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Monday, Mar 20, 2017

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U.S. Review

Two More Rate Hikes in the Cards This Year

• The Federal Reserve raised its short-term target rate 25 bps at its March FOMC meeting, with one dissent. Median projections were largely unchanged and still point to three hikes in 2017 and 2018. We expect some political uncertainty to seep in ahead of the June meeting.
• Headline and core nominal retail sales grew only marginally in February, suggesting a below-trend pace in personal consumption in Q1. Much of the slower pace can be attributed to a delay in tax refund payments. The severe snowstorm that hit the Northeast and parts of the Midwest is expected to pull some seasonally-sensitive monthly indicators lower in March.

Moving Beyond the Noise

The Federal Reserve raised its short-term target rate 25 bps at its March FOMC meeting, with one dissent. Median projections were largely unchanged and still point to three hikes in 2017 and 2018. The target range now rests between 0.75 percent and 1.0 percent. The timing of the next rate hike remains elusive, but with political risks looming including raising the U.S. debt ceiling and use of extraordinary measures (see the Topic of the Week on page 7), reignited Brexit talks, and the first-round for the French presidential election (April 23), some uncertainty is expected to seep in ahead of the June FOMC meeting.

The trend in oil prices will also be important to watch in the coming months, especially as prices have slipped and stockpiles have risen since the early December meeting when OPEC members and non-OPEC nations agreed to cut production. The next OPEC meeting will occur on May 25, and members will undoubtedly reevaluate production levels. As seen in retail sales and consumer prices in February, the slide in oil prices diluted headline activity. That said, with the pass-through from weak oil prices to core inflation largely behind us and goods prices increasing, we expect headline and core prices to continue to firm in the coming months.

Headline and core nominal retail sales grew only marginally in February, suggesting a below-trend pace in personal consumption in Q1. In part, the modest headline sales reading in February reflects a delay in tax refund payments for households that claim earned-income tax credits (EITC) or additional child tax credits (ACTC). According to the Internal Revenue Service (IRS), beginning this year, tax refunds for households that claim EITC or ACTC on their tax return were held until Feb. 15 but did not arrive until the week of Feb. 27. The delay is due to the Protecting Americans From Tax Hikes Act of 2015, which came into effect late last year and seeks to help the IRS verify claims. Such a delay could have some effect on the seasonal adjustment process and absent any adverse weather effect due to the March snowstorm we should see a rebound in activity in March.

Speaking of harsh winter conditions, unseasonably cold temperatures and the Nor'easter will likely show up in seasonallysensitive monthly indicators in March including average weekly hours, initial jobless claims, construction spending, retail sales, utilities output, housing starts and sales activity. In particular, the March storm marked the fifth episode over the past decade that fell on a work day during the nonfarm payroll (NFP) reference week. Indeed, headline NFP only slipped during one significant snowstorm, but the monthly difference in average weekly hours tumbled during each bout and the number of persons who usually work full time but had reduced hours due to bad weather also surged. Although headline NFP will likely be less affected by weather, other indicators could see an outsized downward swing in March as the snowstorm followed unusually mild temperatures in February. Putting it all together, Q1 economic activity is on track to register a weak reading, but activity should rebound in Q2.

U.S. Outlook

Existing Home Sales • Wednesday

Existing home sales started 2017 on a strong note, with sales climbing 3.3 percent in January to a 5.69 million-unit pace. Home sales are now running at their strongest pace since the recession.

Inventory of single-family homes remained relatively unchanged at a 3.6 month supply. The persistence of historically low for-sale inventory is a big reason why prices continue to consistently beat expectations to the upside. The median price of an existing home rose a sizable 7.1 percent year over year in January.

The solid start to the year bodes well for Q1 estimates of realtors' commissions, which show up in the residential investment component of GDP growth. That said, the late-winter storm that has affected much of the Northeast in mid-March may have had a negative effect on sales activity at the start of the spring home buying season.

Previous: 5.69 Million Wells Fargo: 5.52 Million Consensus: 5.58 Million

New Home Sales • Thursday

The pace of new home sales rose 3.7 percent to seasonally adjusted annualized rate of 555,000 units in January, partially recovering December's loss. Sales for November and October were revised down, however. The lower sales figures suggest the post-election bump in mortgage rates may have taken a larger bite out of new home sales than previously reported.

With January's gain, new home sales are up 5.5 percent on a yearover- year basis. Sales rose in every region except the West during the month. The unusually-wet weather in the West may have held back sales in January, but sales are still trending up on a threemonth moving basis. We expect new home sales to remain solid heading into the spring buying season, as market fundamentals, including homebuilder confidence and steady job growth, remain consistent with continued improvement in home sales. We look for sales to increase 2.5 percent to a rate of 569,000 units in February.

Previous: 555,000 Wells Fargo: 569,000 Consensus: 565,000

Durable Goods • Friday

Durable goods orders rose a larger-than-expected 1.8 percent in January. Despite the improvement in the headline, the details were less encouraging. Most of the pickup was due to an increase in the notoriously-volatile aircraft orders component, as government outlays on defense aircraft climbed 59.9 percent and civilian aircraft orders surged 69.9 percent. Stripping away the noise of transportation-related industry sectors, orders actually fell slightly in January. Moreover, core capital goods shipments—a proxy for current business spending—and orders of core capital goods—a leading indicator for future business spending—both declined in January. In each case, however, January's drop followed upwardlyrevised figures for December.

