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Daily Pivots: (S1) 1.3471; (P) 1.3516; (R1) 1.3551; More.....

Intraday bias in GBP/USD remains neutral first. At this point, another rise is still in favor. Above 1.3612 will target 1.3651 key resistance first. Break will resume medium term rise from 1.1946 and target key resistance level at 1.3835. However, another decline and break of 1.3481 will raise the chance of near term reversal and turn focus back to 1.3300 support.

In the bigger picture, the break of long term trend line resistance from 1.7190 (2014 high) is seen as a sign of long term reversal. However, rise from 1.1946 (2016 low) is not impulsive looking. And the pair is limited below 1.3835 key resistance. Hence, we won't turn bullish yet and would continue to monitor the development. On the downside, break of 1.3038 support will now indicate that rebound from 1.1946 has completed and turn outlook bearish. Meanwhile, sustained break of 1.3835 should at least send GBP/USD to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466.

Daily Pivots: (S1) 0.9742; (P) 0.9794; (R1) 0.9834; More....

Intraday bias in USD/CHF remains neutral at this point. We're still slightly favoring that correction from 1.0037 has completed with three waves down to 0.9698. Above 0.9844 will turn bias back to the upside for 0.9977 resistance for confirming this bullish view. However, break of 0.9698 will extend such correction to 61.8% retracement of 0.9420 to 0.1.0037 at 0.9656 before completion.

In the bigger picture, range trading continues between 0.9420/1.0342. At this point, 0.9420 appears to be a strong support level. Therefore, in case of decline attempt, we don't expect a firm break of this level. Nonetheless, strong break of 1.0342 is also needed to confirm upside momentum. Otherwise, medium term outlook will stay neutral.

Daily Pivots: (S1) 110.86; (P) 111.82; (R1) 112.38; More...

Intraday bias in USD/JPY remains on the downside for 110.83 support. As noted before, current development argues that fall from 114.73 is resuming. Break of 110.83 will target 61.8% retracement of 107.31 to 114.73 at 110.14. We'd look for bottoming signal again below 110.14. On the upside, above 112.05 minor resistance will turn intraday bias neutral first.

In the bigger picture, we're holding on to the view that correction from 118.65 is completed at 107.31. And medium term rise from 98.97 (2016 low) is going to resume soon. Sustained break of 114.73 should affirm our view and send USD/JPY through 118.65. However, break of 107.31 will dampen this view and extend the medium term fall back to 98.97 low.

Daily Pivots: (S1) 1.2454; (P) 1.2518; (R1) 1.2611; More....

USD/CAD's recovery from 1.2354 is still in progress but outlook is unchanged. Intraday bias stays neutral first. As long as 1.2623 support turned resistance holds, deeper decline is expected. Break of 1.2354 will extend the fall from 1.2910 to retest 1.2061 low. However, sustained break of 1.2623 will argue that the fall has completed and turn bias back to the upside for 1.2919 resistance.

In the bigger picture, current development argues that rebound from 1.2061 has completed at 1.2919, rejected by 55 week EMA (now at 1.2850) and kept below 38.2% retracement of 1.4689 to 1.2061 at 1.3065. The development also suggests that long term fall from 1.4689 is not completed yet. Decisive break of 1.2061 low will target 61.8% retracement of 0.9406 to 1.4689 at 1.1424. This will now be the favored case as long as 1.2919 resistance holds.

STOCKS

Global stocks look mixed. Nifty and Sensex seem to be trading just below crucial resistances and may come off soon while Dax and Nikkei have come off from immediate resistances and could come down in the next few sessions.

Dow (25369.13, -0.07%) looks bullish towards 25400-25600 as mentioned earlier. Dax (13281.34, -0.78%) on the other hand is finding it difficult to sustain a break above 13400 and while below that, the index could also come off towards 13200-13000 soon. Near term looks bearish.

Nikkei (23707.31, -0.34%) tested resistance below 24000 and while that holds, the index could come off slightly towards 23600-23400 in the near term. Looking at the weekly candles this could act as a long term resistance with a possibility of initiating a fresh downward correction in the coming sessions.

Shanghai (3408.80, -0.38%) almost came up to test 3440 yesterday but came off to close at lower levels. On the upside there is scope for testing 3450-3500 in the medium term.

