Sample Category Title

EURUSD - With the pair seen weakening on a follow through on the back of its Monday losses, more decline should occur on correction. On the upside, resistance comes in at 1.0700 level with a cut through here opening the door for more upside towards the 1.0750 level. Further up, resistance lies at the 1.0800 level where a break will expose the 1.0850 level. Conversely, support lies at the 1.0600 level where a violation will aim at the 1.0550 level. A break of here will aim at the 1.0500 level. Its daily RSI is bearish and pointing lower suggesting further weakness. All in all, EURUSD faces further downside pressure on correction.

Remember yesterday's USD/JPY levels?

USD/JPY Hourly:

It's here on the lower time frame chart that we will look for a long entry on any retest of short term levels. Find your levels, trade your levels. It's always the same.

USD/JPY Hourly:

Find your levels, trade your levels. It's always the same!

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth was stronger over the second half of 2016, supported by higher spending on infrastructure and property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain. The improvement in the global economy has contributed to higher commodity prices, which are providing a boost to Australia's national income.

Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Long-term bond yields have also moved higher, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of further monetary easing in other major economies. Financial markets have been functioning effectively and stock markets have mostly risen.

In Australia, the economy is continuing its transition following the end of the mining investment boom. GDP was weaker than expected in the September quarter, largely reflecting temporary factors. A return to reasonable growth is expected in the December quarter.

The Bank's central scenario remains for economic growth to be around 3 per cent over the next couple of years. Growth will be boosted by further increases in resource exports and by the period of declining mining investment coming to an end. Consumption growth is expected to pick up from recent outcomes, but to remain moderate. Some further pick-up in non-mining business investment is also expected.

The outlook continues to be supported by the low level of interest rates. Financial institutions remain in a position to lend. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.

Labour market indicators continue to be mixed and there is considerable variation in employment outcomes across the country. The unemployment rate has moved a little higher recently, but growth in full-time employment turned positive late in 2016. The forward-looking indicators point to continued expansion in employment over the period ahead.

Inflation remains quite low. The December quarter outcome was as expected, with both headline and underlying inflation of around 1½ per cent. The Bank's inflation forecasts are largely unchanged. The continuing subdued growth in labour costs means that inflation is expected to remain low for some time. Headline inflation is expected to pick up over the course of 2017 to be above 2 per cent, with the rise in underlying inflation expected to be a bit more gradual.

Conditions in the housing market vary considerably around the country. In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for a couple of decades. Borrowing for housing has picked up a little, with stronger demand by investors. With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments.

Taking account of the available information, and having eased monetary policy in 2016, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

• The US trade deficit narrowed to -$44.3 billion in December from -$45.7 billion in November. The smaller-than-expected deficit reflected a greater shrinking of the goods deficit than indicated in last week's advance trade report.

Exports jumped 2.7% to retrace two consecutive monthly declines. December's gain was driven by goods exports, with strong increases in capital goods and other merchandise exports. Food exports declined for a fifth consecutive month with July's surge having now largely run off (that increase contributed to net exports adding substantially to GDP growth in Q3/16). Imports increased for a third consecutive month (+1.5% in December), led by autos and industrial supplies. Capital goods imports also contributed to the gain, although with exports in the same category rising substantially in December, the narrower capex balance implies slightly weaker US equipment investment than the separate shipments data would indicate.

Our Take:

Today's report showed slightly more improvement in the US trade deficit than the BEA incorporated into their advance reading of Q4/16 GDP. Thus there is scope for the reported 1.7 ppt drag from net trade to be revised up slightly to -1.6 ppts. With recent inventory data also implying stronger investment, our current monitoring is for Q4/16 GDP growth to be revised to an annualized 2.1% pace from the 1.9% gain initially reported.

It should remain the case that net trade acted as a very modest drag on growth last year, in contrast with 2015 when more substantial USD appreciation and relatively strong domestic demand contributed to higher imports and stagnating exports. Our forecast assumes the currency will once again strengthen this year amid strong performance of the US economy and rising policy rates. However, we expect net trade will once again subtract only modestly from headline growth this year, while strong domestic spending will drive GDP growth to an above-trend 2.3% rate in 2017.

• The December surplus was down slightly from the upwardly revised November surplus of $1.0B and was stronger than the +$0.2B expected within financial markets going into the report.
• December saw exports rising 0.8% though it was more than offset by a 1.0% gain in imports.

The increase in exports was largely the result of energy exports soaring 15.9% in the month. Excluding the energy component, exports were down 2.1%. Within energy all of the increase reflected energy prices rising 16.5% with the volume of energy exports dropping, albeit marginally, by 0.6%. The strength in imports was more broadly based. Encouragingly imports of industrial machinery and equipment were up a very strong 6.4% in the month which provides some tentative optimism of strengthening in business investment. Significant import increases also occurred in the volatile aircraft component (21.8%) and metal and non-metallic mineral products (6.3%). Energy imports provided a surprising offset dropping 11.9% in the month. Import energy prices rose in the month though by a more modest 3.4% relative energy export prices.

