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Markets lacked strong conviction ahead of US holiday

Notes/Observations

Quiet session ahead of US President Day holiday on Monday. Upcoming elections in Europe and uncertainty over Trump's policies providing some decreased risk appetite

UK Jan retail sales data misses expectations

Overnight:

Asia:

Japan Fin Min Aso: Planning to start economic dialogue with Trump administration in April; have not decided on specific contents

US, South Korea and Japan foreign Ministers condemn in strongest terms the recent North Korea's ballistic missile test

Europe:

ECB's Coeure (France): Exit option for countries from Euro Zone would create permanent impairment of ECB's monetary policy transmission mechanism

EU's Juncker: Not confident that agreement can be reached about Brexit conditions in 2 years. At least 20,000 laws had to be changed in Britain before it could leave the bloc

Americas:

(US) President Trump intends to rescind travel order in near future and replace with ‘substantially revised' order; US Appeals Court puts proceedings over current Trump travel ban on hold, pending further developments on new executive order

(US) President Trump's choice as replacement for National Security Adviser, Robert Harward, has turned down the offer; nominates Alexander Acosta as Labor Secretary

Economic data

(SE) Sweden Jan CPI M/M: -0.7% v -0.7%e; Y/Y: 1.4% v 1.5%e

(SE) Sweden Jan CPI CPIF M/M: -0.7% v -0.7%e; Y/Y: 1.6% v 1.7%e

(EU) Euro Zone Dec Current Account (Seasonally Adj): €31.0B v €36.4B prior; Current Account NSA (unadj): €47.0B v €40.8B prior

(ES) Bank of Spain (BOS): Dec Bad loans at 9.1% v 9.2% prior

(UK) Jan Retail Sales (Ex-Auto Fuel) M/M: -0.2% v +0.7%e; Y/Y: 2.6% v 3.9%e

(UK) Jan Retail Sales (including Auto/Fuel) M/M: -0.3% v +1.0%e; Y/Y: 1.5% v3.4%e

Fixed Income Issuance:

(ZA) South Africa sold total ZAR80M vs. ZAR650M indicated in I/L 2025, 2029 and 2033 bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 -0.6% at 3289, FTSE -0.2% at 7266, DAX -0.5% at 11702, CAC-40 -0.9% at 4855, IBEX-35 -0.7% at 9484, FTSE MIB -1.0% at 18896, SMI -0.3% at 8444, S&P 500 Futures -0.3%]

Equities

Materials: [Essentra ESNT.UK +2.0% (Earnings)]

Industrials: [Heijmans HEIJ.NL +6.5% (Analysts upgrade)]

Financials: [Allianz ALV.DE +2.7% (Earnings, Buyback)]

Healthcare: [Astrazeneca AZN.UK +1.5% (Lynparza meets primary endpoint) ]

Energy: [Vopak VPK.NL -9% (Earnings)]

Speakers

ECB's Lane (Ireland): No need to give up forward policy guidance and saw n o reason seen to turn off policy accommodation. Monetary policy to target inflation but did not expect to cut Deposit Rate again

Turkey Dep PM Simsek:Jan indicators pointed towards moderate economic growth. Domestic demand seen growing moderately but must create 700-800K jobs to reduce the unemployment rate (**Note: Nov Unemployment Rate: 12.1%)

Iceland Stats Agency saw 2017 GDP growth seen at 4.3%

Japan PM Abe reiterated that US and Japan agreed that G20 and G7 finance ministers should discuss FX; did not discuss topic with Trump at all at recent meeting

China Securities Regulatory Commission (CSRC) adjusted rules for refinancing which would now cap private share sales amount at 20% of total shares outstanding under the new rule

Philippines Central Bank's Guinigundo: Monitoring CPI pressure from weak PHP currency (Peso)

Fitch affirmed New Zealand sovereign rating at AA; outlook stable

Currencies

FX majors were mainly stuck in narrow ranges in the absence of meaningful data with USD index stuck near 1-week lows. US yields brushed off upbeat data which capped the USD uptrend. Dealers noted that upcoming elections in Europe will drive currency volatility in coming weeks and uncertainty over Trump's policies seen capping the USD for the time being

The GBP currency was softer after Jan UK retail sales missed expectations coupled with lower back-month revisions. GBP/USD fell by 0.5% to test 1.2420.

