dovish surprise from Draghi. But with the bullish fundamental narrative solidly intact, it’s hard to argue against warehousing some form of Euro proxy trade on the back of the ECB’s apparent hawkish shift.

The Canadian Dollar

Speaking of fake news, after the imminent demise of NAFTA was denied the Loonie had retraced about 60 % of yesterday’s panicked move, but the fact it has not fully recovered is probably due to overextending shorts ahead of Bank of Canada announcement. In the where there’s smoke their fire category and as far as the broader North American trade picture is concerned. In a WSJ interview this morning, President Trump reiterated he would terminate NAFTA unless he gets a fair and “Trump deal” but added to “leaving it a bit flexible” until after the Mexico election. Predictably USDCAD gapped higher some 35 pips in low liquidity before coming back.

The Japanese Yen

Given the general dollar malaise, USDJPY is struggling against the backdrop of BoJ taper overhang and another strong US 10 year Treasury auction. The bid to cover ratio came in at 2.74, which is the highest level seen since December 2014. The markets were convincingly dollar offered overnight, but so far in early trade, APAC traders are showing a higher propensity of cover shorts heading into the weekend probably looking to put this silly week of headline hullabaloo in the rearview mirror.

The Australian Dollar

The Aussie dollar benefited from of all things iPhone sales after the release of data showing better-than-expected retail spending in November.

The currency continued to gather steam overnight influenced by external drivers as the weaker US dollar and surging commodity prices led the charge.

Asia FX

Thankfully local EM Fx traders remain calm while doubting the validity of the China treasuries story and were rewarded for their patience when China’s FX authority SAFE was quick castigate those reports as ‘false news and predictably USDAsia sold off in tandem with US Bond Yields.

The Yuan

Regional currency markets are finding themselves in a much happier spot this morning with USDCNH trading sub 6.50 unwinding both the Treasury headline nonsense and Counter-Cyclical squeeze.

The Ringgit

The Ringgit made the highlight reel once again after a substantial industrial production number yesterday which cemented the markets BNM rate hike view. While we’re likely to enter a healthy correction on oil prices, WTI is at such a lofty levels, and any sell-off is unlikely to have any sustainable adverse effect on the MYR.

Fed Speak

A late NY speech delivered my Dudley is attracting some attention where he sounds very optimistic regarding the US economy reaching its inflation targets but doesn’t expect “transitory” factors to fade out until after Spring 2018. USDJPY came off the 111.05 low, but there was little significant broader based USD impact

Cryptocurrencies

The barrier for Bitcoin to be considered a viable asset class continue to mount. The threat from increased regulatory oversight in the wake of South Korea imposing a ban on Crypto trading could spread and severely dent sentiment. But also the excessive volatility makes trading Crypto coins a fool’s errand with only two discernable strategies investors are apparently using. 1) Buy on dips, sit on your hands and hope it rises or 2) Sell at the current tops and pray it fall. Probably not a quantified methodology for managing risk and suggests the product in its infancy will not be sold as a viable investment grade product by Major investment houses.

Hawkish ECB minutes and China's US bond purchases driving greenback lower

The US dollar is weaker across the board a day before the release of the US consumer price index (CPI) and retail sales data for December. The Bureau of Labor Statistics will publish the monthly report on Friday, January 12 at 8:30 am EST. Economists expect inflation to remain subdued with CPI coming in at 0.1 percent and core CPI at 0.2 percent. Retail sales are also forecasted to slow down with sales at 0.5 percent and the core reading at 0.4 percent. A surprise to the upside would boost the USD, but a confirmation of lower inflation combined with a hawkish European Central Bank (ECB) as per the minutes released earlier could further put pressure on the currency.

• ECB December meeting minutes signal earlier end to QE
• CAD rebounds from end of NAFTA rumours
• US inflation and retail sales to guide dollar on Friday

The EUR/USD gained 0.72 percent on Thursday. The single currency is trading at 1.2033 after the European Central Bank (ECB) released the notes from its December monetary policy meeting. The central bank is preparing the market for the end of its massive quantitative easing program as it talks up the strength of the Eurozone economy. The language change reflects a focus going forward on continued expansion. Inflation has not risen near the desired target, which is why the ECB is not considering raising rates until 2019, but reducing the 30 billion euros a month in bond purchasing would be a step in the rate normalization goal.

