PBOC's move earlier this month to increase interest rates for its standard Open Market Operations (OMO) and Standing Lending Facility (SLF) has sparked speculations of monetary tightening. On February 3, the central bank announced to raise interest rates of 7-, 14- and 28-day reverse repos by +10bps each to 2.35%, 2.5% and 2.65% respectively. At the same, the overnight SLF rate was lifted to 3.1% from 2.75% previously. It was also reported that SLF rates for those banks that fail Macro-prudential Assessment (MPA) requirements is increased by +100 bps. The move came just 2 weeks after the rise in interest rates on medium-term lending facility (MLF). We believe the move aimed at controlling asset price bubble, given that China's lending related to real estate has soared markedly in January. The government would likely maintain its traditional policy benchmark deposit/lending rates unchanged.

China's FX fell -US$ 12.3B to US$2.998 trillion, the lowest since early 2011 in January 2017. According to the State Administration of Foreign Exchange (SAFE), the decline last month was mainly driven y PBOC's FX intervention, as well as seasonal factors including high demand for foreign currencies during the week-long Lunar New Year holiday. Despite a 7th consecutive monthly fall, the size was lowest since July 2016, thanks to a stronger renminbi (USDCNY fell about -1% in January), stricter capital control measures and valuation effects. We remained concerned that renewed strength in US dollar would intensify capital outflow in China again in coming months. Indeed, it is premature to conclude the capital flow situation before releases of the following indicators, namely, FX settlement onshore and cross-border RMB flow by SAFE due February 17, PBOC's FX position net of valuation effects in mid-February and PBOC's reported forward position by the end Feb of this month.

The country's trade surplus widened to US$51.4B in January, from US$40.8B a month. Exports expanded +7.9% y/y in value term, the biggest growth since March 2016 and beating consensus of +3.3%. Imports jumped +16.7% y/y, compared with a +3.1% growth in December. This also marks the fastest growth since April 2013 as commodity prices jumped over the past year. Note, however, that the Lunar New Year effect has distorted January and February figures significantly. We remain cautious and do not come to a conclusion that Chinese underlying trend of trade balance has stabilized. Yet, we do believe that the country's exports growth is slowly returning to mid-single digit.

Market movers ahead

• Market focus next week is set to be primarily on US data and any news from the Donald Trump administration. In our view, political developments in France will also be followed closely.
• In the data calendar, we expect US retail sales to indicate that private consumption got off to a great start in 2017. CPI inflation is likely to spike higher, driven primarily by higher energy and food prices, while we expect yearly core inflation to fall slightly. Markets are also likely to follow Janet Yellen's semi-annual monetary policy testimony to congress closely, as we did not get any major news from the last FOMC meeting.
• In the euro area, we expect a solid German GDP print but think ZEW expectations are set to fall. We believe UK CPI data will attract a lot of attention given last year's GBP depreciation. Also due are the UK labour market report and retail sales.
• Chinese inflation data is up; focus is primarily on the producer price index (PPI).
• In the Scandies, Swedish inflation and the February Riksbank meeting dominate the calendar. In Norway, the week's sole important event is the central bank governor's annual address. The Danish GDP indicator for Q4 is also due for release.

Global macro and market themes

• A moderate China slowdown is set to weigh on the global cycle.
• Our models support the view that the growth acceleration period will be over soon.
• Headline inflation is also close to a peak, as the base effects of oil reverse following January.
• The above factors should support bonds short term but we look for another leg higher in yields later this year.
• Policy uncertainty is set to weigh on euro assets in coming months.

Full Report in PDF

Daily Pivots: (S1) 112.19; (P) 112.76; (R1) 113.81; More...

Intraday bias in USD/JPY remains mildly on the upside for the moment. Current developments suggests that correction from 118.65 has completed at 111.58 already, ahead of 38.2% retracement of 98.97 to 118.65 at 111.13. Further rise should be seen to 115.36 resistance next. Break will confirm this bullish case and target 118.65 high next. In that case, the larger rally from 98.97 could be resuming.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Daily Pivots: (S1) 0.9961; (P) 0.9990; (R1) 1.0043; More.....

USD/CHF's rebound from 0.9860 extends today. Breach of 1.0043 minor resistance indicates short term bottoming. And, the fall from 1.0342 could have completed. Intraday bias is turned back to the upside for retesting 1.0342 resistance next. On the downside, below 0.9935 minor support will turn focus back to 0.9860 instead.