Fixed Income:

Bund futures trade at 164.23 up 39 ticks back above 164 as the curve flattens on risk off trade with French election developments weighing on sentiment. A continued move higher targets 164.94. Support moves to 163.62 then 163.13, 162.92 followed by 162.44.

Gilt futures trade at 126.22 up 32 ticks trading higher with the overall risk off tone as well as weaker Jan Retail sales numbers of out the UK. Resistance moves to 126.70 followed by 127.16. Support stands at 124.91 followed by 124.46. Short Sterling trade flat to up 3 bp with the curve flattening. Jun17Jun18 trades lower to 15/16bp.

Friday's liquidity report showed Thursday's excess liquidity fell to €1.300T down €28B from €1.328T prior. Use of the marginal lending facility falls to €52M from €137M prior.

Corporate issuance saw $800M come to market via 2 issuers in a quiet day, bringing weekly issuance to $23.1B. For the week ending Feb 15th Lipper fund flows reported IG fund net inflows of $3.05B bringing YTD inflows to $20.34B. High yield funds net inflows $157.70M bringing YTD inflows to $890.1M.

Looking Ahead

06:00 (PT) Portugal Jan PPI M/M: No est v 1.0% prior; Y/Y: No est v1.7% prior

06:00 (UK) DMO to sell combined £2.5B in 1-month, 3-month and 6-month bills (£0.5B, £1.0B and £1.0B respectively)

06:30 (IN) India Weekly Forex Reserves

06:30 (IS) Iceland cancelled planned Bond auction

06:45 (US) Daily Libor Fixing

07:30 (BR) Brazil Jan Current Account: -$5.4Be v -$5.9B prior; Foreign Direct Investment (FDI): $9.3Be v $15.4B prior

08:00 (RU) Russia Jan Industrial Production Y/Y: 3.0%e v 3.2% prior

08:00 (PL) Poland Jan Sold Industrial Output M/M: -3.3%e v -4.3% prior; Y/Y: 8.1%e v 2.3% prior, Construction Output Y/Y: -1.7%e v -8.0% prior

08:00 (PL) Poland Jan PPI M/M: 0.3%e v 1.0% prior; Y/Y: 3.7%e v 3.0% prior

08:00 (PL) Poland Jan Retail Sales M/M: -24.4%e v 21.3% prior; Y/Y: 7.7%e v 6.4% prior, Real Retail Sales Y/Y: 7.2%e v 6.1% prior

08:15 (UK) Baltic Dry Bulk Index

08:30 (CA) Canada Dec Int'l Securities Transactions (CAD): No est v 7.2B prior

09:00 (BE) Belgium Feb Consumer Confidence: No est v 0 prior

10:00 (US) Jan Leading Index: 0.5%e v 0.5% prior

10:00 (CO) Colombia Dec Trade Balance: -$0.7Be v -$1.3B prior; Imports: $4.0Be v $4.2B prior

11:00 Potential sovereign ratings (Moody's on Spain and United States Sovereign Debtl Fitch on Finland Sovereign and Canadian rating agency DBRS on Netherlands Sovereign Debt

13:00 (US) Weekly Baker Hughes Rig Count

The ECB minutes from the January policy meeting confirmed much of what we learned from President Draghi at the press conference following that gathering. There was wide agreement among the Governing Council that despite the latest progress in headline inflation, there were no signs yet of a convincing upward trend in underlying inflation and as such, the ECB will continue to "look through" improvements in the headline CPI. Furthermore, the minutes made it crystal clear that there is very little appetite among the officials to begin scaling back asset purchases anytime soon. They indicated that this could put at risk the latest improvement in inflation expectations, as well as the prospect of a sustained uptrend in inflation. These signals amplify our view that the ECB is likely to keep its policy stance intact in the foreseeable future, at least until there is material progress in the bloc's core CPI and the upcoming political risk events in Eurozone are out of the way.