Given the firming we have seen in survey data, from the NFIB survey of small businesses to the ISM survey of manufacturers, we think January's stall in orders is likely temporary. continue to firm in 2017.

Previous: 1.8% Wells Fargo: 1.2% Consensus: 1.0% (Month-over-Month)

Global Review

Bank of England Keeps Rates Unchanged

• As largely expected, the Bank of England (BoE) voted in favor of keeping monetary policy unchanged at 0.25 percent at its meeting this week. Minutes from the meeting showed that the vote was non-unanimous with one dissenter voting to increase rates to 0.50 percent.

Strong Start to the Chinese New Year

• Data this week showed that China's economy started the year off on solid footing. China's fixed-asset investment and industrial production bested market expectations, while retail sales grew slower than expected due to weakness in auto sales.

Bank of England Keep Rates Unchanged

The U.K. economy has performed better than many had expected since the Brexit vote. In fact, the BoE nudged up its Q1 GDP forecast to 0.6 percent from 0.5 percent on non-annualized basis, last month. At its recent meeting, the central bank voted in favor of keeping monetary policy unchanged. Minutes from the meeting showed that the vote was non-unanimous, as one Monetary Policy Committee member voted to raise rates to 0.50 percent. The minutes also noted that the bank is willing to allow inflation to run above the 2 percent target temporarily to protect jobs and growth.

The jobless rate in the U.K. has declined to 4.7 percent—the lowest rate since 1975—and nearing "full" employment. At the same time, average weekly earnings are growing slower than expected; indicating that wage growth is not picking up with underlying inflation and could weigh on the consumer driven economy. That said, the tightness in the labor market should put pressure on wages.

The pickup in inflation makes a convincing case for a rate hike later this year. However, we do not expect for the BoE to do this as there have been no wage acceleration to support inflation and recent data point to weak spots in the economy. This, in addition to uncertainty surrounding Brexit negotiations and the triggering of Article 50 next month, leads us to believe that the BoE will keep rates unchanged for the remainder of the year.

Strong Start to the Chinese New Year

China released its latest fixed-asset investment, retail sales and industrial production (IP) data this week. Fixed-asset investment, which includes capital spent on infrastructure, real estate, machinery spending across the economy, grew 8.9 percent in January and February, besting expectations for an 8.3 percent gain. Investments by state-owned businesses also increased. The Chinese government has relaxed credit lending standards in the hopes of spurring real estate demand, which has paid off as residential investment has picked up over the past two quarters.

Growing demand for steel to meet the increase in infrastructure spending and a rebound in real estate investment has been a major boon to IP, up 6.3 percent year over year during January and February. The first two months of the year are typically combined to account for the time of the Lunar New Year holiday.

Retail sales figures, on the other hand, were lukewarm, expanding at a less-than-expected 9.5 percent clip during the January- February period and undershoot market expectations of a 10.6 percent increase. Disappointing automobile sales, as result of the government reducing tax breaks for small cars, weighed on growth, while consumers favored online shopping, which jumped 31.9 percent.

As the Chinese government moves away from debt driven growth and avoids a hard landing, the strength of the economy will depend largely on investment growth, as fiscal policy becomes less supportive. This will prove to be difficult to sustain over the long term as weak consumption will weigh on growth. On balance, this week's data suggest that the economy started the year strong, but we expect growth to slow to 6.3 percent for 2017.

Global Outlook

Canadian Retail Sales • Tuesday

The Canadian economy slipped into a mild recession in early 2015 following the collapse in energy prices. Resilience in consumer spending during that period prevented, at least in part, the downturn from becoming deeper, and growth in Canadian consumer spending has generally remained solid subsequently. That said, retail sales slipped 0.5 percent in December relative to the previous month. Data that are slated for release on Tuesday will show how retail spending started the year.

CPI data for February are on the docket on Friday. The overall rate of CPI inflation is currently 2.1 percent, essentially in the middle of the Bank of Canada's target range of 1 percent to 3 percent. However, different measures of the core rate of inflation remain below the mid-point. Consequently, we look for the bank to keep its main policy rate unchanged at 0.50 percent, where it has been maintained since July 2015, for the foreseeable future.

Previous: -0.5% (Month-over-Month)

U.K. Retail Sales • Thursday

Consumers in the United Kingdom were the star economic performers in the British economy through most of last year. However, the volume of retail sales has contracted in four of the past five months, and real sales were up only 1.5 percent in January, the weakest year-over-year growth rate in three years. Did spending rebound in February? Data on the docket on Thursday will help gauge the current state of consumer spending.

Higher inflation may be weighing on growth in consumer spending recently. Consumer prices started 2016 more or less flat on a yearago basis. However, the most recent reading on CPI inflation had consumer prices up nearly 2 percent. Higher inflation helps depress growth in real spending via erosion in purchasing power. CPI inflation for February will print on Tuesday. Further acceleration in consumer prices could eventually induce the Bank of England to raise rates.

