Sample Category Title

Fed repricing continues to dominate markets with US Treasury yields nudging higher.But FX volatility has gone into hiding while FX traders remain somewhat dormant within extremely narrow trading ranges. Higher US Treasury yields suggest a firmer dollar but verbal intervention by Commerce Secretary Ross on Tuesday, saying that it's 'not that the US is too strong' but that 'other currencies are weak' likely kept the dollar bulls temporarily at bay. But the overall storyline is little more than another day of consolidating for global FX markets,

US equities backpedalled as investors tapped the breaks as all asset classes are looking to non-farm payrolls on Friday to seal the deal for a March rate hike. IN the meantime it might be best to cosy up with a good book

Australian Dollar

The RBA statement was primarily unchanged, but there has been lots of banter on the removal of ‘having eased monetary policy in 2016' in the forward guidance which should offer the markets some repose to rule out any easing and perhaps start to pricing in rate hike expectations.After surging to a high of .7630 post-RBA, the Aussie has retreated on a combination of Higher US Treasury yields and lower commodity prices. Predictably the commodity sag is spilling over into local equity and EM markets While the street continues to run long AUD, there was likely some opportunistic profit taking spilling into the space ahead of Friday US Jobs data , which weighed negatively on local sentiment. But overall there appear to be little fuss or concern in Forex Land with volatility getting squeezed and participation rates running thin

New Zealand Dollar

The significant drop in dairy product prices at the overnight GDT auction has weighed on the New Zealand dollar.While the prospects of higher US interest rates has significantly weighted down the Kiwi, the slide in dairy prices did little more than to encourage dealers to double down on the short NZD bets. The technical picture looks dire with the NZDUSD retreating to mid-January levels.

Japanese Yen

Dollar-Yen made little progress overnight despite UST 10 year yields topping 2.50 % perceived to be the line in the sand for US dollar traders. But with the overhang Secretary Ross verbal shots that 'other currencies are weak', very dull trading ranges and a severe lack of participation, one can only conclude that the market remains in wait and see mode ahead of Fridays Non-Farm Payrolls

China

Prospects of the US March rate hike continue to weigh on Yuan sentiment as USDCNH movements continue to track the broader USD sentiment.

Monthly FX reserves for China came in better than expected above the supposed psychological 3 Bln barrier.The first rise in 8 months and will be viewed as a short-term reprieve from the economic fidgets that have been caused by capital outflows. However, with US interest rates set to rise, we should expect the Yuan to weaken, and perhaps the capital outflow feedback loop comes back in play

'Citi announced the inclusion eligibility of Chinese onshore bonds to its emerging markets and regional government bond indices. If China continues to meet eligibility criteria for the next three consecutive months, Index inclusion will likely begin in February 2018 in a staggered manner over a three-month period.'( cut velocity)

China has a burgeoning government bond market, and its inclusion into CITI global bond indices could be a source of much welcome capital inflow to counter the economic sting of the recent waves of capital outflow.

I think this is a very positive which will be embraced by foreign investment funds even more so after news last week that the onshore FX derivative markets in China are now open to foreign institutional investors.

WTI

WTI straddled $53 a barrel again as oil traders jockey for positions while the usual theme plays out. Will Opec supply cuts or increased US supply win out in the long run?

Gold has posted losses in the Tuesday session. In North American trade, the spot price for one ounce is $1217.35. Gold dropped to a low of $1215.97 earlier in the day, its lowest level since February 3. On the release front, the US trade deficit jumped to $48.5 billion, higher than the estimate of $47.0 billion. On Wednesday, the US releases ADP Nonfarm Employment Change, ahead of the official Nonfarm Payrolls report on Friday.

