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Near term US 10 year note yield outlook:

The market has indeed continued to chop in that 2.31/64% range that has been in place since Dec 15th, still seen as a large correction (potential triangle/pennant, continuation pattern) and with eventual new highs after (see in red on daily chart below). Note that the sloppy/messy trade since Dec adds to the view of a triangle (characteristic), while the resolution higher may be rapid (triangles often resolve sharply). On a near term basis, there remains some risk for a further period of ranging before resolving higher (see in red on daily chart below). Nearby resistance is seen at the bearish trendline from Dec/ceiling of the triangle (currently at 2.50/52%) and that Dec 2.64% high. Support is seen at the 2.29/31% with a break/close a bearish sign and aborting this bullish view. Bottom line: rangy trade from the Dec high at 2.64% seen as a correction (poss triangle), suggests eventual upside resolution (potentially sharp).

Strategy/position:

Reached the buy target from the Feb 22nd email at 2.34% (.02 above the base of the triangle) on Feb 24th and for now, would continue to stop on a close below 2.28%. However will want to get more aggressive on an upside resolution of the triangle to maintain a good risk/reward in the position.

Long term outlook:

Very long term, the market continues to chop near the middle of the 1.32/3.05% range that has been in place since June 2012 and as been discussing, the 3 wave decline from the Jan 2014 high at 3.05% to the July 6th low at 1.32% (A-B-C) argues a large "complex" correction. Note that the increasing likelihood of another upleg above 2.64% (see shorter term above) argues a huge "flat" type correction and ideally with eventual gains back to that 3.05% high (and even temporarily above). For those familiar with Elliott Wave analyses, "flats" break down to a series of 3-3-5 waves and explains and fits that 3 wave decline to new lows at 1.32% on July 2016. As noted above, a break/close clearly below 2.28/31% would abort the view of this triangle and in turn put this longer term bullish view also on hold. Bottom line : more bullish scenario discussed over the last few months (gains to Jan 2014 high at 3.05%) has become more likely as the action from Dec is seen as a large correction (triangle/pennant).

Strategy/position:

Also switched the longer term bias to bullish on Feb 24th at 2.34% and would continue to use the same exit as the shorter term above (down resolution of the triangle since Dec).

Current:

Nearer term : reached target from Jan 22nd email at 2.34% on Feb 24th. .
Last : short Feb 2nd at 2.47%, took small profit Feb 22nd at 2.42%s (.05 profit).

Longer term: bullish bias Feb 24th at 2.34% for a potentially rapid move to 3.05%.
Last : bear bias Nov 23rd at 2.54% to neutral Jan 13th at 2.40%.

USDJPY - The pair took back its intra day losses on Tuesday and followed through higher on a rally during Wednesday trading session. On the downside, support comes in at the 113.00 level where a break if seen will aim at the 112.50 level. A cut through here will turn focus to the 112.00 level and possibly lower towards the 111.50 level. On the upside, resistance resides at the 114.00 level. Further out, we envisage a possible move towards the 114.50 level. Further out, resistance resides at the 115.00 level with a turn above here aiming at the 115.50 level. On the whole, USDJPY looks to extend its upside pressure.

Investors were sponging up the plethora of suggestive Fed commentary overnight, President Trump's State of the Union speech, and a profusion of economic data. They left the 20,000 Dow Jones level in their rear view mirror, breaching 21,100 as the market latches on to Trumpflation, despite the President's address coming across about as clear as dishwater concerning actual policy. Regardless, there was enough meat on the bone to content the street with financials, powering their way higher supported by the prospect of stronger US economic growth. As for the dollar, Fed speaks guided the markets and lifted the pricing for a March rate hike to 75% probability and the US 10 Year bond yields have ratcheted higher, nearing in on the 2.5% level.

Australian Dollar

Strong Aussie data with GDP, 1.1% QoQ 0.3% higher than expectations, along with buoyant China PMI data has lent support to the AUD. Even more impressive was the Aussie dollar gains that came as US 10 year yields ratcheted higher to 2.47 % (+.7 %) overnight. The AUD appears poised for another attempt at 0.7700 cents, but the weight of USD demand could prove to be an act of overreaching near term. Indeed, the AUD should remain firm on the crosses, which are still a favoured way for dealers to express their bullish Australia bias. Corporate demand will intensify over the next couple of weeks with dividend buying, likely to keep the AUD supported on dip buying. However, with USD on firmer ground, there is a high chance for a near-term correction lower at some point, with markets flagging Aussie longs and growing weary of the constant rebuffs at .77 level.