Eliminating the impact of price changes the December trade picture was not quite as encouraging. A 1.6% rise in import volumes and a 1.0% decline in real exports both contributed to the real trade surplus dropping to $3.1B (on chained 2007 dollars) from $4.1B in November.

Our Take:

Despite the deterioration in the real trade balance for December, today's report is still indicative of a significant improvement in net trade for the fourth quarter. Though this resulted mainly from imports volumes dropping a marked 15.5% on an annualized basis, a 3.0% rise in exports also made a contribution. This improvement suggests that net exports will add around 4.5 percentage points to annualized Q4 GDP growth. This improvement along with expected solid increases in key expenditure areas such as the 2.5% gain in consumer spending will more than offset an anticipated sizeable drawdown in inventories and keep overall Q4 GDP growth at an above-potential rate of 1.8%. Our forecast assumes this rate of growth will continue through this year supported by broad-based gains among most of the major expenditure areas. This is expected to eventually prompt a tightening by the Bank of Canada though not until next year with the overnight rate holding steady at the current 0.50% in the interim. A key risk to this outlook is the possibility of increased trade protectionism by the U.S. Such would have a dampening impact on exports though business investment would also see some downward pressure.

The US dollar has extended its bounce that began at around the start of the month as the Dollar Index's stay beneath 100 proved to be temporary. Consequently, the EUR/USD, GBP/USD and basically everything else against the dollar has fallen sharply today. However, the dollar's strength is not apparent so much against the perceived safe haven gold, silver and yen. Still, it does look like that, after careful consideration, the market has decided that the dollar should resume its reign as the King of FX. Perhaps it was that strong 227K rise in headline employment for the month of January that triggered this latest bounce in the dollar as it reinforces the view that there will be at least a couple of interest rate rises coming up this year thanks to an improving economy. Elsewhere, central banks have re-iterated their dovish rhetoric, not least the European Central Bank and Reserve Bank of Australia. The Reserve Bank of New Zealand could be next.

Ahead of the RBNZ's monetary policy decision on Wednesday night (Thursday morning NZ time), it looks like the NZD/USD may have topped out. Today's sell-off has been triggered in part by news that the RBNZ's Governor Graeme Wheeler will step down when his term ends in September. Deputy Governor Grant Spencer will replace him for six months after his departure until a permanent successor is appointed in 2018. With the NZ general election coming up at the end of September, the next government will have plenty of time "to make a decision on the appointment of a permanent governor," according to Finance Minister Steven Joyce.

What this probably means in terms of monetary policy is that neither Wheeler nor Spencer - as a caretaker - will probably make any changes to interest rates now, unless something dramatically happens in the economy. Thus, the monetary policy will most likely remain extreme accommodative - by New Zealand's standards anyway. Indeed, although a record low, the current 1.75% official cash rate (OCR) in New Zealand is one of the highest among the developed economies.

Against the US dollar, the NZD could weaken sharply if today's bounce in the greenback is also sustained. In the US, interest rates are already on the rise. This means that the divergence between monetary policies in the US and NZ is narrowing, which reduces the appeal of the NZD as a carry trade. This is the number one reason why I am fundamentally bearish on the kiwi.

NZD/USD in the process of forming a bearish engulfing reversal pattern?

Meanwhile the NZD/USD is in the process of forming a rather bearish-looking price pattern on its daily chart today: a potential bearish engulfing candlestick. This particular formation often signals a change in the trend: the buyers had dominated the first half of the session, temporarily pushing price above the previous day's range, but they failed to maintain that momentum and before long the sellers took charge to push the market all the way back to below the previous day's low. Now in this case, today's candlestick is obviously not complete yet and we will require a close below 0.7280/5 to make this pattern valid.

Nevertheless, price action looks rather bearish. The false break above 0.7350, the high from last week, clearly shows there wasn't much willingness from the buyers to bid up the kiwi at those elevated levels. The sellers have sensed this weakness and have taken control of price action today. But it remains to be seen if the sellers have conviction in their trade. Will they hold onto their bearish bets or fold, letting the kiwi bounce back? But it is also worth noting that this reversal-looking price formation has taken place around a very important long-term resistance area. As shaded in the chart, this 0.7320-0.7380 range was where the bulk of the last buying phase took place before the sellers took control back in November. It could be that not all the (large) sell orders then were filled before price turned, so today's earlier rally gave the sellers another chance to enter the market (short) at or around their intended entry levels. Or it could be that those who sold in November, took profit at lower levels and are now re-establishing their bearish positions at around the same price levels. Another reason for today's weakness could be profit-taking from the buyers who were wary of a possible sell-off around this important resistance area. Perhaps, it was a combination of all these factors. Whatever the reason, the selling pressure has been evidently strong.

