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News and Events:

UK economy shows signs of weakness

The UK economy has weathered surprisingly well since the Brexit vote as economic data consistently surprises to the upside. However, dark clouds have started to gather on the horizon as the reality of Brexit becomes a major concern for businesses and consumers. January UK retail sales came in on the soft side with the headline gauge contracting 0.2%m/m versus an expected expansion of 0.7%. In addition, the previous month's reading was downwardly revised to -2.2% from -2% initially estimated. Sales have been gloomy since December as retail customers brace for the Brexit shock. We do not expect this trend to improve in the short-term against the backdrop of rising inflation and growing concerns about the UK's outlook outside of the European Union.

The pound sterling partially erased Friday's losses this morning as it rose 0.55% against the greenback with GBP/USD hitting 1.2480. On the medium-term, the trend remains negative as traders are reluctant to take long positions before negotiations begin. According to CFTC data, net short speculative positioning remained stable last week at roughly 30% of total open interest. On the technical side, the strong resistance standing at 1.28 will continue to cap any upside gains, while on the downside, the 1.23-1.24 area will act as support.

Russian economic recovery continues

Russia's unemployment rate will be released later today, which should increase to 5.4% from 5.3%. However, this rise should be viewed as a purely seasonal increase as unemployment in Russia tends to rise at this time of the year.

What really matters to us at the moment is the business environment and it seems that there is more confidence in the Russian economy since Trump's election as relations between both nations thaw and even warm.

Commodity prices are also on the rise, which is definitely helping Russia, even though crude oil prices are stalling below $54. GDP expectations are at 0.6% for this year according to the Economic Development Ministry's outlook. For the time being fundamental data is showing positive momentum. In particular, manufacturing and commodity production are increasing.

Currency-wise, the ruble has been strengthening for more than a year and we believe that this trend should continue over the year. Reloading the ruble's position is a good trade. Our target is 50 ruble for one dollar by year-end.

Today's Key Issues (time in GMT):

• Feb Consumer Confidence Indicator, last 4,5 DKK / 08:00
• Feb 17 Total Sight Deposits CHF, last 539.0b CHF / 09:00
• Feb 17 Domestic Sight Deposits CHF, last 464.5b CHF / 09:00
• Feb CBI Trends Total Orders, exp 4, last 5 GBP / 11:00
• Feb CBI Trends Selling Prices, last 28 GBP / 11:00
• Central Bank Weekly Economists Survey (Table) BRL / 11:25
• Jan Federal Debt Total, last 3113b BRL / 13:00
• Dec Wholesale Trade Sales MoM, exp 0,40%, last 0,20% CAD / 13:30
• FRB President Mester Speaks at Central Banking Series SGD / 14:15
• Bank of England Bond Buying Operation GBP / 14:50
• Feb A Consumer Confidence, exp -4,9, last -4,9 EUR / 15:00
• Feb 19 Trade Balance Weekly, last $956m BRL / 18:00
• Feb 19 ANZ Roy Morgan Weekly Consumer Confidence Index, last 116,4 AUD / 22:30
• Jan Formal Job Creation Total, exp -45324, last -462366 BRL / 23:00
• Jan Tax Collections, exp 137340m, last 127607m BRL / 23:00
• SURVEY: Private Capital Expenditure 2017-18 A$84.8b AUD / 23:00

The Risk Today:

EUR/USD is now consolidating above 1.0600. Hourly resistance is given at 1.0679 (16/02/2017 high). Expected to see further strengthening. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is still trading below strong resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should bounce lower towards support given at 1.2254 (19/01/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY's demand is fading after its increase from support given at 111.36 (28/11/2016 low). Bearish pressures arise around hourly resistance given at 115.62 (19/01/2016 high). The technical structure suggests further weakness. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF's short-term bullish momentum is back to bullish. The pair lies within an uptrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Nonetheless, we believe that the pair is likely to strengthen again above parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

EUR/USD is almost unchanged in the Monday session, as the pair trades at 1.0620. US markets are closed for Presidents' Day, so we're unlikely to see much movement from the pair. In the eurozone, German PPI improved to 0.7%, beating the forecast of 0.3%. The eurozone will release Consumer Confidence, which is expected to remain unchanged at -5 points. On Tuesday, Germany and the eurozone will release Flash Manufacturing PMI reports.