Donald Trump has been in office for over a month but still continues to create controversy on an almost basis, much to the consternation of the markets. Still, the US dollar remains strong, buoyed by a strong economy and the increasing likelihood of a rate hike at the upcoming Fed policy meeting on March 15. The likelihood of a March hike as jumped to 84%, according to the CME group, compared to 33% just a week ago. Why the huge jump in odds? One reason is that Fed policymakers have sent out strong hints that the Fed is leaning towards raising rates next week. Earlier in the year, the Fed sent out signals Fed sent out signals that it would stay on the sidelines until it had a clearer picture of Trump's economic agenda, such as an outline of tax reform or fiscal spending plans. That has changed, as the Fed appears poised to move ahead despite the lack of any details about the administration's economic policy. This week's job numbers will be critically important, as strong numbers will likely boost the odds of a March move as well as push the greenback to higher levels.

West Texas crude has inched upwards in the Tuesday session. In North American trade, WTI crude futures are trading at $53.37. Brent crude futures are trading at $56.08, as the Brent premium trades at $2.71. On the release front, the US trade deficit jumped to $48.5 billion, higher than the estimate of $47.0 billion. On Wednesday, the US releases ADP Nonfarm Employment Change, ahead of the official Nonfarm Payrolls report on Friday. As well, the US releases the weekly Crude Oil Inventories report.

Donald Trump has been in office for over a month but still continues to create controversy on an almost basis, much to the consternation of the markets. Still, the US dollar remains strong, buoyed by a strong economy and the increasing likelihood of a rate hike at the upcoming Fed policy meeting on March 15. The likelihood of a March hike as jumped to 84%, according to the CME group, compared to 33% just a week ago. Why the huge jump in odds? One reason is that Fed policymakers have sent out strong hints that the Fed is leaning towards raising rates next week. Earlier in the year, the Fed sent out signals Fed sent out signals that it would stay on the sidelines until it had a clearer picture of Trump's economic agenda, such as an outline of tax reform or fiscal spending plans. That has changed, as the Fed appears poised to move ahead despite the lack of any details about the administration's economic policy. This week's job numbers will be critically important, as strong numbers will likely boost the odds of a March move as well as push the greenback to higher levels.

HIGHLIGHTS OF THE WEEK

Highlights

• Through a series of speeches over the last two weeks, the Federal Reserve has pulled up market expectations for rate hikes. We now expect three hikes of 25 basis points over the coming year.
• The Fed believes it has made significant progress on its dual mandate of full employment and price stability. Additionally, the improvement in international growth prospects has assuaged fears of market turbulence.
• We expect strong GDP growth and stable inflation, but we would prefer the Fed heed caution as it removes accommodation. There remains a significant amount of labor market slack and a further appreciation of the U.S. dollar could hold back inflation. Finally, this is the time of the cycle that policy errors occur. Raising rates too fast risks economic disruption.

Over the last couple of weeks the tone of the Federal Reserve has turned decidedly hawkish towards rate hikes. Various members have strategically signaled that a rate hike at its March meeting is a highly probable outcome, as are additional hikes in 2017. Markets have taken this warning by pricing in 2-3 rate hikes this year. The barrage of Fed speeches with consistent hawkish tones is no accident; it should be viewed as a deliberate attempt to pull forward market expectations. In the absence of an unforeseen shock, to not deliver a rate hike on March 15th would now threaten the Fed's credibility in the eyes of market participants.

From the eyes of the Fed

At the risk of sounding like a broken record, we remain entrenched in the view that the U.S. economy has been on solid footing for some time. Stable economic growth has materialized with consistent employment gains, equating to 16 million private sector jobs added since 2010. The unemployment rate is now hovering at estimates consistent with its natural rate. From the purview of the Fed, the objective of full employment is being met. As further proof, tighter labor markets are resulting in wage increases meaningfully outstripping inflation. Firm evidence of this first became apparent back in early 2016. As we have noted previously, our internal models estimate that the pass-through of wages into the Fed's preferred measure of inflation (core PCE) is 12-18 months. Simply put, inflation appears likely to reach its 2% target by the end of this year. And with that, the Fed will have reached its second mandate of price stability.