Previous: -0.3% (Month-over-Month) Consensus: 0.4%

Eurozone PMIs • Friday

The purchasing managers' indices in the Eurozone have risen sharply in recent months. In February, both PMIs stood above 55, the highest readings for both indices since early 2011. Unfortunately, incoming "hard" data do not exhibit the same level of economic resilience. For example, industrial production (IP) in the euro area was growing in excess of 4 percent (year 0ver year) in early 2011, the last time the manufacturing PMI exceeded 55. The underlying growth rate of IP today is about 2 percent. The March PMIs, which will print on Friday, will be interesting, but they may not tell analysts much about the "true" state of economic activity in the Eurozone today.

The ECB will conduct a quarterly tender for its Targeted Long-Term Refinancing Operations (TLTRO) on Thursday. Strong interest by banks in the Eurozone would indicate that growth in bank lending could strengthen further in coming months.

Manufacturing PMI:55.4 Consensus: 55.3 Services PMI:55.5 Consensus: 55.3

Point of View

Interest Rate Watch

Cyclical and Secular Credit Trends

Patterns in credit reveal clues about the cyclical and long-term character of credit trends and the ability of those markets to sustain economic growth.

Net lending at commercial banks (top graph) provides an excellent illustration of cyclical and secular trends. Net lending exhibits a clear pattern of peaking before the onset of a recession. This may appear surprising since bank lending is considered a lagging indicator of the economic cycle. In contrast, the actual behavior is that bank lending actually leads the cycle at the top and is coincident with the cycle on the upturn.

Meanwhile, the longer-term trend since the early 1990s was clearly on the upswing until the 2008-2009 recession. Yet, again in contrast to conventional wisdom, net lending has returned to a new high in recent quarters.

Who's Borrowing?

Since the Great Recession, the biggest boom in credit market debt has been the government sector, not the household or the nonfinancial corporate sector (middle graph). Nonfinancial corporate debt has risen in the current expansion but remains much closer to historical levels than its government counterpart.

Meanwhile, the household sector exhibits a cyclical pattern that typically peaks as a recession begins but there is a modest longer-term upward trend that does not exhibit the amplitude of the nonfinancial and government sectors.

Government debt is the true outlier for two reasons. First, the current share of GDP is at all-time highs for government debt. Second, the break out since the Great Recession has been out of character since the 1960s.

Corporate CFOs as Rational Actors

Consistent with expectations, the steady decline in AA corporate bond yields has been accompanied by a steady decline in short-term debt as a share of total debt (bottom graph). Long-term financing has steadily increased since the mid-1980s as would be consistent with the same interest rate downtrend.

Credit Market Insights

Household Wealth Hits New Record

The Federal Reserve's Financial Accounts of the United States for Q4 2016 show that household wealth in the United States increased $2.04 trillion to a hit a fresh record high of $92.8 trillion at the end of 2016. The strong stock market performance after the election certainly played a role, as did house price growth. Households' financial assets, which reflect investment wealth, rose 2.1 percent in Q4, while nonfinancial assets, which include real estate values, rose 1.9 percent.

Households accumulated debt at a slightly slower pace in Q4, rising at a 3.8 percent annual rate, down from 3.9 percent in Q3. Consumer credit debt growth was behind the slowdown, as home mortgage debt rose at a slightly faster pace.

Consumer credit followed a similar path in the first month of 2017, according to the Federal Reserve's monthly consumer credit report. January marked the smallest one month increase in consumer debt since 2012, reflecting households paying down credit card balances, as auto and student loans rose on the month.

Taken together, households' balance sheets are in good shape on the aggregate. The average consumer is less burdened by credit card debt, while rising stock market and home values add to wealth. This bodes well for future personal consumption as households are increasingly comfortable with their financial situation, triggering the wealth effect and encouraging spending.

Topic of the Week

Debt Ceiling Hike a Ways Off

The nation's borrowing limit has been suspended since November 2015 and on March 15, will reset to the total amount borrowed at that point in time, or roughly $20 trillion. Thursday of this week the Treasury began taking extraordinary measures to stay under the borrowing limit. These extraordinary measures, combined with the influx of revenues from tax collections in April, will keep the Treasury under the debt limit and with enough cash on hand to continue funding the government's existing obligations.

The Congressional Budget Office (CBO) estimates a federal budget deficit for the current federal fiscal year of $559 billion. The CBO's estimate of the budget deficit, however, relies on current law remaining unchanged. The current federal funding bill runs out on April 28, by which time Congress will need to enact another continuing resolution to keep the government operating. In our assessment, this new funding bill will be the product of bipartisan negotiations and thus will likely result in a higher budget deficit for the current fiscal year, $650 billion, in our view. Should our base case unfold, it is likely that Congress will need to lift the borrowing limit later this summer or at least before the end of the fiscal year in September. The exact timing will depend on the spending level agreed to next month as well as revenue collections in the coming months. We expect Congress will agree to a clean debt ceiling increase in April 2017 when it passes the next funding bill in order to avoid a contentious debate after the August recess.