After Fed Chair Janet Yellen's upbeat take on the US economy, the markets are keen to review the Fed policy minutes, which will be released on Wednesday. Testifying before Congress last week, Yellen noted that inflation is moving towards the Fed's 2 percent target, the labor market remains red-hot and consumer spending is strong. Yellen strongly hinted that a rate hike was imminent, leaving the markets to speculate if the Fed prefers to make a move in March or June. If the US economy stays on track in 2017, analysts expect two or three rate hikes of a quarter-point. At the same time, the Fed wants to take into account the economic stance of the new administration, but this remains an elusive goal. Donald Trump continues to have difficulty filling in key cabinet positions and the media continues to probe connections between Trump officials and Russia. Trump has fired back by bitterly attacking the media, and lost in the mayhem is a clear and coherent economic policy. Although Trump has been in office for just over a month, the perception of a muddled and disoriented White House is creating uncertainty in the markets, and is, as Trump would say, “bad for business”.

The ECB released the minutes of its January policy meeting on Thursday. The minutes indicated that the central bank continues to have little appetite for reducing stimulus. Policymakers stated that the recent climb in inflation could prove to be temporary and there is political uncertainty ahead. France and Germany, the two largest economies in the eurozone, go to the polls later this year, as does the Netherlands. Inflation has moved close to the central bank's target of around 2 percent, prompting calls from Germany and elsewhere to tighten monetary policy. At this point in time, a majority of ECB policy makers are in favor of maintaining course the asset-purchase program, which ends in December. However, if growth and inflation numbers continue to climb, there will be increased pressure and louder voices calling for a tightening in monetary policy.

Today, in the UK the House of Lords is due to begin its debate over the government's Brexit bill. The House of Commons has already passed this bill, making no meaningful amendments to it. The House of Lords is expected to approve it as well, with the possibility of any amendments appearing rather low once again. Even if the Lords manage to introduce any changes, those would have to be ratified by the Commons, who have already showed their intentions of not wanting to interfere with or delay the government's plans. As such, although we may get some interesting remarks from lawmakers over the next few days, the broader Brexit story is unlikely to change much, with the triggering of Article 50 still set to take place late March.

Considering that May's government appears determined to regain full control of immigration, and that the EU is highly unlikely to grant the UK full access to the single market is such a case, we maintain our view that we may be headed for a "hard Brexit". What's more, we think that for that to change, it is the UK that will have to back off a little, since the EU is bound by multiple treaties that do not allow much flexibility to politicians and technocrats over the free movement of people. Sterling may react little to any "Brexit" headlines heading into and at the time of triggering Article 50, given that most of the negotiating intentions of both sides could already be priced in. However, in the aftermath of the triggering, EU-UK talks are likely to begin dominating news headlines, and uncertainty with regards to the divorce terms may start to escalate. As such, we believe that any near-term rebounds in GBP are likely to stay limited. We still see as a temporary ceiling for GBP/USD the 1.2850 territory. Nevertheless, our favorite proxy for any potential sterling softness in the foreseeable future is GBP/JPY, bearing in mind that the looming political risks in Eurozone could benefit the yen due to its status as a safe haven.

GBP/JPY tumbled on Friday, braking below the support (now turned into resistance) barrier of 141.20 (R1) to hit the psychological zone of 140.00 (S1) and the upside support line drawn from the low of the 16th of January. Given that the rate is trading above that line, but still below the downside resistance line taken from the peak of the 15th of December, we remain sidelined with regards to the short-term outlook. We would like to see a clear break below 140.00 (S1) before we get confident on more near-term declines. Such a break is possible to open the way for our next support of 138.80 (S2). For now, we see the possibility of a corrective bounce due to short-covering after Friday's slide, which could stay limited near the 141.20 (R1) hurdle.

RBA February meeting minutes in focus

During the Asian morning Tuesday, the RBA will release the minutes from its February policy meeting. The tone of the statement accompanying that decision was surprisingly optimistic in our view, as the officials basically disregarded the latest mixed batch of data out of Australia. If the minutes confirm that the RBA is indeed as confident on the domestic economy as the statement led us to believe, AUD could come under renewed buying interest. The short-term trend in AUD/USD remains to the upside, given that the pair continues to trade above the uptrend line taken from the low of the 13th of January. Now the rate is testing the 0.7680 (R1) resistance level, where a clear break is possible to open the way for another test near the 0.7730 (R2) zone, defined by the peak of the 16th of February.

The key risk to this view is the possibility of potentially worried comments regarding the strength of AUD. The RBA has repeatedly expressed its desire for a weaker currency and the market has not been paying a lot of attention to that. However, considering our recent experience with the RBNZ's verbal intervention, we will scan the minutes for any clues on how dissatisfied the RBA is with the recent strength of AUD, and whether it may choose to utilize similar tactics to those of the RBNZ in the future. In case the minutes show more nervousness with regards to Aussie's exchange rate than the actual statement did, AUD/USD may confirm the negative divergence between our short-term momentum studies and the price action and could fall below the aforementioned uptrend line. Something like that could cause the pair to correct near the 0.7600 (S2) key support.