In the bigger picture, prior rejection from 1.0327 resistance argues that USD/CHF is staying in a medium term sideway pattern. In any case, decisive break of 1.0342 resistance is needed to confirm underlying strength. Otherwise, we'll stay neutral in the pair first. In case of another fall, we'd expect strong support from 0.9443/9548 support zone. Meanwhile firm break of 1.0342 will target 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Daily Pivots: (S1) 1.2462; (P) 1.2522; (R1) 1.2553; More...

GBP/USD dips mildly today but stays in range of 1.2346/2705. Intraday bias remains neutral for the moment. Price actions from 1.1946 are viewed as a consolidation, no change in this view. In case of another rise, we'd expect upside to be limited by 1.2774 to bring larger down trend resumption. On the downside, below 1.2346 will revive the case that such consolidation is completed at 1.2705 already. In that case, intraday bias will turn back to the downside for retesting 1.1946 low.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Daily Pivots: (S1) 1.0634; (P) 1.0671 (R1) 1.0693; More.....

EUR/USD's breach of 1.0619 minor support finally suggests that the corrective rise from 1.0339 is completed at 1.0828. Intraday bias is back on the downside for retesting 1.0339 low first. Decisive break there will confirm resumption of medium term down trend. On the upside, however, above 1.0713 minor resistance will delay the bearish case and turn bias neutral first.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Canadian dollar are lifted by solid job data and strength in oil prices today. The Canadian job market expanded by 48.3k in January, much better than expectation of 0.0k. Unemployment rate also dropped 0.1% to 6.8%. Meanwhile WTI crude oil is gaining 1.7% at the time of writing and is pressing 54 handle. It's possible that WTI is heading to retest recent resistance at 55.24 based on current momentum. On the other hand, the greenback is also strong, except versus Aussie and Loonie. Trump trades as back in force and Donald Trump said he will deliver a "phenomenal" tax overhaul within two or three weeks. From US, import price index rose 0.4% in January.

ECB Mersch Urged to Take Rate Cuts off the Table

ECB executive board member Yves Mersch said the central bank should take rate cuts off the table as the economy has been strong with inflation heading back to "comfort zone". And he urged to change the communication that "even lower rates" would be considered as a move, to maintain the central bank's credibility. Nonetheless, Mersch is in no support for ending the quantitative easing program. He said that "while the economic outlook for the euro area is steadily brightening, dark clouds are building up on the political horizon beyond the continent."

Released from Europe, UK trade deficit narrowed to GBP -10.9b in December. UK industrial production rose 1.1% mom, 4.3% yoy in December. Manufacturing production rose 2.1% mom, 4.0% Yoy.

RBA Lowe: Hard to Say Exchange Rate is Fundamentally High

RBA Governor Philip Lowe suggested that "it's hard to say that the exchange rate is fundamentally too high". Moreover, "if the global outlooks were to change and the exchange rate/interest rate combination led to growth being downgraded, then you could make the case that the exchange rate was too high". He admitted that it is difficult to say "the configuration is leading to growth outcomes that aren't satisfactory". He forecast the economy to grow by around 3% over 2017 and 2018 while inflation will increase modestly.

From Asian pacific, Australia home loans rose 0.4% in December. Japan tertiary industry index dropped -0.4% mom in December, domestic CGPI rose 0.5% yoy in January. China trade surplus widened to USD 51.4b in January, up from USD 40.8b, and beat expectation of USD 48.8b. In CNY terms, trade surplus widened to CNY 354.5b, up from CNY 275.4b, and beat expectation of CNY 295.3b.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0634; (P) 1.0671 (R1) 1.0693; More.....

EUR/USD's breach of 1.0619 minor support finally suggests that the corrective rise from 1.0339 is completed at 1.0828. Intraday bias is back on the downside for retesting 1.0339 low first. Decisive break there will confirm resumption of medium term down trend. On the upside, however, above 1.0713 minor resistance will delay the bearish case and turn bias neutral first.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Economic Indicators Update

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box

Friday February 10: Five things the markets are talking about

After some respite of late, the "Trump trade" is in vogue once again with investor flows returning to the market. Treasuries and gold trade down, while global indexes straddle atop of new highs.

The 45th U.S President, with a couple of words yesterday - "phenomenal" tax breaks - has refocused on his pro-business agenda, promising significant tax announcement within a few weeks.

This 'risk-on' trade has not even being dented by a U.S Court of Appeals upholding the suspension of Trump's travel ban.