Now, if the NZD/USD goes to on to break the noted 0.7280/5 support level and preferably holds below this area on a closing basis then we could potentially see significant follow-through in selling pressure in the days to come. The next support area where price may head to is around 0.7220-40, which was resistance in the past. Below this range, we have the Fibonacci extension levels and the moving averages as the next bearish objectives, as per the chart.

Meanwhile if the NZD/USD's weakness turns out to be temporary and price subsequently moves north of the 0.7350 resistance level, then in this case it will become likely that the kiwi will aim for the liquidity zone above 0.7485, the most recent swing high, next.

The U.S. trade deficit narrowed to $44.3 billion in December from a $45.7 billion deficit in November. The trade deficit was just slightly better than the consensus expectation.

Exports bounced back (+2.7%) after two months of contraction. The increase was led by capital goods (+7.9% m/m), but industrial supplies (+2.1%), automotive exports (+1.4%) and consumer goods (+0.5%) also saw gains. Export gains were even stronger in real terms (+3.6%).

Imports rose 1.5%, with all major categories posting gains. Most notably, automotive sector imports jumped 5.5%. Goods imports in real terms rose 1.5%.

Key Implications

No major surprises here. Zeroing in on trade volume trends, both exports and imports picked up in the latter half of 2016, after a flat performance earlier in the year. That is very much in line with an acceleration in economic growth both at home and abroad.

For the year as a whole, the trade deficit in goods shrank in 2016 to $750 trillion, and is well below the peak deficits seen in 2006 to 2008 period when oil prices were at a record high. However, the trade surplus in services shrank slightly in 2016, as the strong U.S. dollar led to faster growth in services imports, such as travel. Therefore the overall trade deficit grew slightly in 2016 to $502 trillion, up from $500 trillion in 2015. Again, this is well below the record $762 trillion deficit posted in 2006.

The U.S. dollar has given back most of its post-election gains on a trade-weighted basis, and is now only about a percent higher than its year-ago levels. A strong dollar has been exerting a considerable drag on goods inflation, but that affect will likely start to move into the rear view mirror in the coming months. This will add to strengthening core price pressures in the latter half of the year.

Daily Pivots: (S1) 1.0707; (P) 1.0747 (R1) 1.0790; More.....

EUR/USD is still staying above 1.0619 minor support and intraday bias remains neutral first. As noted before, choppy rise from 1.0339 is seen as a correction. Hence, in case of another rise, upside should be limited by 1.0872 resistance and bring fall resumption eventually. Break of 1.0619 will argue that the corrective rise is completed and turn bias to the downside for retesting 1.0339 low.

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

Canada's trade balance remained in surplus territory for a second consecutive month in December, although it narrowed slightly to $923 million (from an upwardly revised $1B in November). Exports rose 0.8%, slightly behind the 1.0% gain in imports. In real terms, exports slipped 1.4% while imports were up 0.4%.

The gain in exports was driven by energy products (+16%), which reached the highest level in two years as a result of higher prices. Providing some offset were declines in motor vehicles and parts (-5%), and metal ores and non-metallic mineral products (-13%) which gave back some of the massive gains recorded in November.

Higher imports were underpinned by a 22% jump in the highly-volatile aircraft and other transportation equipment, industrial machinery (+6%), and metal and non-metallic mineral products (+6%). Meanwhile, imports of energy products slid 12% on the month.

Canada's trade surplus with the U.S. narrowed to $4.4B in December (from $4.7B), as the rise in imports (1.3%) outpaced the increase in exports (+0.2%). Canada's trade deficit with the rest of the world narrowed to $3.5B (previously $3.7B) as exports jumped 2.6% and imports were up by a more modest 0.5% during the month.

Key Implications

Despite the pull back in export volumes in December, net trade will nonetheless contribute to economic growth during the fourth quarter, which is likely to come in slightly above 2%.

Going forward, exports are expected to gain some momentum, with US demand expected to remain healthy and the loonie unlikely to move much from its recent mid-70 US cent range. However, with NAFTA renegotiations being a key priority for President Trump, the overall outlook for trade has been clouded. But, while the risks are certainly tilted to the downside, it will likely take some time before any potential measures are put into action.

As such, we expect the Bank of Canada to remain on hold as it continues to assess any impact from forthcoming policies enacted by the new administration.

Daily Pivots: (S1) 0.9886; (P) 0.9924; (R1) 0.9944; More.....

USD/CHF's recovery from 0.9860 extends higher today but stays below 1.0043 minor resistance. Intraday bias remains neutral first. As long as 1.0043 holds, deeper decline is expected. Current fall from 1.0342 is seen as the third leg of the pattern from 1.0327. Below 0.9860 will target 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0043 will indicate short term bottoming and turn bias back to the upside.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expecting the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359, after the consolidation completes.

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