The USD was under pressure yesterday when the financial press reported that China was considering diversifying away from its US treasury holdings. China denounced the rumours, but as global trade comes to the forefront and the Trump Administration has decided to play an America First strategy there has been a shift in what is considered a safe haven. The euro has advanced 0.24 percent this year and remained above the 1.20 price level.

The USD/CAD lost 0.16 percent since market open on Thursday. The currency pair is trading at 1.2528 with the CAD recovering from yesterday's reports that the US was ready to withdraw from NAFTA. Canadian officials have increased the odds that the Trump Administration would pull out of the renegotiation table and invoke a six month period before terminating their participation in the two decade agreement. The White House has denied the rumours but gave no assurances about the fate of NAFTA saying the President's mind changed.

Mexican and Canadian officials are now seeking new ways to approach the demands of the United States in particular regarding the auto sector. The US wants to increase the content of vehicles to 85 percent American from the current 62 percent.

The loonie remains higher against the greenback year to date at 0.42 percent with the upcoming monetary policy decision by the Bank of Canada (BoC) on January 17 expectation of a lift to the interest rate after a strong jobs report in December. The fate of NAFTA has been singled out as a concern by Governor Poloz, but it remains to be seen what was the desired impact of the two anonymous Canadian officials who spoke on the record to the press. If the intent was to sound out the White House and get a reaction, it was muted as very little seems to have changed. But if the plan was to measure market reaction to a possible end of NAFTA then the BoC could end up delaying its rate hike until NAFTA negotiation talks reach a conclusion however diluted it might be.

Market events to watch this week:

Friday, January 12
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m

Gold prices continue to point upwards, and the trend has continued in the Thursday session. In North American trade, the spot price for an ounce of gold is $1322.22, up 0.41% on the day. On the release front, PPI and Core PPI both missed their estimates, with declines of 0.01%. On the employment front, unemployment claims jumped to 261 thousand, above the forecast of 246 thousand. On Friday, traders should be prepared for some movement from gold, as the US releases CPI and retail sales reports for December.

Gold has restored some luster in recent weeks, as the base metal has climbed 3.7% percent since December 1. The rally has been all the more impressive, as risk appetite has been high, with the US economy looking strong and the Fed raising interest rates in December. Gold prices often fall when investors are more comfortable with riskier assets, but a weaker US dollar has helped gold post higher – on Wednesday, gold touched a high of $1327, its highest level since mid-September.

The US dollar was broadly lower on Wednesday, and gold took advantage with considerable gains. The catalyst for this move was a report on Wednesday that China was considering slowing or halting the purchase of US government bonds. China boasts the largest currency reserves, estimated at $3 trillion. It is also the biggest holder of US government bonds, in the amount of $1.19 trillion. Why would China make this move? One reason is that it may consider US treasuries less attractive compared to other assets. As well, it could be part of China’s strategy to flex some muscle as a possible trade war looms between the US and China, which are the two largest economies in the world. The report has pushed US Treasury yields higher and sent the US dollar downwards.

The British pound has posted gains in the Thursday session, erasing the losses seen on Wednesday. In North American trade, GBP/USD is trading at 1.3549, up 0.30% on the day. In economic news, British Manufacturing Production slowed to 0.4% in November, down from 0.7% a month earlier. Still, this beat the estimate of 0.3%. Over in the US, Import Prices slowed to 0.1%, short of the estimate of 0.4%. On Thursday, the US releases PPI reports and unemployment claims.

The US dollar is under pressure, after a report on Wednesday that China was considering slowing or halting the purchase of US government bonds. China boasts the largest currency reserves, estimated at $3 trillion. It is also the biggest holder of US government bonds, in the amount of $1.19 trillion. Why would China make this move? One reason is that it may consider US treasuries less attractive compared to other assets. As well, it could be part of China’s strategy to flex some muscle as a possible trade war looms between the US and China, which are the two largest economies in the world. The report has pushed US Treasury yields higher and sent the US dollar downwards.