Helping the risk hungry bulls is the overnight China trade data. The world's second largest economy trade balance is "officially" at multi-month highs as imports and exports top estimates.

Today, the market will focus on Japan's PM Abe 'meet and greet' with Trump. While POTUS may discuss his concerns over a 'strong' dollar with Abe, it's expected that whatever is said publicly will focus on trade and investment deals.

Canada's employment report is out at 08:30am.

Note: China's January Trade surplus hit a five-month high with both exports and imports exceeding expectations (+$51.4B vs. +$48.5Be); exports hit a ten-month high while imports hit 45-month high.

1. Equities soar in Asia, flattish in Europe

In Asia, regional bourses took the baton from Wall Street and pushed stocks to multi week and monthly highs.

The MSCI Asia Pacific Index jumped +0.9%, to the highest level since July 2015. Japan's Topix rose +2.2%, the most since January 4, to bring it back above its average price for the past 50 days.

In Australia, the S&P/ASX 200 Index climbed +1% for a fourth-straight gain and the best weekly performance since early December. Benchmarks in Singapore and Taiwan climbed +0.7% percent, while Malaysian shares rose to the highest level since April.

In Hong Kong, the Hang Seng added +0.2%, while China's main stock indexes posted their biggest gains in three months.

However, the Australasian euphoria has not been carried over to Europe. Indexes there are trading mixed as geopolitical uncertainties across the region continue to weigh on the markets. The FTSE 100 is outperforming as energy, commodity and mining stocks trade sharply higher after the IEA raised 2017 global oil demand in its monthly report. Financial stocks are weighing in the Eurostoxx, especially French banks.

U.S stocks are set to open in the 'black' (+0.1%).

Indices: Stoxx50 +0.1% at 3,283, FTSE +0.4% at 7,260, DAX +0.5% at 11,698, CAC-40 +0.3% at 4,840, IBEX-35 +0.1% at 9,450, FTSE MIB -0.2% at 18,903, SMI -0.2% at 8,423, S&P 500 Futures +0.1%

2. Oil prices surge on compliance reports, gold prices lower

This morning IEA monthly oil report is very bullish for crude oil price. The data highlights a +90% compliance rate from last Novembers OPEC production cut agreement - which is a record for OPEC.

Brent crude futures are up +66c at +$56.29 a barrel, U.S West Texas Intermediate (WTI) crude futures have rallied +56c to +$56.56 a barrel.

The IEA has also indicated that if the "current compliance levels are maintained, the global oil stocks overhang that has weighed on prices should fall by about -600k bpd in the next six-months.

On Monday, investors will get the "official" OPEC compliance data.

Crude 'bears' will take some comfort in the fact that the higher oil prices go should encourage more U.S producers (shale) to come back on line.

Precious metals are trading under pressure from a firmer dollar. Spot gold is down -0.5% at +$1,223.93 per ounce ahead of the U.S open. On Wednesday, it touched its highest since November at +$1,244.67.

3. Sovereign yields are on the rise

U.S Treasury yields backed up +6bps yesterday, successfully halting a rally that took yields to the lowest level in three-weeks (+2.34%). Ahead of the U.S open, U.S 10's have rallied another +2bps to +2.42%.

In Germany 10-year bond yields have increased +2bps to +0.33%, while French yields have increased +5bps to +1.03%.

Note: The fear of "Frexit" - France's far-right candidate Marine Le Pen presented her program for such an exit yesterday - should continue to widen periphery/bund spreads.

In Japan, the BoJ has acted in its QE operations to stem the rally in bond yields on the long end. Again, the bank has slightly increased its purchases of the 10 to 25-year debt basket in an effort to keep yields lower.

While down-under, the Aussie and Kiwi bonds fell, sending 10-year yields up +5bps to +2.70% and +4bps to +3.20%.

4. The 'Big' dollar gets the thumbs up

Of all the asset classes, the FX market will be the first to react as dealers focus on results from today's discussions on trade and FX issues between Japan's PM Abe and President Trump in Washington.

Note: Abe has previously suggested that currency discussions should be left to G20 or G7 meetings, but Trump and his Twitter account may be the outlier.

At today's press conference, investors might only hear about Japan's message that the BoJ's monetary policy so far has been to raise inflation.

The USD/JPY pair is higher (+0.4% to ¥113.34) overnight on yield differentials, while the EUR is little changed trading atop of €1.0645. The techies are still looking for lower levels for the single unit, believing a clear break of €1.0610 would suggest a new "bear" cycle.