Today's highlights

The European day is very quiet in terms of data releases. The most noteworthy indicator we get will be Eurozone's preliminary consumer confidence index for February, which is forecast to have remained unchanged.

Markets will remain closed in the US and Canada in celebration of Presidents' Day and Family Day respectively.

As for the rest of the week

On Tuesday, we get the minutes from the RBA's February meeting, as we noted above. We also get the preliminary manufacturing and services PMIs for February from several European nations and the Eurozone as a whole.

On Wednesday, the main event will be the FOMC February meeting minutes. We think that the market may look through the minutes for extra details on the Fed's forward guidance and the timing of the next increase in borrowing costs. From the UK, we get the 2nd estimate of Q4 GDP and from Germany, the Ifo survey for February.

On Thursday, we have no major events or indicators due to be released.

On Friday, Canada's CPI data for January are due out.

In PBOC's latest set money report, China's new renminbi loans rose to RMB 2.03 trillion in January. However, it came in below consensus of RMB 2.44 trillion and RMB 2.5 trillion the same period last year. Although it is usual for new loans to be high earlier in a year as banks front-load their loans for profit maximization, the January figure missed expectations as lending to non-bank financial institutions fell for the month. Outstanding renminbi loans growth decelerated to +12.6% y/y, from +13.5% in December. Medium and long term corporate bank lending, a barometer of corporate sector demand, increased +43.4% y/y to RMB 1.52 trillion, whilst medium- and long-term household loans, mainly mortgage loans, rose to a record high of RMB 0.63 trillion. This suggests that PBOC's recent tightening measures have yet to feed through the housing market. We believe a few months' data would be needed to see the effectiveness of these measures..

Overall, total social financing (TSF), before adding local government bond net issuance, rose to RMB 3.74 trillion in January, up from December's RMB 1.63 trillion. Adjusted TSF stock expanded +15.5% y/y in January, slowing from +15.7% a month ago. According to PBOC, TSF stock growth (not adjusting for local government bond issuance) grew +12.8%y/y in January, easing from around +13% in December. On the money supply, growth in broad money supply (M2) has decelerated for a third straight month, easing to +11.3% y/y, in January. We believe a critical factor dragging on M2 growth is ongoing capital outflow. The decline in FX reserve to US$2.998 trillion, the lowest since early 2011, in January, has already sent initial evidence that capital outflow remained so severe that PBOC had to intervene in the FX market. Last Friday, SAFE reported net sales of US$19.2B worth of FX in January, compared with US$46.3B and US$ 33.4B in December and November, respectively. According to SAFE, the diminished sales amount signaled that pressure from capital outflow “has been remarkably alleviated since 2017”. It added that, “despite external uncertainties, China's sound economic fundamentals will determine stable cross-border capital flows in the medium and long run”. In our opinion, the diminished figure was merely helped US dollar's depreciation during the period

Inflation came in higher than expected in January. Headline CPI accelerated to a 32-month high of +2.5% y/y, from +2.1% in December. While high energy prices and Lunar New Year effect did helped push inflation higher, the core reading suggested that the underlying trend has also improved. Core inflation, excluding food and energy, rose to+2.2% y/y in January, from +1.9% a month ago. Food inflation increased +2.7% y/y, up from +2.4% previously, whilst nonfood inflation rose to +2.5% y/y, from +2% in December. Upstream PPI jumped +6.9% y/y in January, after a +5.5% expansion in the prior month.

Strong inflation would give room for PBOC to continue monetary tightening. In early February, PBOC raised interest rates of 7-, 14- and 28-day reverse repos by +10bps each to 2.35%, 2.5% and 2.65% respectively. It also lifted the overnight SLF rate to 3.1% from 2.75% previously. The move has sparked speculations for further tightening, especially the loan data above confirmed that mortgage lending remained strong in January.

'The failure of retail sales in January to rise at all after December's 2.1 per cent month-to-month drop demonstrates that consumers' spending has shifted down several gears in response to slowing employment growth and rising inflation.' - Samuel Tombs, Pantheon Macroeconomics

Sales in the United Kingdom dropped for the third straight month in January, indicating that consumers started feeling the pressure of higher prices and slower wage growth. According to the official data published by the British Office for National Statistics on Friday, retail sales slid 0.3% over the previous month, coming in short of analysts' expectations for a 1.0% increase and following a downwardly revised 2.1% slide in December. If compared with the same month a year ago, sales rose at the slowest pace since November 2013, jumping 1.5%. The downmove was mainly driven by higher prices of fuel and food at both conventional and online stores, which rose 1.9% on average in January when compared to the same month a year ago. At this point, analysts worldwide expect prices to be on an uptrend through the year, as retailers are struggling to keep their businesses afloat following the devaluation of the Sterling caused by the decision of the UK to the European Union. Nevertheless, despite expectations for inflation to hit 3% and above this year, economists are eyeing rather anaemic wage growth, with real income being at risk of posting its worst year since 2013.