Nifty (10632.20, -0.05%) saw an intra-day low of 10592 yesterday, near the support zone of 10600-10550 and while that holds, we may expect a test of 10750 on the upside. Failure to move up just now would take the index below 10550, initiating fresh correction towards 10400 in the medium term. Similar support on the Sensex (34433.07, -0.03%) would be at 34250 above which the index may remain sideways or try to move up again.

COMMODITIES

Brent (69.15) and WTI (63.53) are almost quiet after the sharp rise seen yesterday. Brent has crucial resistance at 70 which is likely to hold and push back prices towards 68-67 in the medium term. A break above 70 is not factored in just now and if that happens would be surprising. Weekly resistance on the WTI near 65-66 and on the Brent near 70 is expected to produce rejection in the near term.

Gold (1320.10) is paused near 1320 levels and is likely in a sideways consolidation mode unable to decide further movement just now. We may either see a bounce towards 1350 or a fall to 1300 in the near to medium term.

Copper (3.2525) has risen back from 3.23 instead of coming off towards 3.20 or lower. It could re-attempt a test of 3.30-3.35 before coming off to current 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.

Daily Pivots: (S1) 0.7811; (P) 0.7838; (R1) 0.7869; More...

AUD/USD's rally resumed after drawing support from 4 hour 55 EMA. Outlook is unchanged. Considering bearish divergence condition in 4 hour MACD, upside should be limited by 0.7896 cluster resistance (61.8% retracement of 0.8124 to 0.7500 at 0.7886) resistance zone to bring short term topping. Break of 0.7804 minor support will turn bias to the downside for 55 day EMA (now at 0.7725). However, sustained break of 0.7886/96 will pave the way for retesting 0.8124 high.

In the bigger picture, we're still slightly favoring the case that corrective rise from 0.6826 medium term bottom is completed at 0.8124, after hitting 55 month EMA (now at 0.8032). But stronger than expected rebound from 0.7500 is dampening this bearish view. On the downside, break of 0.7500 will target 0.7328 key cluster support (61.8% retracement 0.6826 to 0.8124 at 0.7322) to confirm this bearish case. But break of 0.8124 will extend the rise from 0.6826 to 38.2% retracement of 1.1079 (2011 high) to 0.6826 (2016 low) at 0.8451 before completion.

Aussie trades broadly higher in Asian session as lifted by retail sales data. While AUD/UD is still limited below 0.7896 key near term resistance, EUR/AUD has dipped through 1.5226 support, which signals more Aussie strength ahead. Over the week, Yen remains the strongest one on speculations of BoJ stimulus exit. Dollar suffered steep selling of talks that China will slow purchases of US assets. But still, the greenback in trading mixed, in red against Yen Aussie and Kiwi only.

Australia retail sales grew 1.2% in November

Australian Dollar is lifted by stronger than expected retail sales data today. Retail sales grew 1.2% mom in November, triple of expectation of 0.4% mom. There are talks that RBA could finally join some other global central banks in tightening this year. And RBA could raise the official cash rate by 25bps in August. However, the key would possibly lie in wage growth, which has been sluggish in spite of healthy job market growth. Also, recent cooling of housing markets also lessen the pressure on RBA to hike. These will be the two key factors to watch ahead.

Chicago Fed Evans prefer pause in rate hike

Chicago Fed President Charles Evans said he'd prefer a pause in tightening and wait until mid-2018 before raising interest rate again. He said that "I'd feel a lot more confident if I saw those transitory reductions in the inflation rate go away." And, "if in fact things are worked out we could resume a nice gradual pace (of rate hikes) at that point, and still get the funds rate up to its natural level before too long." 

St Louis Fed President James Bullard joined the debate on so far price level targeting. Bullard said Fed's inability to meet inflation target in the past five years resulted in a 4.6% gap in the economy. And that amounts to more than USD 820b in the USD 18T economy. And to compensate for that, Fed would have to allow inflation to hit 2.5% for a decade.

Trump may announce Nafta withdrawal

Reuters reported that Canadian government is increasing convinced that US President Donald Trump will announce withdraw from Nafta, giving six month notice. Officials declined to comment on the rumor. The next talk between the US, Canada and Mexico will start on January 23 in Quebec, Canada. There are talks that officials are already scheduling to meet again in Mexico the next month, but there is no formal announcement yet. Canadian Dollar is mildly lower after the news.