Note: Weak growth potential and political uncertainty (Frexit and Netherlands) will continue to pressure the ECB with "lower for longer" rate policy.

The pound (£1.2492) is a tad higher after better trade and industrial production data (see below).

5. U.K growth balanced in December

Data this morning shows that the U.K.'s trade deficit with the rest of the world narrowed in December and that both manufacturing and construction output rose. This would suggest that the U.K economy ended Q4 more balanced rather than consumer-led growth.

The deficit in trade in goods and services narrowed to -£3.3B from -£3.6B m/m - a weak pound has being supporting exports of aircraft, gold and oil.

Manufacturing output rose +2.1% on the month, construction output grew +1.8%.

Note: A faster inflation rate should squeeze consumer spending in 2017, thus making growth in other parts of the economy critical to maintaining economic momentum ahead of Brexit talks.

US equity markets are looking to build on Thursday's record highs in all three major indices, with futures indicating another higher open on Wall Street today.

US President Donald Trump has started making the right noises again as far as markets are concerned, with Thursday's promise of a "phenomenal" tax announcement in the coming weeks certainly hitting all the right notes. Investors have become a little apprehensive in recent weeks due to the unpredictable nature of Trump's policies and the timing of the announcements which has taken the edge of moves we saw heading into year end.

Of course, we're still seeing indices trading at record highs but the moves are lacking conviction. You get the feeling that investors aren't exactly ready to abandon ship just yet but they're not fully on board either. Trump's change of stance on the "One China" policy in a phone call with Xi Jinping is another welcome move from the President and it hopefully lays the groundwork for better relations between the world's two largest economies, something that has been far from guaranteed and still is. Hopefully this is a positive step forward.

The next test for Trump will be his meeting today with Japanese Prime Minister Shinzo Abe. A number of topics are due to be discussed at the meeting, many of which Trump was critical of, when it comes to Japan, throughout his campaign and since. One of the major concerns with Trump's Presidency is his relationships with other leaders and whether it will damage trade and cooperation, something we'll hopefully have a better idea of after today's meeting.

The economic calendar is once again looking a little bare, as has been the case for most of the week. UoM consumer sentiment stands out as being the key economic release today, with spending being such an important part of the US economy and crucial to the Fed sustainably hitting its 2% inflation target. We're expecting a small drop in the number today but even so, it is expected to remain around the same levels to those prior to the global financial crisis. We'll also get a UK GDP estimate for the three months to January from NIESR today, with growth in the period seen at around 0.5%, not bad at all under the circumstances.

USD/CAD is showing little movement in the Friday session. Currently, the pair is trading at 1.3140. On the release front, Canada releases employment change, which is expected to post a sharp decline of -10.1 thousand. In the US, today's highlight is Preliminary UoM Consumer Sentiment, with the markets expecting a strong reading of 97.9 points.

US crude stockpiles continue to record surpluses. On Wednesday, Crude Oil Inventories made a splash, soaring 13.8 million barrels, according to the Energy Information Administration (EIA). The indicator has recorded five straight surpluses, easily exceeding forecasts on each occasion. The huge gain also marked the highest surplus since late October. Crude posted sharp losses on Tuesday, following the release of the API inventories report, which predicted a surplus of 14.2 million, compared to a forecast of 2.38 million. US crude prices are down 2.7 percent this week, as US oil production continues to increase. The EIA says that US production in 2017 will be the highest since 1970, so cuts from OPEC and Russia may not lead to higher oil prices, due to the steady increase in US crude production. The Canadian dollar is sensitive to crude fluctuations, and stronger oil prices would likely boost the Canadian dollar.

Donald Trump didn't field much of an economic platform during the election campaign, but he did promise a significant fiscal boost through infrastructure spending and tax cuts. This led to a post-election euphoria in the markets and boosted the US dollar. Fast forward to February, and optimism has been replaced by caution and unease, as Trump continues to entangle himself in controversy, both with US trading partners and at home, with the media and Supreme Court. On Thursday, Trump said that the administration was working on a "phenomenal" tax plan, which would be released in a few weeks, although he gave no details. Trump's plan is expected to lower taxes for both corporations and individuals, although tax reform promises to be a slow and daunting task, as changes to the US tax code can only be made by Congress. Still, the markets are hungry for any movement in this direction, and the dollar could get a strong boost once Trump outlines his tax agenda.