Given that the Bank confirmed what we already know, that it will likely remain dovish, there was little reaction in the euro on the release of these minutes. The currency even managed to outperform most of its major counterparts in the following hours. EUR/USD continued to trade north on Thursday but the recovery was stopped near the 1.0680 (R1) level and the prior upside support line taken from the low of the 16th of January. Although the pair is trading above the short-term downtrend line drawn from the high of the 2nd of February, the fact that it remains below the aforementioned prior upside support line, makes us switch to flat with regards to the short-term picture.

However with regards to the bigger picture, we believe that as we approach the upcoming elections in the Netherlands and France, political developments and uncertainty could begin to weigh increasingly more on the common currency. Even if EUR/USD continues to trade higher for a few more days, as long as it remains below the obstacle zone of 1.0800, the medium-term outlook remains cautiously negative from a technical standpoint as well. We expect the bears to take charge again at some point soon and perhaps aim for another test near the 1.0500 area in the weeks to come. However, given that we still have risks surrounding Trump's fiscal and tax plans, our favorite proxy to exploit any forthcoming euro weakness is EUR/JPY, considering that the yen may enjoy some safe-haven flows should Eurozone's political risks heighten further.

Today's highlights

During the European day, we get UK retail sales for January. The forecast is for both the headline and the core retail sales rates to have rebounded following a very sharp decline in December. The forecasts are supported by the nation's consumer sentiment indicators, such as the TR/IPSOS and the Gfk indices, both of which showed increased optimism in the month. Although a confirmation that UK consumers continue to spend at a robust pace could support the pound on the news, we remain cautious with regards to the future performance of both retail sales and sterling. A strong case can be made that consumers' real income growth is likely to be squeezed by rapidly rising inflation in coming months. This could be a factor that weighs on consumer spending, a concern the BoE outlined in its latest Inflation Report as well.

GBP/USD is currently trading between the upside support line drawn from the low of the 19th of January, and a short-term downside line taken from the peak of the 9th of February. This keeps the short-term bias of the pair flat for now, but strong retail sales today could prove the catalyst for a break above the aforementioned downside line. This is possible to lead to a test at 1.2545 (R1), where a break may trigger extensions towards 1.2600 (R2).

With regards to GBP's broader outlook, we maintain the view that despite the rebound following Theresa May's Brexit speech, as we approach the triggering of Article 50 in late March, the bigger story that drives sterling will be the likelihood of a "soft" versus a "hard" Brexit. For the time being, the signals from both sides suggest we are headed for a "hard" exit. The UK wants control of immigration, while the EU will not allow full access to the single market in such a case. As such, we don't expect any potential short-term rebounds in Cable to lead to a healthy uptrend. After all, the price structure on the daily chart suggests that the medium-term path remains to the sideways. The pair has been oscillating between 1.2100 and 1.2850 since the 7th of October. With that in mind, we expect future rebounds to remain limited below 1.2850, the upper bound of that range.

From Sweden, we get inflation data for January, and the forecast is for a decline in both the headline and the underlying CPI rates. Considering that the notable surge in both rates in December was fuelled by some temporary factors, such as rising airfare prices, we share the view for a tick down in January. Something like that could bring SEK under renewed selling pressure.

We do not have any speakers scheduled for today.

On the updated chart of USDJPY, we can see a nice and strong bullish turn taking place from around the 111.60 level, where we labeled end of a complex correction. As such, recent recovery gives us an indication for a completed double zig-zag correction and a suggestion that higher levels will now follow while market stays above 111.60. At the moment we see price trading in black wave 2, with possible support coming in at 61.8 Fibonacci ratio.

USDJPY, 4H

'The euro may well survive this year's wave of elections and populist calls for a return to national currencies.' - Jean-Michel Paul, Bloomberg

Pair's Outlook

After unexpectedly jumping during the second half of Thursday's trading session, the common European currency consolidated its position against the US Dollar on Friday morning. The future direction of the currency pair is still unclear. However, there are two possible scenarios for the future. First of all, the rate might break the weekly PP at 1.0680 and surge as far as the 1.0733 level, where the 100-day SMA is located at. On the other hand, the rate might retreat to the monthly PP at 1.0650. To do that, the pair would need to pass the support provided by the 20-day SMA at 1.0663.