There has even been improvement on the Fed's pseudo 'third mandate' of financial stability. Last year, Janet Yellen and company were delayed by a series of event risks that, at the time, were real threats to financial markets. These included fears of a China hard landing, Brexit, and political uncertainty by way of the U.S. election. All of these events caused equity markets to swoon before quickly reversing. Amidst the various speeches in the past two weeks, the Fed appears to also be signaling confidence on global stability. As Fed Governor Brainard noted, "the near-term risks to the United States from abroad appear to have diminished". In fact, synchronized waves of improvement in global production indices have boosted sentiment on corporate profits and economic growth profiles. The improvement has been so substantial that inflation expectations are finally evolving favorably for America's trade partners. For the time being, financial stability and the Fed's pseudo third mandate are in check.

With all the boxes checked, the Fed has displayed a brave heart towards pulling forward market expectations. Outside of any major setback, we believe the Fed is poised to raise rates three more times in 2017, with the first occurring at their meeting next week.

What the Fed could be missing

The above describes what we believe the Fed will do. Now, let's tackle what we think they should do. There are still many factors, not just internationally, that cast a wide band of uncertainty on the U.S. economy. Take the unemployment rate. While the basic measure has returned to its steady state, there is still plenty of controversy around the degree of slack that may still persist, and the Fed should heed caution in tightening too aggressively. In particular, job growth in America has not been paralleled by a strong recovery in the participation of the core working age population (25-54 years). We estimate that approximately 2 million more people can be enticed and absorbed into the job market, which would restrain inflationary pressures through this supply side response. With payroll data showing consistent above trend growth in jobs per month, this corroborates the presence of the remaining labor market slack. The unemployment rate has held relatively constant due to a steady stream of people joining the workforce.

In addition, the persistent disappointment in inflation should not be ignored. The strength of the greenback has contributed to this by way of lower import prices. This can be seen in the wedge between the prices of services and goods – the latter are impacted to a larger degree by currency movements due to greater trade exposure (Chart 2). How much higher the U.S. dollar can appreciate is uncertain, but the risks appear tilted to the upside. We know that a faster pace of rate hikes at a time when other major central banks are still providing a high amount of monetary accommodation should be supportive for the dollar and a headwind for inflation. A swift pace of rate hikes would be more palatable if other central banks were closer to catching up to the Fed. Unfortunately, at the moment, they are falling further behind.

Expansions don't suddenly die, they suffocate.

The other reason for caution is that this is the time of the economic cycle where policy errors can occur. Recessions are accidents, in part caused when the monetary policy rate rises to a level that chokes off growth (Chart 3). The best way to assess how much the Fed can raise rates before it starts to disrupt the economy is to take the inflation-adjusted policy rate and compare it to the assumption of the natural real rate of interest (R*). The real monetary policy rate is about -1% at the moment and most estimates of R* range from 0 to 1%. In this regard, the current monetary accommodation being provided by the Fed is less than meets the eye. At the pace of rate hikes inferred from the Fed itself, monetary accommodation could be all but eliminated by 2018. What further complicates the outlook is that R* is not directly observable. As such, the Fed would know it has overshot the mark only after observing a negative impact on the economy.

So why the deluge of Fed speeches expressing confidence in a faster rate hiking cycle? At the heart of it is a fear of falling behind the curve on inflation. However, we would be remiss to ignore the fact that the Fed has consistently missed to the downside on inflation for the last five years, and an inflation target should be understood as having symmetry. As members of the Fed have noted before, a lot more is known about controlling high inflation than deflation.

Due to the low run-rate of global and American economic growth, the amount of monetary accommodation is lower than most realize. Too quick an adjustment in rates over the coming quarters has the potential to undermine already low economic growth prospects. This rationale for caution is in addition to the multitude of foreign risks ranging from European bank balance sheets, to political policy uncertainty, to valuations of risk assets globally. So gradual should remain the name of the game, particularly when you're the only central bank swimming upstream amongst the major advanced economies. The Fed should adopt nerves of steel when inflation starts bumping against its 2% target and resist the urge of being too uncompromising.