The January building approvals missed this morning, coming in at -1.8 % vs. -.5 % expected, and the AUD has fluttered on the data, dropping below the .7650 level.

Base metals continued to flourish overnight in the wake of the stronger China PMI's and President Trump alluding to the 1 trillion US infrastructure proposal, which provided an additional underpin to the AUD.

Japanese Yen

USDJPY is the stand-out legatee of the March rate hike repression as USDJPY remains the market's favourite pair to express a strong USD bias, but demand does appear to be broad-based suggesting the market is still looking to buy more topside exposure. Fed hawkishness underpinned the price action with Kaplan incredibly upbeat and the Beige book evidencing a further compression in labour markets. While the market could pause ahead of

decisive speeches by Fed Vice Chairman Fischer and Chairman Yellen, there appears little reason to talk down March, so the tail risk remains a Hawkish one. No hint of FOMC obfuscation this time around as the FOMC stars are coming together and the 115 now appears to be a bridge not too far to cross.

WTI

Oil traders remained edgy when the EIA Crude Stocks change report was released. The headline number beat the forecasts, but traders were unnerved on the news that a stockpile of 520.2 million barrels was a record. WTI dropped from $54.40 to $53.65 at the close. One has to believe that eventually, the Energy sector will tick higher if the Trump administration's focus is to make America grow again and inventories top out soon.

Offshore Yuan

The CNH continues to trade off its back foot, as expectations ratchet higher for a March rate hike. Despite the positive PMI, CNH continues to be very much driven by the broader dollar landscape.

EM APAC

While Donald Trump has the spotlight, it was the Fed speakers that stole the limelight. Repricing of March rate hike expectations will weigh on regional sentiment, yet the most important detail remains Tax reform. While President Trump sounded unusually placatory yesterday, there were no specifics revealed on the border tax adjustment, but we need to be cognisant that any acceleration of these expectations will give the dollar a boost and should weigh on regional markets in the near term.

Yesterday, I published an AUD/NZD trade idea to look for shorts heading into the Australian GDP number.

AUD/NZD Daily:

The daily chart shows an obvious higher time frame resistance level and as mentioned above, price action up into this zone looks very choppy. You can see the way that price has spiked in and out of the 25 pip zone that I've drawn.

With AUD/NZD sitting at higher time frame resistance and the general downward trend we've seen in the last few GDP numbers, I was obviously playing for a miss on expectations and a drop in price on the back of that.

But…

The print came in WELL above expectation and the Aussie ripped higher on the back of it.

Interestingly, price is still being capped by the top of the daily resistance zone higlighted in yesterday's original trade idea.

AUD/NZD Daily:

This level will continue to be the key as to which way we look to trade the pair.

If price stays under it, then we will look for shorts (or stay in shorts if your stop was still above this higher time frame level).

If price moves above it, then we will look for longs on any short term pullbacks.

The most recent Beige Book for the period between early-January through mid-February indicated that the economy continued to expand at a modest to moderate pace across all regions.

Labor markets were reported to be tight, with some Districts noting widening labor shortages. Employment growth was for the most part characterized as moderate, with three Districts citing modest growth and only two reporting that it was little changed.

Wages in most Districts rose modestly or moderately, with a few reporting some pickup in the pace of wage growth. Wage pressures were particularly felt by engineers and IT workers as a number of Districts noted shortages of these skilled workers.

Price pressures were little changed from the prior report across most Districts. Both selling and input prices were up, with the former up modestly to moderately in some case while the latter was only up modestly. Businesses expect this trend to continue in the months ahead, with modest upward pressure expected in both selling and input prices.

Manufacturing activity accelerated, with most Districts characterizing the pace of growth as moderate. Key measures of activity, such as new orders, production, and shipments were all said to be up in several Districts and the outlook was said to be generally positive. There were also some reports of labor shortages in the sector.

Businesses were generally optimistic about the near-term outlook but to a somewhat lesser degree than in the prior report. Some respondents from the Boston and Dallas Districts cited concern about policy changes in the new administration along with the associated uncertainty.