'Acquisitions of equities were moderated by sales of US government debt instruments in the month, for which Canadian investors have reduced their exposure in each of the last five months.' - Statistics Canada

The Canadian capital inflows rose less than expected in December, official data showed on Friday. Statistics Canada reported foreign investment in the country's government securities surged to $10.2B in the reported month, following the preceding month's $7.3B, whereas economists penciled in an increase of $11.6B. On the positive side, total inflows increased compared with the previous year's $106.0B to $161.3B in 2016. In the meantime, net inflows of debt securities rose to $107.9B in the reported year from $91.6B in 2015. This increase was mainly driven by solid growth of inflows into debt securities issued by corporations. In volume terms, equity inflows rose to $9.7B in the 12th month of the year. On a yearly basis, the value of investment into equities increased from $14.4B to $53.4B. In addition, Statistics Canada reported the sum of outflows in 2016 declined sharply to $13.8B from $60.2B previously, as investors dampened their interest for cross-border assets.

The Aussie is trading around the mid-point of 0.7600/0.7700 congestion after quick reversal from fresh high at 0.7730 (posted on 16 Feb) signaled false break above range tops.

Pullback from 0.7730 was so far held by 10SMA (0.7658) but near-term risk is turning lower after slow stochastic formed bearish divergence pattern and reversed from overbought territory.

Next strong support, daily 20SMA (currently at 0.7626) that tracks the uptrend since early Jan) is in focus, with break here to generate stronger bearish signal.

Extension and close below consolidation range floor at 0.7600 would confirm reversal and open way for stronger correction of 0.7160/0.7730 rally.

Break back above 0.7700/30 is needed to neutralize downside threats and signal bullish continuation.

Res: 0.7688, 0.7700, 0.7730, 0.7755
Sup: 0.7658, 0.7626, 0.7600, 0.7584

The pair is consolidating above 112.60 (low of strong three-day fall from 114.94 (15 Feb high).

Near-term action remains biased lower following strong upside rejection at 114.94 that left daily candle with long upper shadow and subsequent strong acceleration lower.

Near-term action is holding below bearishly aligned daily Tenkan-sen / Kijun-sen lines (113.28 / 113.59) with the latter expected to cap extended upticks, ahead of fresh push lower.

We need to see clear break below cracked 112.86 support (Fibo 61.8% of 111.57/114.94 upleg) to confirm bearish stance.

Loss of 112.60 handle would open psychological 112.00 support and expose key support and near-term base at 111.60.

Conversely, break and close above daily Kijun-sen would sideline persisting downside risk, in favor of stronger correction of 114.94/112.60 downleg

Res: 113.28, 113.59, 113.77, 114.05
Sup: 112.60, 112.37, 112.00, 111.60

Top of falling daily Ichimoku cloud is for now holding attempts through strong support zone between 1.2422 and 1.2404 (55/100 SMA's/daily cloud top). Series of lower lows from 1.2580 (09 Feb high/recovery rejection), keep near-term bias at the downside, together with weakening daily studies that support negative scenario. Upticks are facing strong barrier, thick hourly cloud (spanned between 1.2451/91) that is expected to cap upside attempts. Clear break below 1.2400 is needed to signal fresh weakness towards 1.2345 (50% of 1.1986/1.2704 upleg/daily Kijun-sen), with 1.2282/60 ( daily cloud base/Fibo 61.8%) in extension. Conversely, sustained break above hourly cloud and 20 SMA (1.2514) would shift focus higher and expose upper pivots at 1.2550/80.

Res: 1.2433, 1.2463, 1.2480, 1.2508
Sup: 1.2404, 1.2386, 1.2345, 1.2282

Near-term risk turned lower and pressures 55SMA support at 1.0600, following Friday's strong close in red after repeated upside rejection at 1.0675 zone, where daily Kijun-sen capped. Falling 10SMA (currently at 1.0633) is expected to cap consolidation above 1.0600 handle, before bears resume. Clearing supports at 1.0600/1.0580 (55SMA/Fibo 61.8% of 1.0520/1.0678 upleg) would open way towards next key support at 1.0520 (15 Feb spike low/daily Ichimoku cloud base). To neutralize bear pressure, the price needs to break and close above 1.0675/86 barriers (30 /20 SMA's).

Res: 1.0633, 1.0647, 1.0675, 1.0686
Sup: 1.0600, 1.0580, 1.0560, 1.0520