During the last instance of the re-establishment of the debt ceiling from March to November 2015, there was little effect on net Treasury issuance while the Department of the Treasury enacted extraordinary measures to stay under the borrowing limit. We expect similar dynamics to play out this time. For further reading see our special report Capitol Hill Update: Debt Ceiling Hike a Ways Off available on our website.

HIGHLIGHTS OF THE WEEK

United States

• The Fed carried out its well-telegraphed rate hike this week. Despite the Fed's hawkish messaging in advance of the decision, its expectations for rate increases were unchanged, leading bond yields to dip.
• The Fed edged up its economic forecast for 2018, as did TD Economics in our latest forecast, released this week.
• Overseas, one populist threat to the Eurozone was vanquished this week as the populist right-wing party lost the Dutch election. However, the UK is days away from triggering the two-year Brexit negotiation process with the EU, so the risk of euro-driven market volatility remains.

Canada

• Economic growth in Canada continues to surpass expectations. With recent data on manufacturing sales, growth in the first quarter appears likely to surpass our recent forecast of 2.6% (annualized). This would mark the third straight quarter that growth came in above 2.5%.
• The Canadian housing market is the gift that keeps on giving. The further prices and sales appear to move from fundamentals, the bigger the risk of a correction. The downside risk is greatest in the Greater Toronto Area where prices are up 24% year-on-year.
• To deal with housing, the Bank of Canada prefers macro-prudential tools to the blunt instrument of interest rate policy. With scant inflation, the central bank is likely to remain on hold through 2018. While further upside surprises to growth could pull rate hikes forward, a sharper turn negative in housing could just as easily push rate hikes even further into the future.

UNITED STATES - THE FED TAKES ANOTHER STEP ON THE RATE HIKE TIGHTROPE

Markets were cautiously optimistic this week as the Fed carried out its well-telegraphed rate hike, and one populist threat to the euro zone was vanquished in the Dutch election. The Fed hiked the funds rate 25 basis points, to a range between 0.75% and 1.0%. Bonds rallied in the wake of the decision, since the hawkish rhetoric leading up to the decision was not born out in a more aggressive pace of rate hikes in the Fed's "dot" plot. The Fed continues to expect to raise rates three times in total in 2017, unchanged from its December forecast. Even with a dip downwards in yields this week, the 5-Year Treasury yield remains close to a sixyear high(see Chart).

During the press conference, Yellen characterized the economy as "progressing nicely", and that the Fed views three hikes per year as a "gradual" pace in the current environment. While the median interest rate projection remained unchanged, the number of dots at the median rose (from six to nine). The Fed's economic projections told a similar story, edging up by 0.1 percentage point its outlook for core inflation in 2017 and its outlook for economic growth in 2018. In other words, FOMC members are a bit more confident, but no more hawkish, than they were in December.

The Fed was not alone in nudging up its forecast. In our latest economic forecast released this week, we also bumped up our forecast for growth in 2018. The upgrade is largely owing to a more optimistic forecast for domestic demand, and business investment in particular. Measures of business sentiment have largely held on to their post-election jumps, and we expect that optimism will translate into increased spending over the next two years. Particularly now that the weakness in corporate profits appears to have turned around, and the worst is over in the oil patch.

As always, there are upside and downside risks to the outlook. The most notable upside risk stems from fiscal policy. We continue to believe it is too early to include any potential boost from the kinds of tax cuts or infrastructure spending that was promised during the campaign. As evidenced by the current debate on healthcare reform, it is going to take time for Republican members of Congress and the White House to reach an acceptable compromise on these key policy priorities. Therefore, we expect any fiscal boost to be a factor in the 2018 outlook and beyond, not this year.

Like the Fed, we also expect a gradual pace of rate hikes this year. Downside risks to the forecast have not entirely vanished. Concerns stemming from political uncertainty in Europe did clear one hurdle this week with the Dutch election result. But, France's Presidential elections loom (on April 23rd and May 7), and the UK is on the cusp of triggering two years of Brexit negotiations with the EU. The potential for euro-driven market volatility to disturb markets' current placid optimism is real. And on this side of the pond, the risk that the Trump administration moves from rhetoric to real protectionist measures on trade also looms.

Taking a step back to the here and now, the U.S. economy is doing well. The Fed must now walk a tightrope balancing the need to remove monetary stimulus against the risk of taking rates too high, which would dampen domestic growth too much or trigger risks abroad.

CANADA - LET THE GOOD TIMES ROLL

Economic growth in Canada continues to surpass expectations. With recent data on manufacturing sales, growth in the first quarter of this year appears likely to surpass our recent forecast of 2.6% (annualized). This would mark the third quarter that growth came in above the mid-2% mark.

The strong economic performance has been echoed in robust job creation, falling unemployment and rebounding labor force participation. In February, the unemployment rate fell to 6.6% (from 6.8%), while the employmentto- population ratio of prime working-age people (those between 25 and 54) rose to its highest level since the 2008 recession (Chart 1). Even the seeming turn toward part-time employment that characterized 2016, appears to be reversing. Full-time job creation over the past three months is running at the fastest rate in over seven years.