What can we expect from the Bank of England in early 2018? The BoE raised rates in November for the first time in 10 years, but maintained rates at the December meeting. With serious concerns about how Brexit will affect the economy, the BoE will be hesitant to raise rates, even with inflation higher than the Bank’s target of 2%. The BoE holds its next policy meeting in February, and policymakers are not expected to raise rates at that time.

Brexit negotiations have been difficult and progress has been slow, as Europe is not keen on rewarding Britain for departing the European Union. There are serious divisions within the British government with regard to the talks. and May has to walk carefully, as she has a razor thin majority in parliament, Prime Minister May can ill afford any mistakes, and if her government runs into trouble, she may be forced to call elections, which could shake up the markets and send the pound downwards. The public is almost evenly split on whether Brexit is a good idea, and there are serious concerns that the British economy will take a hit, even if a deal is worked out before the March, 2019 deadline. The parties do not have a lot of time to hammer out a host of trade issues, and all indications are that the negotiations road will be bumpy and difficult. One card that Britain may hold is that the EU, which has been united so far in its position on Brexit, may see the unified front fall apart find that some countries try to cut favorable trade deals with Britain.

Two issues happened in China have roiled the market over the past two days. While the adjustment of renminbi fixing mechanism has resulted in a weaker currency, a news report citing an anonymous Chinese official as recommending to trim or halt purchases of US Treasuries has sent the longer-dated US Treasury (UST) yield higher, thus steepening the UST yield curve. While the former reveals that the Chinese government continues to actually intervene the FX market, putting its commitment to internationalize the currency in question, the latter is merely an act to maintain currency stability and a response as the US-China trade friction once again heats up.

Suspension of the Use of 'Countercyclical Factor' in Renminbi Fixing

A new piece on Tuesday suggested that the Chinese government has abruptly suspended the use of 'countercyclical factor' in the renminbi fixing mechanism. The instant market reaction was weakness in the currency against US dollar. Recall that back in May 2017, the Chinese government introduced the countercyclical factor as one of the determinants, together with the previous day's close price of USDCNY and USD movement overnight against the CFETS basket, of the daily renminbi fixing rate. The government explained that use of the 'countercyclical factor' was to curb volatility. It is not coincidental that a new ingredient was added during the time when renminbi was staying at the lowest level in 9 years. Indeed, the 'countercyclical factor' is just another tool (besides stringent capital control and selling of FX reserve) for the authority to contain renminbi's depreciation.

Goldman Sachs' analysis revealed that a negative correlation of the 'countercyclical factor' and the previous intra-day price change. Moreover, the factor displayed 'asymmetric response' to the exchange rate: the countercyclical factor's offsetting reaction was bigger following renminbi depreciation in the previous day than following renminbi appreciation. This evidenced that the authority favored stronger renminbi at during the period. Removal of the 'countercyclical factor' in the fixing mechanism might signal that the government is not in favor of renminbi appreciation from the current level. Similar to other currencies, USD's weakness over the past weeks has lifted renminibi, sending the CNYUSD pair to the highest level since September 2017 on January 8. Removal of the 'countercyclical factor' suggests that renminbi movement would be more market-determined. However, it is the government's frequent and unpredictable change in its pricing mechanism that makes it difficult for renminbi to gain the status of a global currency

China to Trim Purchases of US Treasuries

Another news report cited a senior Chinese official recommending to lower or stop purchases of US government bonds. This had sent 10-year yields to a 10-month high of 2.597% at one point before pullback. Undeniably, China is the biggest foreign creditor of US Treasury with a holding of US$ 1.19 trillion as of October 2017. However, China's calculus in terms of US Treasury purchases is on trade and currency stability. The chart below shows that China had been trimming US Treasury holding in 2016 during the time of massive selloff of renminibi It has resume buying 2017 but the pace accelerated in the mid-year as renminibi movement stabilized.