Meanwhile, the President of US Chamber of Commerce Thomas J. Donohue warned that withdrawing from Nafta would be a "grave mistake". He said that "the American economy has taken several big steps forward with regulatory relief and tax reform, and the administration deserves lots of credit. But a wrong move on NAFTA would send us five steps back." He supported the modernization of the 24 year old trade agreement. But he emphasized that the trade agreement "should not close markets, undermine investment protections, or limit trade with regulatory red tape." And, "the bottom line is that growth will be weakened, not strengthened or sustained, if we pull back from trade."

Looking ahead

ECB monetary policy meeting accounts will be a key focus today. Eurozone will also release industrial production. Canada will release new housing price index. US will release PPI and jobless claims.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7811; (P) 0.7838; (R1) 0.7869; More...

AUD/USD's rally resumed after drawing support from 4 hour 55 EMA. Outlook is unchanged. Considering bearish divergence condition in 4 hour MACD, upside should be limited by 0.7896 cluster resistance (61.8% retracement of 0.8124 to 0.7500 at 0.7886) resistance zone to bring short term topping. Break of 0.7804 minor support will turn bias to the downside for 55 day EMA (now at 0.7725). However, sustained break of 0.7886/96 will pave the way for retesting 0.8124 high.

In the bigger picture, we're still slightly favoring the case that corrective rise from 0.6826 medium term bottom is completed at 0.8124, after hitting 55 month EMA (now at 0.8032). But stronger than expected rebound from 0.7500 is dampening this bearish view. On the downside, break of 0.7500 will target 0.7328 key cluster support (61.8% retracement 0.6826 to 0.8124 at 0.7322) to confirm this bearish case. But break of 0.8124 will extend the rise from 0.6826 to 38.2% retracement of 1.1079 (2011 high) to 0.6826 (2016 low) at 0.8451 before completion.

Economic Indicators Update

USDJPY - The pair closed further lower on sell off on Wednesday. On the downside, support lies at the 111.00 level where a break if seen will aim at the 110.50 level. A cut through here will turn focus to the 110.00 level and possibly lower towards the 109.50 level. On the upside, resistance resides at the 112.00 level. Further out, we envisage a possible move towards the 112.50 level. Further out, resistance resides at the 113.00 level with a turn above here aiming at the 113.50 level. On the whole, USDJPY faces further bearishness.

Caution enter at your own risk

It has been a very unsettling time in the macroeconomic world since we entered 2018, but the plethora of USD destabilising headlines overnight stretching from Beijing to Washington has thrown a spanner into the works letting the foxes run wild in the USD henhouse. It all kicked off with suspicious headlines from 'people familiar with the matter” that China officials are viewing US treasuries as less attractive. But the timing of the headline is what sent the market reeling trigging a frantic knee-jerk reaction on USD and Gold as it was thought China was retaliating ahead of potential trade announcements from the Trump Administration.

We have been down this road before, and US treasuries are often used during the political ping-pong match when trade tensions escalate. While it’s entirely possible that China could take measure to rebalance their reserve as they have done in the past, but the markets quickly dismissed the headline first viewing it as little more than political sabre rattling and then correctly determining its highly improbable China will stop buying US Treasuries.

Equity Markets

The US equity markets waned in very choppy trading overnight as US yields jumped higher on the China rumours but more significantly that NAFTA speculation was suggesting that President Trump would announce the US is pulling out of the trade agreement which sent the three major US stock indexes reeling given possible negative implication on corporate earnings. However, the selloff is likely a bit overblown, as political noise tends to exaggerate when there is a shortage of US economic data.

Oil Markets

Oil prices were buoyant, and while showing no signs of buyers remorse, Traders did not substantially add to yesterday’s gains despite the Energy Information Administration reported a higher draw than expected. After touching price peaks not seen since 2014 on Wednesday, the lack of follow-through from the EIA data could mean markets are getting a bit fatigued, and a healthy correction could be on the cards.

Gold Markets

Gold markets were predictably reactive to the rumour roil overnight. Nevertheless, that aside, rising oil prices and strong global growth suggest gold will remain supported as investors look for inflation protection. Also, a highly anticipated stock market correction is providing support on dips which continues to support the bullish Gold narrative.