The rebound in growth is explained in large part by the recovery in the oil patch, where the turn-up in energy prices has helped. Our recently published forecast expects the oil and gas sector to lead economic growth over the next year. Following close behind is the construction sector, benefiting from the energy rebound as well as residential real estate activity that continues to push full-steam ahead.

And here in lies the rub. The housing market has been the gift that keeps on giving, but there are legitimate worries about how long this can be sustained. The further prices and sales appear to move away from fundamentals, the more pronounced the risk of a correction (Chart 2). The downside risk is greatest in the Greater Toronto Area where prices are up 24% year-on-year, amidst low inventories. One need not go out on a limb to say this appears excessive. Even with strong population growth, sales relative to population have pushed above historic levels.

The vulnerability to housing correction is the main source of downside risk to the Canadian economy. Periods of such rapid appreciation are generally followed by corrections. However, in the near-term, without a major catalyst, the housing market appears likely to keep on chugging. Higher mortgage rates and tighter regulations have so far appeared to have little effect on the market, and further increases may also be taken in stride given their likely gradual pace.

All of this brings into question how the Bank of Canada should respond. In terms of housing, the Bank has been consistent that it prefers macro-prudential tools to the blunt instrument of the overnight rate. Instead the Bank's policy will be guided with reference to the outlook for inflation. And, apart from rebounding energy prices, inflation pressures appear scant. The average of the Bank of Canada's trio of core inflation measures is sitting at 1.6% - well shy of target.

At the same time, the Bank has expressed increasing concern for external risks. Given this sensitivity and its desire to support a rotation toward exports, which relies on a competitive exchange rate, we expect the Bank of Canada to remain on hold through the this year and well into 2018. While further upside surprises to economic growth could pull this forward, a sharper correction in the housing market could just as easily push rate hikes even further into the future.

Fed speakers could stop USD slide

The USD is weaker against major currencies across the board after the Fed hiked rates for the third time since the financial crisis but lacked upgrades to the economic projections. A proactive but patient Fed, with other central banks standing pat, meant the forward looking FX market came away with a less hawkish view on future US interest rates and sold the USD despite a 25 basis points hike to the benchmark rate. Fed member speeches during the week will give the central bank the chance to add more clarity into the FOMC statement and Chair Yellen's press conference.

The Office for National Statistics in the UK will release the monthly inflation data on Tuesday, March 21 at 5:30 am EDT (9:30 GMT). After the Bank of England (BoE) held interest rates at 0.25 percent the minutes from the policy meeting showed members discussed raising rates if inflation accelerated. The lone dissenter in the BoE Kristen Forbes voted for a rate hike as she felt inflation was rising quickly and would remain above the BoE's target for at least 3 years. A higher inflation indicator on Tuesday would appreciate the pound as higher UK rates could happen sooner rather than later. UK retail sales data will be released on Thursday, March 23 at 5:30 am EDT (9:30 GMT) with a forecasted gain of 0.4 percent that could restore confidence after a drop last month.

The Reserve Bank of New Zealand (RBNZ) will publish its rate decision on Wednesday, March 22 at 4pm EDT (8pm GMT). Analysts expect the rate to remain unchanged at 1.75 percent after a disappointing fourth quarter GDP has reduced the probabilities of a rate hike in the short term.

The EUR/USD gained 1.201 percent in weekly trading. The single pair is trading at 1.0750 after the Fed hiked interest rates by 25 basis points for the first time in 2017. The market had already priced in the central bank move after heavy handed signalling from Fed members. Investors had become used to ignoring Fed comments and forecasts as for the past two years there was the promise of multiple rate hikes and in reality only 1 hike per year was delivered. The Fed had to change its communication strategy to avoid catching the market off guard as the CME FedWatch tool showed very low probabilities of a rate hike March as late as mid February.

The hype created by Fed officials was made into reality on March 15, but without further guidance and with a statement laced with less hawkish undertones investors sold the US dollar. The greenback is down against all majors ahead of a quiet week for US economic indicator releases. Fed Chair Janet Yellen will speak at a research conference in Washington on Thursday, March 23 at 8:45 am EDT (12:45 pm GMT) giving her another turn to comment on the central bank forecasts for US growth. Fed members Charles Evans, William Dudley, Neel Kashkari and Robert Kaplan are all scheduled to speak this week and could use the opportunity to clarify their stance on the central bank's rate path that triggered a drop in the USD after the March monetary policy meeting.

The USD/MXN lost 2.791 percent in the last five days. The currency pair is trading at 19.0852 after a new round of peso positive comments came from the Trump administration. Top trade advisor Peter Navarro said that a new trade agreement replacing NAFTA should make the Canada, Mexico and the United States collective a global manufacturing powerhouse. This follows comments from Secretary of State Rex W. Tillerson and John F. Kelly Secretary of Homeland Security during their joint visit to Mexico at the end of February. While being careful not to openly contradict the statements from President Trump, there has been a clear softening in the language used with regard to Mexico-US trade and immigration.