GBP/USD is lower on Tuesday, continuing the downward trend which marked the Monday session. Currently GBP/USD is trading at 1.2170. On the release front, British numbers have started the week on a sour note. British BRC Retail Sales Monitor declined 0.4%, marking a second straight decline. The Halifax HPI report rebounded with a gain of 0.1%, but this missed the estimate of 0.4%. In the US, the trade deficit jumped to $48.5 billion, higher than the estimate of $47.0 billion. On Wednesday, the US releases ADP Nonfarm Employment Change, ahead of the official Nonfarm Payrolls report on Friday.

The pound's woes continue, as GBP has slipped below the 1.22 line in the Tuesday session. GBP/USD has dropped 3.0% since February 24, as the pound trades at its lowest levels since January 17. As Britain prepares to invoke Article 50 and commence negotiations over its departure from the European Union, there is palpable uncertainty in the markets about the negative ramifications of Brexit. The Service and Manufacturing PMIs in February were weak, which has weighed on the sagging pound. All eyes are on the annual budget release on Wednesday. This event will be carefully monitored by the markets as it could trigger significant movement from GBP/USD.

Donald Trump has been in office for over a month but still continues to create controversy on an almost basis, much to the consternation of the markets. Still, the US dollar remains strong, buoyed by a strong economy and the increasing likelihood of a rate hike at the upcoming Fed policy meeting on March 15. The likelihood of a March hike as jumped to 84%, according to the CME group, compared to 33% just a week ago. Why the huge jump in odds? One reason is that Fed policymakers have sent out strong hints that the Fed is leaning towards raising rates next week. Earlier in the year, the Fed sent out signals Fed sent out signals that it would stay on the sidelines until it had a clearer picture of Trump's economic agenda, such as an outline of tax reform or fiscal spending plans. That has changed, as the Fed appears poised to move ahead despite the lack of any details about the administration's economic policy. This week's job numbers will be critically important, as strong numbers will likely boost the odds of a March move as well as push the greenback to higher levels.

USD/CHF - 1.0147

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 1.0140

Kijun-Sen level                    : 1.0131

Ichimoku cloud top                 : 1.0110

Ichimoku cloud bottom              : 1.0097

Original strategy :

Buy at 1.0110, Target: 1.0210, Stop: 1.0075

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0110, Target: 1.0210, Stop: 1.0075

Position : -

Target :  -

Stop : -

Dollar’s intra-day breach of previous resistance at 1.0146 confirms recent erratic upmove from 0.9861 has resumed and bullishness remains for this move to extend further gain to 1.0175-80, then towards 1.0200-10, however, near term overbought condition should prevent sharp move beyond previous chart resistance at 1.0248, risk from there is seen for a retreat later.

In view of this, would not chase this rise here and would be prudent to buy dollar on pullback as 1.0100-10 should limit downside. Only break of indicated support at 1.0073 would suggest an intra-day top is formed instead, risk weakness to 1.0040-45 but reckon support at 1.0009 would remain intact. 

GBP/USD - 1.2193

Most recent candlesticks pattern   : N/A

Trend                                 : Near term down

Tenkan-Sen level                 : 1.2204

Kijun-Sen level                    : 1.2222

Ichimoku cloud top              : 1.2267

Ichimoku cloud bottom        : 1.2261

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

As cable has remained under pressure after meeting renewed selling interest at 1.2301, suggesting near term downside risk remains for recent decline from 1.2706 to extend further weakness to 1.2170-75 but reckon 1.2150 would limit downside due to loss of downward momentum and 1.2120-25 should hold, bring another rebound later. 

In view of this, would not chase this fall here and would be prudent to stand aside in the meantime. Above the Kijun-Sen (now at 1.2222) would bring recovery to the Ichimoku cloud (now at 1.2261-67), break there would suggest an intra-day low is formed, bring test of said resistance at 1.2301 which is likely to hold from here . 