Key Implications

The Beige Book continues to paint a relatively bright picture of the domestic economy and outlook, corroborating our view of ongoing economic improvement. Most Districts highlighted the manufacturing sector's continued improvement, pointing to a number of activity proxies (new orders, production, shipments, and capacity utilization) that continued to exhibit stronger growth. This morning's ISM manufacturing report for February further corroborates this story, with the index rising for a sixth consecutive month to 57.7 – the strongest expansion on record in well over two years.

The one fly in the ointment was associated with the somewhat lesser degree of optimism reported by business contacts. Respondents also expressed concern about the new administration's policy changes and associated uncertainty. With that said, it should be noted that businesses were still generally optimistic about the near-term outlook and indicators for business sentiment, such as the NFIB's small business optimism index, are holding at very high levels.

• All districts reported modest or moderate economic growth early this year with activity generally increasing across industries.
• Business contacts were optimistic about the near-term outlook, although slightly less so than in the previous report as some cited greater policy uncertainty under the new administration.

Consumer spending growth was characterized as modest while retail sales were more subdued as districts noted an ongoing shift to online sales. Manufacturing activity accelerated, building on an improved assessment in the previous report in which some districts noted conditions took a turn for the better relative to a year ago. Modest growth was reported in the energy sector, in contrast to declines that continued through last year. Housing indicators including construction, sales and prices were generally modestly higher. Commercial real estate activity also grew modestly.

Labour markets were once again characterized as tight and some districts noted greater shortages of labour, particularly for skilled workers. In some cases that was seen as contributing to a pickup in wage growth; otherwise wages generally rose modestly or moderately. Price pressures were little changed, with output prices rising modestly or moderately in most districts but flattening off in a few.

Our Take:

Today's solid Beige Book won't, on its own, convince policymakers to raise rates in March, but a generally positive assessment of economic conditions early this year and further evidence of a tight labour market support the Fed giving serious thought to another hike. There was already a growing consensus among Committee members that further tightening should come sooner rather than later, and a decent run of economic data―most notably upside surprises in the latest employment and inflation reports―and the potential for fiscal stimulus seems to have convinced a growing number that there is little cause for delay. Recent comments to that effect have boosted the odds of a rate hike in March as high as 80% according to Bloomberg. Chair Yellen's remarks on Friday will help firm up expectations for the coming meeting, though at this stage there appear to be few barriers to raising rates.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

CPI inflation rose to 2.1 per cent in January, reflecting higher energy prices due in part to carbon pricing measures introduced in two provinces. The Bank is looking through these effects, as their impact on inflation will be temporary. The Bank's three measures of core inflation, taken together, continue to point to material excess capacity in the economy.

Overall, recent data on the global and Canadian economies have been consistent with the Bank's projection of improving growth, as set out in the January Monetary Policy Report (MPR). In Canada, recent consumption and housing indicators suggest growth in the fourth quarter of 2016 may have been slightly stronger than expected. However, exports continue to face the ongoing competitiveness challenges described in the January MPR. The Canadian dollar and bond yields remain near levels observed at that time. While there have been recent gains in employment, subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States.

The Bank's Governing Council remains attentive to the impact of significant uncertainties weighing on the outlook and continues to monitor risks outlined in the January MPR. In this context, Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent.

The Institute for Supply Management (ISM) manufacturing index rose 1.7 points to 57.7 in February. This marks the sixth consecutive month of expansion in the U.S. manufacturing sector, and pushes the pace of expansion to its strongest showing since August 2014. The reading was above consensus expectations for the index to hold at its January reading of 56.

Most subcomponents of the index expanded at a faster pace in February. The backlog of new orders rose enough to suggest an expansion rather than a contraction (+7.5 to 57). New orders also rose strongly (+4.7 to 65.1), followed by imports (+4.0 to 54). Declines were observed in employment (-1.9 to 54.2), prices (-1.0 to 47.5), and customers' inventories (-1.0 to 47.5).

Given the strength in new orders and the weakness in inventories, the spread between the two – useful as a leading indicator of activity – widened slightly in February to 13.6 (January: 11.9). This suggests that momentum in the expansion of manufacturing activity is likely to continue in the coming months.