G-10

Canadian Dollar and Mexican Peso

Both currencies gapped lower on the NAFTA headlines. While we do not know the full extent of the US trade policy as of yet, there is some thought we are entering the year of US protectionism, and there is no better platform than World Economic Forum in Davos Jan 23-26 to unleash a torrent of protectionist America First policy. While uncertainty around the NAFTA agreement is swirling, the risk of its demise is elevated wilting any Bank of Canada rate hike momentum the Canadian dollar was riding.

Japanese Yen

Asia is very much in focus this morning after the USDJPY plummeted through significant support levels like a hot knife through butter. USDJPY is touched a low of 111.30 overnight of the China/Treasuries rumours triggered a wave of dollar selling, but unlike against other G-10 pairs, USDJPY has failed to recover suggesting the market remains on guard against a quicker pace of BoJ tapering. Also, while the latest move is screaming, 'correction ', surprisingly few are willing to take a pig and a poke at this juncture .

Asia FX

Good news is the market is not falling to pieces after the mini USDCNY squeeze. Moreover, whatever whispers have been circulating about the imminent demise of Asia FX, they indeed have not led to a dramatic transformation or a notable shift in attitude. Instead now is the time to be patient and let the rumour roiled markets settle.

Not to diminish the fact that rising US yields could present some significant headwinds for local currencies, but the USD is getting little support from higher US rates suggesting FX markets are less sensitive to that specific correlation near term.

China inflation data was a bit damp, and that too has given traders cause for thought.

The Malaysian Ringgit

The Ringgit remains entrenched around the 4.00 USDMYR level awaiting the next domestic catalyst. Industrial Production is due later today, but I suspect the market remains more focused on rate hike speculation. On a positive note, high-energy prices are most helpful to Malaysia adding a welcome boost to fiscal revenue.

The Canadian dollar fell 0.62 percent on Wednesday after reports circulated about the Trump administration pulling the US out of NAFTA. The loonie had a positive return this year versus the greenback, but the NAFTA setback has it now at negative 0.11 percent YTD. Canadian officials anonymously agreed that there is a rising probability of the White House giving a six month notice on the trade agreement.

The White House made an official announcement that there hasn't been any change in the Trump's administration position on NAFTA, but given the lack of real progress on the talks between Canada, Mexico and the United States there was little hope of a successful renegotiation to begin with.

The CAD has been surging after a strong Canadian jobs report put the odds of a rate hike by the Bank of Canada (BoC) at 80 percent for the January monetary policy meeting. The outcome of the NAFTA renegotiations is one of the identified unknowns by Stephen Poloz which could keep the central bank from raising interest rates.

The USD/CAD gained 0.65 percent on Wednesday. The currency pair is trading at 1.2543 after the impact of the report by Reuters who cited two unknown sources within the Canadian government on the probability of the end of NAFTA. The trade agreement renegotiations will enter its sixth round of talks.

The process has been slow and painful as the United States opened negotiations with a very one sided demands that were met with shock from their counterparts in Canada and Mexico and they have not backed down. Mexico has said it would back out if tariffs were introduced and Canada has also questioned the higher US content rules on vehicles.

The Canadian dollar was on the rise with strong fundamentals and a higher oil price sustaining the move, but it all changed with the open secret that Canadian officials foresee its largest trading partner backing out of the two decade deal. The resulting uncertainty on the two partner NAFTA deal and bilateral trade with the US, outstanding disputes in mind, puts downward pressure on the prospects for the Canadian economy. The USD is having a terrible start of the year, but very swiftly the CAD could underperform optimistic expectations.

The Bank of Canada (BoC) Business survey released this week showed that Canadian companies are not suffering extra anxiety in their outlook due to their trade agreement, but as evidenced today the market does not share that optimism.

Governor Poloz ended the year with a speech focusing on the topics that kept him up at night but the solid December jobs report and the BoC Survey have all but convinced the market that a rate hike will be announced on the January 17 central bank meeting.

The price of oil rose to $63.380 after the release of the US crude inventory data by the Energy Information Administration (EIA). A bigger than expected crude drawdown of 4.9 million barrels was almost double the forecast of 2.5 million barrels. Gasoline and distillates showed a buildup of inventories with gasoline stocks rising 4.1 million barrels versus the 2.5 million estimate. Distillates rose 4.2 million barrels destroying the forecast of 1 million.

Market events to watch this week:

Thursday, January 11
8:30am USD PPI m/m
8:30am USD Unemployment Claims
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