The MXN has appreciated versus the USD since the inauguration of President Donald Trump on January 20. The worst case scenarios for the peso have not materialized despite the rhetoric putting pressure on the Latin American currency during the lengthy election process and the eventual victory of Trump. The current US administration has focused on trade and immigration, but has not delivered details on what was seen as the biggest factor of the USD rally: pro-growth policies such as tax stimulus and infrastructure spending. The peso is trading near pre-election levels but risks remain as the US Federal Reserve appears willing to hike interest rates higher multiple times in 2017 and Secretary of Treasury Steven Mnuchin has reassured markets those pro-growth polices are coming.

XAU/USD gained 2.29 percent in the last week. The price of gold is trading at $1,229.42 as the USD retreated and political risk with a potential trigger of Article 50 in the coming week making the metal an attractive safe haven. The fact that the elections in the Netherlands did not signal an advance for eurosceptics did little to stem the anxiety regarding upcoming Brexit and the looming French elections where Marine LePen has a higher chance than the Dutch far-right candidate Geert Wilders did.

A rise in gold prices in the same week that the Fed announces a rate hike is not that common but the way the central bank communicated the impending March rate hike had investors changing expectations. The Fed might have oversold their hand as it only delivered a rate hike of 25 basis points, but kept forecasts unchanged which was taken as less hawkish than anticipated taking into account the Fedspeak that saw the market switch from 20 percent probability of a rate hike to 93 percent in three weeks.

Market events to watch this week:

Monday, March 20

• 8:30pm AUD Monetary Policy Meeting Minutes

Tuesday, March 21

• 5:30am GBP CPI y/y
• 8:30am CAD Core Retail Sales m/m

Wednesday, March 22

• 10:30am USD Crude Oil Inventories
• 4:00pm NZD Official Cash Rate
• 4:00pm NZD RBNZ Rate Statement

Thursday, March 23

• 5:30am GBP Retail Sales m/m
• 8:00am USD Fed Chair Yellen Speaks
• 8:30am USD Unemployment Claims

Friday, March 24

• 8:30am CAD CPI m/m
• 8:30am USD Core Durable Goods Orders m/m

*All times EST

USD/CHF - 0.9968

Most recent candlesticks pattern : N/A

Trend                                    : Near term down

Tenkan-Sen level                  : 0.9967

Kijun-Sen level                    : 0.9979

Ichimoku cloud top                 : 1.0046

Ichimoku cloud bottom              : 1.0019

Original strategy :

Sell at 1.0020, Target: 0.9920, Stop: 1.0055

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 1.0020, Target: 0.9920, Stop: 1.0055

Position : -

Target :  -

Stop : -

As the greenback has remained under pressure, suggesting recent decline from 1.0171 is still in progress and may extend further weakness to 0.9920-25, however, loss of near term downward momentum should prevent sharp fall below 0.9900 and reckon 0.9870-75 would hold from here, risk from there has increased for a strong rebound later.

In view of this, would not chase this fall here and would be prudent to sell dollar on recovery as the lower Kumo (now at 1.0019) should limit upside and bring another decline. Only above previous support at 1.0060 (now resistance) would abort and signal low is formed instead, risk rebound to 1.0090-95 first.

GBP/USD - 1.0755

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.2349

Kijun-Sen level                    : 1.2309

Ichimoku cloud top              : 1.2258

Ichimoku cloud bottom        : 1.2210

Original strategy :

Buy at 1.2290, Target: 1.2400, Stop: 1.2255

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.2290, Target: 1.2400, Stop: 1.2255

Position : -

Target :  -

Stop : -

As cable has eased after rising to 1.2399, suggesting consolidation below this level would be seen and pullback to 1.2320-25 cannot be ruled out, however, reckon downside would be limited o 1.2290-00 and bring another rise later, above said resistance at 1.2399 would extend recent rise from 1.2109 low to 1.2410-15 but reckon 1.2440-50 would hold, price should falter well below resistance at 1.2471, bring retreat later.

In view of this, would not chase this move from here and we are looking to buy cable on pullback as 1.2290-00 should limit downside and bring another rise. Below 1.2265-70 would suggest top is possibly formed, risk test of said support at 1.2241 which is likely to hold on first testing.

Fed / ECB Policy Collision

At the start of the year the dominate thinking in FX markets was USD would outperform in the G10. With the Fed the only G10 central banks raising policy rates in 2017, yields differential would favor rotation in the greenback. However, with economic data in Europe rapidly improving, political risk dissipating and ECB members comments sounding hawkish the probability of ECB tightening has increase meaningfully. As stated in our Yearly Market Outlook the likelihood Fed and ECB policy converging in September forcing investors to shift their rate rotation strategy remains resilient.

Last weeks FOMC 25bp hike to 75-100bp indicates a reaction to rising inflation, strong confidence levels and robust optimism in financial markets. Yet lack of real improvement in data including core inflation and failure of real wages to improve forced a "dovish hike" statement (despite arguments to the contrary). The Fed fund rate median "dots "remained unchanged at three hikes in 2017 followed by three more in 2018. Yellens statement "we have plenty of time to see what happens" suggest a comfort level and not panic policy setting many had suggested. The sharp reaction in asset with US 10 year yields dropping 10bp, S&P jumping 1%, USD falling and rush into all things EM indicates scant worries of a steeper tightening cycle.