Seventeen of the eighteen industries reported expansion in February, with textile mills, apparel, leather and allied products, and machinery registering as the top three categories driving the expansion in the month.

Key Implications

February's ISM manufacturing report is broadly positive. It suggests that the U.S. manufacturing sector continued to expand at a robust pace at the start of this year. All categories except customers' inventories are expanding, while both new orders and production have surged back up near cycle highs. Comments by survey respondents were broadly positive, with rising energy prices being acknowledged by some industries as a challenge, but not a game changer.

Despite its recent strong showing, the U.S. manufacturing sector will face a number of challenges this year. The high dollar will continue to dampen the export competitiveness of U.S. firms, and policy uncertainty, both domestic and abroad, could weigh on demand.

February's ISM data for the U.S. manufacturing sector mirrors the good news from other purchasing manager's surveys for Europe, Japan, China, and other large emerging markets released this morning. So far the survey data for 2017 suggests that the momentum from the strong pickup in global economic growth at the end of last year has carried over into January and February. While this implies that global economic growth is on track to expand at an above 3.0% annualized pace in the first quarter, we await confirmation from the hard data that is to come in the following weeks.

• Bank monitoring risks to outlook given uncertainties about developments abroad
• These risks and slack in the domestic economy means current policy stance still appropriate

As-expected, the Bank of Canada held the overnight rate steady at 0.50% today. Recent developments appear to align with the Bank's base case forecast with global growth strengthening. In Canada, the Bank noted that recent data point to the economy growing at a slightly stronger pace than its 1.5% forecast. While the headline inflation rate rose in January, this reflected temporary effect of rising energy prices that in part rose because of the implementation of carbon pricing measures in Alberta and Ontario. As such the Bank said it is "looking through these effects" and noted that the core prices measures substantiate that the economy continues to run with "material excess capacity."

Our Take:

While financial markets debate the timing of the next hike by the US Fed, there is little anticipation that the Bank of Canada will move off the sidelines. The Bank's uneasiness about the global economic outlook and policy developments in the US were noted again today's brief statement. The Committee reiterated that there is slack in the domestic labour market pointing to the slow pace of wage gains and hours worked as evidence. The Bank also remains concerned about exports which they say continue to face "competitiveness challenges."

Despite presenting an upside risk to the fourth quarter's growth forecast, the tone of the statement seems lukewarm about the economy given the focus on the persistence of excess capacity and pressures on exports. This did little to alter the market's assessment that there is about only a one in three chance that the Bank will hike rates late this year.

Our forecast is that Canada's economy will grow at faster pace this year. We expect tomorrow's Q4 real GDP report to confirm the economy grew at a 1.8% annualized pace with a 0.2% increase in December providing a solid handoff to 2017. That momentum combined with mild recovery in the oil & gas sector will be sufficient to offset any weakening in the housing market and keep the economy growing at an above-potential pace. Against this backdrop, underlying measures of inflation are forecast to gradually increase to 2%. In the near term however uncertainty about potential policy initiatives by the new US Administration and their impact on Canada sets up for the Bank to stay on the side-lines.

The Bank of Canada met expectations today, once again holding its key policy interest rate unchanged at 0.5%. Indications that fourth quarter growth likely beat the Bank's expectations were counterbalanced against ongoing competitiveness challenges.

The Bank of Canada made clear its view that recent gains in inflation are likely to be temporary, and that its three new measures of core inflation continue to point to economic slack.

Moreover, the challenges the Bank identified at its last policy decision, namely the high level of the Canadian dollar (in broad terms), and elevated bond yields are still in play. The statement noted this fact, while also mentioning that ongoing gains in employment have come with subdued growth in wages and hours worked, in contrast to the United States.

Key Implications

This was another dovish statement from the Bank of Canada. The statement accompanying the rate decision continued the tone of recent communications, namely that the level of the loonie and movements in bond yields are not seen as helpful given the economic slack still remaining in Canada.

Indeed, the Bank of Canada once again contrasted the current economic situation in Canada with that in the U.S., with the clear message that unlike south of the border, the Bank of Canada will not be tightening monetary policy any time soon.

Today's statement provides further confirmation of our view that the Bank of Canada will not be taking its foot off the accelerator. Over the near term, given the still significant economic uncertainties, particularly beyond Canada's borders, we continue to see the risks to monetary policy as tilted towards further easing.