The Japanese yen continued to strengthen significantly across the board and investors digested news about the potential tapering. On Tuesday, BoJ announced that it would reduce its bond purchases on the longer term 20 and 40 year bonds. This led the markets to react to the news as a form of tapering from the BoJ. Following through on the gains from Tuesday, the Japanese yen rose 1.07% on the day on Wednesday.

Economic data remained sparse with the exception of the manufacturing and industrial output data from the UK. According to the report from the ONS, UK's manufacturing output rose 0.4% on the month beating estimates of a 0.3% increase. Industrial output was also stronger, rising 0.4% on the month as expected. Construction output was weaker at 0.4%, missing estimates of a 0.7% increase.

Looking ahead, economic data will shift to the U.S. with the producer price index data expected to show a 0.2% increase on the headline and 0.2% increase on the core. FOMC Member, Dudley will be speaking later in the day.

Regulators are haunting cryptocurrencies
China says it is only diversifying its options
Tesco needs to have better suppliers

Bitcoin price made another low on Thursday for 2018, thanks to South Korea’s Justice Minister. It is another bad day for cryptocurrencies and once again the news which is hitting the cryptomarket is on the regulatory. According to South Korea’s Justice Minister, the country is busy in preparing a bill which will ban all cryptocurrencies trading. His stance towards digital currencies seems to be far-fetched given the market cap of South Korea’s cryptocurrency exchanges. Yes, the price of bitcoin in South Korea pride at a premium of around 30 percent and developments like today are designed to reduce that premium. We do think this is what the regulators are trying. Banning cryptocurrencies altogether would be difficult given that the country is one of the biggest market in the world especially for bitcoin and Ethereum.

It is important to keep in mind that this is not the first time that the regulators have gone after the cryptocurrency market. During this week alone, we have seen two headlines emerging from South Korea aimed at Bitcoin by using the regulatory tactic. There is no doubt that the demand for Bitcoin in South Korea is massive and some elements of the public behaviour (when it comes to trading the cryptocurrencies) aren’t far from gambling habits.

Nonetheless, traders should not read too much into the South Korean situation because even once the bill is drafted, it would require a backing of 297 members of the National Assembly, a process which could easily take months or even years.

China and US treasuries

‘China has reduced their purchase of US treasuries’ was the news which crashed the prices of the US Treasuries and pushed the dollar index lower yesterday. But the Chinese officials clearly labelled this as fake news and assured markets that China is only diversifying its options. We do know that China is the largest buyer of the US Treasuries, and if there is any reduction in the Chinese appetite for the US Treasuries, it would have serious consequences for the global markets.

In 2018, the US is looking to boost its debt supply significantly and without the Chinese demand for the US Treasuries, the situation would have a different outcome. The US extending its hand of friendship towards Taiwan does make the situation more arduous (China and Taiwan are old rivals). Therefore, the underlying message should not be neglected; the US should tread very carefully. China is currently holding 1.2 trillions of US debt and it has the ability and power to jolt the US markets. President Trump should think more seriously towards the Chinese trade surplus situation. Every action would have its consequences, whether it is geared towards how China is dealing with a North Korean nuclear crisis or something else. China is certainly not tied under any agreement to buy US bonds and the message is clear that there are other debts which the country can always look to buy.

Tesco Disappoints

Christmas sale was disappointing, that is the message from the U.K.’s biggest grocery retailer, Tesco. Weeks leading up to Christmas were the most important ones and the firm had a major problem with its supplier, Palmer and Harvey. The company did experience a 1.9 percent rise in like for like sales (3Q LFL sale; Act, 2.3%, Est, 2.4%). However, looking at competitors such as Sainsbury and Morrison, both have beaten their forecast for Christmas trading. This doesn’t put Tesco in a strong position at all. The retailer which dominates the British High Street needs to make sure that it keeps its tools sharp to fight inflationary pressure by keeping the prices low. There is no doubt that Tesco has turned the corner and avoided a Debenhams style disaster but it needs to make sure that it stays on track to deliver on its medium-term ambition. This is mainly because the competition is fierce in this space and discounters such as Lidl and Aldi have performed extremely well. Lidl’s Christmas sales increased by 16% and Aldi saw 15%.