Barring any political upheaval (which is clearly a big "If") , by September, conditions should be correct for the ECB to begin indicating the removal of emergency support framework. At the ECB press conference Draghi indicated that risks of deflation had "largely disappeared" and stated that the ECB "no longer had a sense of urgency" is taking further action, clearly hawkish tone.

While in an interview with Handelsblatt ECB council member Nowotny suggested that process of policy normalization could see increase in the deposit rate ahead of ending bond purchases and prime rate. This is counter to the general expectations for ending QE before raising interest rate. It also opens the prospect of advance tightening. With a shallow Fed policy path and the ECB shifting toward less accommodation it's hard to forecast sustained EURUSD weakness below 1.05. In addition, convergent tighter monetary policy around September should have impact of unbridled equity optimism.

Brexit: When Will Article 50 Be Triggered?

What a contradiction! The expected economic nightmare triggered by the Brexit vote has not materialised. Indeed, unemployment rate has reached its lowest level in 42 years at just 4.7%. It seems that at least for now, the UK economy is not the worse off from its decision to exit of the European Union. Nonetheless, it is worth noting that pressure on wages are almost non-existent. One explanation, the lack of job security (for example with the zero-hour contract) is showing the structural change of the labour market not only in the UK but globally in the western world. This definitely pushes unemployment rate to go lower.

Earlier last week, the Bank of England decided to keep its interest rates unchanged at 0.25%. It is clear that Brexit fears are helping the central bank as the pound remains weak. On top of that, we see European uncertainties growing in the medium term, in particular given the impact the French Elections outcome may have.

When looking more specifically at data, inflation is on the rise and we should see the BoE hinting to further tightening in the medium-term. The triggering of the article 50 looms and negotiations are likely to last longer than expected as trade agreements are paramount for the future UK competitiveness.

As Brexit proceedings drag on and fears of a hard Brexit continue to loom large, the pound continues to paint a very vivid picture of market worries. At present, UK Parliament remains split on PM May's EU exit plans. The outcome however will be of little relevance as May will likely plough on and trigger Article 50 as planned. The question on everyone's lips right now of course is whether the PM will cut the cord with no actual deal in place.

The pound has been feeling the heat from both the single currency and the greenback over the past couple of weeks on the back of renewed hard Brexit fears. We believe that there is a strong opportunity to reload bullish pound positions. The dragging out of these proceedings will be more damaging than the actual exit itself. Brexit will clearly not be the promised apocalyptic nightmare and will allow the UK breathing space to regain its competitive stance, free from constraint from Brussels.

Negative Real Wage Growth Threatens US Recovery

The US dollar had a tough week amid lacklustre economic data and a rather dovish Federal Reserve. The US economy created 235k private jobs in February, widely beating the median forecast of 200k, while the previous month's reading was upwardly revised to 238k. All employment measures improved in February as the unemployment rate eased to 4.7% as participation climbed to 63%. The U-6 measure, commonly known as the underemployment rate, fell to 9.2% from 9.4% a month previous. So, after such a bullish report how come the Fed sound that dovish?

Well, there are a few explanations for this. Firstly, wage growth clearly failed to impress despite the solid pace of job creation. Average hourly earnings grew 0.2%m/m versus 0.3% expected. In addition, inflation pressures have intensified over the last few months as crude oil prices recovered - the consumer price index rose 2.7%y/y in February. Taken together, these developments pushed real wage growth in negative territory during the first two months of the year - average weekly earnings contracted -0.5%y/y and -0.3%y/y in January and February respectively - which will ultimately translates into weaker purchasing power for the common American in the longer run. This is the first time since December 2013 that the gauge has dipped below the neutral threshold. In fact, since the fourth quarter of 2015 real wage growth has started to decelerate. This negative trend could explain why the Fed was not in such a hurry to raise rates last year.

Over the coming months the Fed will find itself on the hot seat as core inflation pressure remains subdued and US consumer are suffering from weaker purchasing power. As a quick reminder consumer spending accounts for roughly 70% of the US GDP. Moreover, less disposable money for consumers means less price pressure, which translates into falling consumer prices, which ultimately means that the Fed will have to increase rates slowly if not taking a break during the process altogether.

It is not without reason that Janet Yellen stressed, during the press conference, that the Fed remains data-dependent and not interested in aggressive tightening. So far the Fed appears relatively confident, meaning that it is betting heavily on Trump's economic programme.

All in all, in the short-term the market will stay focused on the political risk in Europe, which would help the dollar to hold ground against the single currency. The dollar's medium-term outlook is heavily dependent on the results of the EU political elections; however, should the political chessboard stay unchanged in Europe, the USD will start to reverse gains.

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Next week's market movers

• In New Zealand, the RBNZ is likely to remain on hold and maintain its dovish bias amid lackluster economic data and elevated uncertainty around global trade.
• In the UK, CPI figures for February could impact market expectations with regards to near-term policy tightening by the BoE.
• We also get key economic data from Eurozone, the US, and Canada.