Traders' Sentiment

SWFX traders are once more almost neutral, as 51% of trader open positions are long on Friday. Meanwhile, 62% of trader set up orders are to sell the Euro.

'GBP/USD continues to consolidate at its 55 day ma at 1.2426, we maintain a negative bias but patience is needed. A close below here will introduce potential to the 1.2253 the 18th January low.' – Commerzbank (based on FXStreet)

Pair's Outlook

As was anticipated, the GBP/USD pair was able to reach the 20-day SMA on Thursday, however, was unable to maintain trade at its level, ultimately retreating and closing with a 28-pip rally. The Sterling is likely to post more gains, as that would reconfirm the Cable's current consolidation trend today. The 1.2550 level is expected to be the ceiling, assuming the 20-day SMA will be overcome. Technical indicators, on the other hand, are unable to confirm the possibility of the positive outcome, as they are giving mixed signals. Another leg down is possible, but with the 1.2460/40 area, a strong psychological support, remaining intact.

Traders' Sentiment

Today 59% of traders are long the Pound, compared to 61% on Thursday. The buy and the sell order ratio is now equal to one.

'The dollar needs a pretty much strong buying incentive to make certain the Fed's rate increases three times this year.' – Bank of Mitsubishi UFJ (based on Market Watch)

Pair's Outlook

The US Dollar failed to outperform the Japanese Yen on Thursday, despite upbeat US fundamentals. Investors took profit of the recent rally, causing the Buck to erase Monday's and Tuesday's gains. The pair remains on the back foot, risking to drop under the 113.00 major level today, with the weekly pivot point at 112.89 acting as the closest support. Contrariwise, a technical correction could occur after yesterday's relatively sharp decline, with the interim target still being the 115.00 mark, where the upper Bollinger band, the 55-day SMA and the weekly R2 form a tough supply area.

Traders' Sentiment

There are now 55% of traders with a positive outlook towards the US Dollar today (previously 56%). At the same time, the number of orders to acquire the Greenback inched up from 55 to 57%.

'We don't expect much in the way of market movements going into Friday's session, but gold should nevertheless see something of a bid heading into the weekend.' – Edward Meir, INTL FCStone (based on Reuters)

Pair's Outlook

The yellow metal traded rather flat on Friday morning, as it found support in the monthly R1, which is located at 1,237.68. The bullion retreated to that level after it stopped and reversed its surge in the second half of Thursday's trading session. Gold has two possible future scenarios. Either the bullion finds enough strength in the support level to rebound and approach the 1,245 level, or the yellow metal will fail at that and begin a move lower. A move lower would result in a fall to the weekly PP, which is located at 1,232.24.

Traders' Sentiment

Traders are long on the metal, as 55% of SWFX trader open positions are bullish. In addition, 57% of trader set up orders are to buy the bullion.

'We are still seeing strong growth in part-time employment in January 2017, and in recent months, increasing growth in full-time employment.' - Bruce Hockman, Australian Bureau of Statistics

The Australian labour market continued its uptrend for the fourth consecutive month, with employers adding more workers than expected over the month of January. The official figures released by the Australian Bureau of Statistics on Thursday showed that the number of employees topped analysts' expectations for a 9.7K rise, inching up 13.5K compared to an upwardly revised 16.3K surge registered in the preceding month. The upmove was mainly caused by a jump in part-time employment, which rose by 58.3K and managed to offset an abrupt drop in the number of full-time workers, which plummeted 44.8K. In the meantime, the jobless rate came in at 5.7%, down from 5.8% in December, as the seasonally adjusted labour force participation rate fell to 64.6% from 64.7%, which resulted in total number of unemployed diving to 720.02K. The male jobless rate took a fall, sliding to 5.5%, the lowest point in nearly 4 years, whilst the female unemployment held at the same level of 5.8% in the reported month.