EUR/USD - 1.0569

Most recent candlesticks pattern   : N/A

Trend                      : Sideways

Tenkan-Sen level              : 1.0581

Kijun-Sen level                  : 1.0583

Ichimoku cloud top             : 1.0600

Ichimoku cloud bottom      : 1.0568

Original strategy  :

Buy at 1.0535, Target: 1.0635, Stop: 1.0500

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.0535, Target: 1.0635, Stop: 1.0500

Position : -

Target :  -

Stop : -

Although the single currency retreated after rising to 1.0640 yesterday and consolidation with initial downside bias is seen for weakness to 1.0560, reckon downside would be limited to 1.0540-45 and bring another rebound later, above said resistance at 1.0640 would extend the erratic rise from 1.0493 low for retracement of early decline to 1.0660-65 (50% Fibonacci retracement of 1.0829-1.0493) and possibly towards resistance at 1.0680, however, price should falter well below 1.0700-05 (61.8% Fibonacci retracement).

In view of this, we are looking to buy euro on dips. Below 1.0510 would abort and risk retest of 1.0493 but only break there would shift risk back to the downside and signal recent decline from 1.0829 has resumed for further selloff to 1.0470 and then towards previous support at 1.0454.

USD/JPY - 114.10

Most recent candlesticks pattern   : N/A

Trend                      : Near term up

Tenkan-Sen level              : 113.94

Kijun-Sen level                  : 113.92

Ichimoku cloud top             : 114.16

Ichimoku cloud bottom      : 113.95

Original strategy  :

Sell at 114.50, Target: 113.35, Stop: 114.80

Position :  -

Target :  -

Stop : -

New strategy  :

Sell at 114.55, Target: 113.55, Stop: 114.85

Position :  -

Target :  -

Stop : -

As the greenback recovered after finding support at 113.56 yesterday, suggesting consolidation with initial upside bias would be seen and corrective bounce to 114.50-55 cannot be ruled out, however, if our view that a temporary top formed at 114.75 last week is correct, upside should be limited to 114.50-55 and bring another decline later, below said support at 113.56 would bring retracement of recent rise to 113.20-25 (50% Fibonacci retracement of 111.69-114.75), however, downside would be limited to 113.00 and 112.84-86 (previous resistance and 61.8% Fibonacci retracement), bring rebound later.

In view of this, we are looking to sell dollar on recovery for such move as 114.50-55 should limit upside, bring another decline. Only above said resistance at 114.75 would abort and signal the rise from 111.69 has resumed and extend gain to 114.96 (previous resistance) but price should falter well below resistance at 115.38.

• The US January trade deficit, as expected, represented an increase from December's -$44.3B.
• The deterioration resulted from a strong 2.3% rise in imports partially offset by a modest 0.6% rise in exports.

The increase in imports represented the fourth consecutive monthly increase that averaged a robust 1.6% per month. This strength in part reflects the impact of the strong U.S. dollar lowering the price of imports. The nominal increase in January imports was also helped by rising oil prices that sent petroleum imports up a sizeable 18.4%. However, it was not just a price story with the volume of petroleum imports up a solid 9.2%. Excluding the petroleum component, imports we up a solid 1.3% on a nominal basis and 1.4% on a volumes basis.

The increase in exports in January was largely a petroleum story with this component up 13.7% in the month. A lion's share of the increase reflected volumes which jumped 12.7%. Excluding this component, exports dropped 0.6% on a nominal basis and 0.5% on a volumes basis.

The report showed a deteriorating trade deficit with China and Canada but an improving deficit with Mexico, the EU and Japan.

Our Take:

The deterioration in the January deficit occurred largely as a result of imports rising for the fourth consecutive month. For 2017 as a whole imports are expected to increase 3 1/2% that would be up from 1% gain achieved in 2016. This strengthening is consistent with the U.S. dollar appreciating further this year reflecting a Fed continuing to tighten monetary policy in the face of steady policy in most other major economies. Exports are expected to recover this year following two years of underperformance though the strong currency will limit the increase to a moderate 2%. Imports outpacing exports results in net exports continuing to be a small drag on growth in 2017. The expected strengthening in U.S. business investment along with still robust consumer spending will contribute to overall GDP growth strengthening this year to an above-potential rate despite the drag from trade.