On Monday, we have a relatively light day, with no major events or indicators due to be released.

On Tuesday, the UK will release its CPI data for February. The forecast is for both the headline and the core rates to have risen, something supported by the UK services PMI for the month, which showed that rapidly rising input costs led to the largest increase in prices charged by service providers for eight-and-a-half years. At the latest BoE gathering, some members noted that they would consider reducing stimulus should there be any further upside news on the prospects for growth or inflation, while Kristyn Forbes actually voted for an immediate hike. This suggests that in case the CPIs accelerate further as expected, then the next big market theme could well be whether the BoE will reduce its asset purchases, or even hike rates at some point in the foreseeable future. At the very least, accelerating inflation is likely to lead to more hawkish dissents in coming months, assuming that economic growth remains robust. Having said all these though, we are skeptical as to whether we will actually see a BoE rate hike in the near-term, mainly because the Bank is unlikely to rush into monetary tightening before the Brexit negotiating landscape becomes clearer.

On Wednesday, late during the day, the RBNZ rate decision will be in the spotlight. At its latest gathering, the Bank retained its easing bias despite improving domestic economic data. Policymakers indicated that numerous uncertainties persist, particularly in the global outlook, and policy may need to adjust accordingly. As was later explained by Governor Wheeler, this was a reference to the risks surrounding exports and the prospect of increased global protectionism. What's more, the officials reiterated that a decline in the Kiwi's exchange rate is needed, something that became reality following their dovish policy signals. Since that meeting, economic data have been lackluster. Although the nation's terms of trade improved in Q4, GDP growth slowed notably in the quarter, much more than the RBNZ's own forecasts. To make matters worse, economic growth for Q3 was revised lower. Bearing also in mind that the aforementioned global risks remain elevated, we see no material reason for the Bank to shift to a more upbeat tone, especially since something like that could trigger a surge in NZD. Despite the fact that we expect the Bank to maintain a dovish bias though, we do not expect the officials to actually take action in the foreseeable future, barring some unforeseen shock. This view is amplified by the fact that the nation's 2-year inflation expectations have rebounded notably in recent quarters, alleviating some pressure from the Bank to take further steps in order to boost inflation.

On Thursday, the only major indicator we get is UK retail sales for February, but no forecast is presently available. Consumer sentiment indicators were mixed during the month. The TR/IPSOS figure declined, and while the Gfk index ticked up, it remained negative. The combination of these prints does not paint a clear picture about consumer optimism in the month. The fact that the BRC retail sales rate rose somewhat, but also remained negative, does not make the situation any clearer. Our own view is that both the headline and core rates are likely to have remained unchanged within the negative territory, with risks skewed to the upside. We base that on the hypothesis that if consumer demand was to continue deteriorating, it would be more clearly visible on the aforementioned sentiment indicators, we think.

On Friday, we get the preliminary manufacturing and services PMIs for March from several European nations and the Eurozone as a whole. Most of these indices are expected to have ticked down, but to still remain at elevated levels. Considering that all of these surveys are expected to show that Eurozone's economy continues to perform well, we believe that they are likely to be another set of pleasant news for ECB policymakers, who at their latest meeting shifted to a more optimistic tone. Although President Draghi reiterated that there is no convincing upward trend in the core CPI yet and as such the Bank will keep its stimulus program unchanged, he made it clear that there is diminished willingness among the Governing Council for any more extraordinary easing measures. If incoming data continue to show that economic growth and inflationary pressures are gradually picking up, then we would expect the ECB to drop more dovish aspects of its forward guidance in coming meetings. We think that the Bank's next step is to remove the word "lower" from the reference regarding rates remaining at current, or lower levels in the foreseeable future.

From the US, we get durable goods orders for February. Expectations are for the headline rate to have risen for the second consecutive month, while no forecast is available for the core figure. Our own view is that the core figure likely rose as well, after a minor slide in January. We base our expectations on the nation's ISM manufacturing PMI for the month, where the New Orders sub-index rose notably, indicating a rising pace of increase in new orders. What's more, US civilian aircraft orders were decent during the month, which further supports the forecast for another increase in the headline rate.

From Canada, we get CPI figures for February. In the absence of a forecast, we see the case for the core rate to have ticked up, but we are mindful on whether the headline rate followed suit. Our view for the core rate is based on Canada's Markit manufacturing PMI survey for February, which indicated that as a result of increased cost pressures, there was a solid increase in the prices of finished products. However, February's yearly change in oil prices suggests that the headline rate could stay unchanged, or even tick down, as energy-related effects start to filter out of the yearly CPI calculation. Although a potential acceleration in core inflation is likely to be an encouraging development for BoC policymakers, we do not expect this to lead to a material shift in their dovish tone. At its latest meeting, they did not appear particularly worried about inflation, but they did maintain a cautious tone with regards to exports, which continue to face competitiveness challenges as they noted. This was a hint that the strength of the Canadian dollar is muting the outlook for exports and as such, we expect BoC officials to maintain a relatively dovish tone in the foreseeable future, despite any modest progress in economic data.