'The big uptick in permits should be good news for inventory-constrained homebuyers, as permits eventually become starts, which in turn become new homes for sale. As a result, we shouldn't be surprised to see a strong uptick in starts in mid-2017.' -Ralph McLaughlin, Trulia

US building permits advanced more than expected whereas homebuilding activity weakened in January, official figures revealed on Thursday. The Commerce Department reported building permits rose 4.6% to a seasonally adjusted annual pace of 1.29 million in January, following the previous month's upwardly revised 1.23 million units and surpassing analysts' expectations for a 1.23 million-unit rate. The increase caught markets by surprise, as the figure reached the highest level since November 2015, suggesting solid growth in starts in the middle of 2017. Meanwhile, housing starts declined 2.6% to an annualised rate of 1.25 million units in the same month, following December's upwardly revised reading of 1.28 million, whereas economists expected them to increase to a 1.23. Analysts suggest that the housing market recovery is likely to be sustained by strong labor market, which supported household formation. Separately, the Philadelphia Federal Reserve said its Manufacturing Index jumped to 43.3 points in February, the highest level in 33 years, driven by a jump in new orders, which climbed to 38.0 from 26.00. Data also showed the Employment Index fell to 11.1 from 12.8, while the Business Outlook Index for the next six months slid to 53.5 points.

SNB's sight deposits added +3.81B franc, or +0.71%, to 539B franc, in the week ended February 8. This marks the biggest increase since November when the central bank intervened in the aftermath of Donald Trump's victory. The move this time was, again, to curb the strength of the franc with EURUSD breaking below the support level of 1.0676/84 in late January. There are several reasons that have triggered the recent EURCHF selloff: intensifying political risks associated with upcoming elections in the Eurozone, rising of Swiss bonds yields alongside German ones, and concerns over US' accusation of currency manipulation. We retain our forecast that EURCHF would weaken further. While SNB's intervention would continue, the central bank is likely more tolerable over modest franc appreciation given better domestic economic developments

Eurozone Political Risks:

As the market awaits the first round of the French presidential election, scheduled on April 23, rising popularity of the far-right candidate Marine Le Pen, leader of the Front National Party, has raised concerns over Frexit, a French departure from the EU. The market had also begun talking about Nexit (the Netherlands leaving EU) and Grexit (Greece leaving EU) as Dutch election is coming next month while Greece is once again on the verge of financial crisis. Heighted political risks can be exemplified in the widening in European sovereign spreads since end of January. The chart below shows that German-French 10-year yield spread has widened to the highest level since 2013 on February 6. Despite the pullback since then, the spread has remained elevated. Meanwhile, French bond yields have risen to the levels very close to those of Ireland.

Swiss Yields Moving Higher

SNB has been maintaining the sight deposit rate unchanged at -0.75%, and the target for the three-month Libor at between -1.25% and -0.25%, for some time. Yet, we notice that Swiss yields have actually bottomed out in mid-2016. The chart below shows that Swiss 10-year bond yield have been tracking its German counterpart. The positive correction has increased since Trump's victory in November. Rising Swiss bond yields might be a reason why franc's upside is not much dampened by SNB's negative rate policy.

Currency Manipulator?

US President Donald Trump's preference for a weak USD has raised expectations that his administration would strengthen accusations over currency manipulation: the tactic of weakening a country's currency so as to increase competitiveness of the country at the expense of others. According to the US Treasury Department, the three criteria for a country to be considered a currency manipulator include 1) an economy has a trade surplus with the US above US$20B, 2) an economy has a current account surplus amounting to more than 3% of its GDP and 3) an economy that repeatedly depreciates its currency by buying foreign assets equivalent to 2%. Switzerland has been in US' watch list for some time. Although the country runs trade surplus of less than US$20B with the US, the trend is on the rise. Meanwhile, Switzerland has a current account surplus of around 10% of GDP and it spends as much as 9% of its annual GDP on currency intervention. Speculations that the US would eventually criticize Switzerland on the issue have driven the franc higher.

Event Calendar

Mar 15 Wed Dutch election
Mar 17-18 G20 Finance Ministers meeting
Mar 26 Sun Germany Saarland state elections
Mar 31 Current deadline to trigger Article 50
Apr 23 French presidential election (first round)
Apr 28 German FDP Federal party conference
May 07 French presidential election (second round)
May 07 German Schleswig-Holstein state elections
May 11-13 Finance Ministers meeting
May 12 German North Rhine-Westphalia state elections
May 26-27 G7 Summit Sicily
Jul 07-08 G20 summit Hamburg
Sep 24 German Federal Election