2017 is year of high uncertainty, mainly hinging on the shift of global political agendas, from the new policy direction under Trump's administration, to the beginning of negotiations between the UK and the EU on Brexit, to the leadership transition in China. On the currency outlook, we remain constructive over USD this year, anticipating Trump's pro-growth policy would drive higher economic expansion and inflation, and facilitate a tighter monetary policy stance. With the market shy of pricing in three Fed funds rate hikes (as signaled in the December dot plot) this year, there is room for USD to rally further should incoming macroeconomic data eventually convince traders that more rate hikes are possible. We are bearish on Treasuries and expect US yields to move higher, especially at the front-end. Monetary policy divergence should bold well for the greenback, especially against the euro.

US pro-growth policy: Donald Trump promises to adopt expansionary fiscal policy with reduction in both income and corporate tax rates. A corporate tax rate at 15% (proposed by Trump, compared to House GOP's 20%) could boost S&P 500 EPS by up to about 10% in 2017. Lower income tax rate, weighted towards higher-income groups, would be a boost to consumer spending. Trump's 'America's Infrastructure First' policy is supportive of 'investments in transportation, clean water, a modern and reliable electricity grid, telecommunications, security infrastructure and other pressing domestic infrastructure needs'. While there is not yet a firm number on infrastructural expenditure, it is widely estimated that US$ 500B would be spent over a decade. The reforms, probably to be passed in the second half of the year, should result in above-trend economic growth and inflation. The downside risk, however, is that the new government fails to implement fiscal stimulus measures to an extent that is sufficient to boost growth that meets expectations. Other risks are that Trump's actual policies, including those on immigration and Obamacare, turn out to be milder than what were promised in his election platform.

Policy Divergence and USD as High Yield Currency: The current Fed funds rate, at 0.75%, has made the greenback one of the top three G10 high yield currencies, after New Zealand dollar (RBNZ's OCR at 1.75%) and Australian dollar (RBA's cash rate at 1.5%). Capital inflows to the US should accelerate further given the likelihood that more rate hikes are coming this year, together with steady monetary policies in the antipodean central banks, capital inflation. Policy divergence is again a major theme this year. The December dot plot unveiled the median projection of 3 rate hikes this year, while the market has for now priced in only two, of which one would come in June. We believe the market would expect more rate hikes if the new government delivers the pro-growth policies as promised and if the US economic growth remains resilient. Nonetheless, expectations of two rate hikes, together with the upbeat growth profile, have already distinguished the Fed's monetary policy from other major central banks'. For instance, ECB in December surprised the market by announcing tapering to its QE program, noting it would extend the program until December 2017 but would reduce the pace of buying to 60B euro per month from April 2017, compared with the current 80B euro. Yet, the central bank maintained a dovish tone in the accompanying statement, warning of "subdued underlying inflationary pressures" and 'downside risks' to growth. President Draghi also stressed that there's no intention to taper to program towards zero and left the door open to increasing purchases again if necessary. Another example is BOC. While the central bank would likely keeps its monetary policy on hold throughout the year, the risk is for further easing. Meanwhile, the central bank would maintain a dovish tone in its monetary statements

Japanese yen would remain pressured against US dollar if BOJ sticks to its yield curve targeting policy. A more hawkish Fed and US-led yield curve steepening is likely to support USD against major currencies through widening yield differentials.

EM Currencies Worse Off

More rapid Fed funds rate hikes, Trump's protectionism in the form of trade restrictions and global anti-immigration sentiment are likely to hammer emerging market economies. The first two events are expected to affect aversely EM currencies with large current account deficits. Higher US interest rates (both real and nominal) and a stronger greenback would tighten EM financial conditions. The market is concerned about the sharp depreciation in the Chinese renminbi, the official currency the world's biggest economic growth driver. We expect the strong USD setting would continue renminbi's depreciation and exacerbate capital outflow in China, leading to further intervention, such as widening of trading bands and capital controls, by PBOC

Daily Pivots: (S1) 1.2187; (P) 1.2247; (R1) 1.2296; More...

GBP/USD recovered ahead of 1.2200 and intraday bias stays neutral. Consolidation there could extend with another rise. But overall outlook is unchanged. That is, corrective rise from 1.1946 has completed at 1.2774. Recovery from 1.2200 should be limited 1.2509 resistance and bring fall resumption. Below 1.2200 will target a test on 1.1946 low. Decisive break there will confirm larger down trend resumption.

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.

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Dollar surged with stocks and yield overnight but momentum was unconvincing. Dollar index hit as high as 103.82 but failed to sustain above recent resistance at 103.65. The index is currently trading back at around 103.20. DJIA gained 119.16 pts, or 0.60% to close at 19881.76. However, that close to yesterday's open at 19872.86 which indicates indecisiveness. S&P 500 performed slightly better as it closed up 19.00 pts, or 0.85% at 2257.83, comparing to the open at 2251.57. 10 year yield jumped to as high as 2.518 but closed at 2.450, sharply below the open at 2.511 even though it ended up 0.004. 30 year yield perform worse, opening at 3.123 but closed at 3.047, down -0.016 from prior close. In the currency market, EUR/USD breached 1.0351 near term support briefly but failed to stay below and is back at 1.0410. Markets are generally staying cautious ahead of employment data from US.

Nonetheless, focus will turn to minutes of December FOMC meeting first. Besides the discussion over the 25 bps rate hike decision made on the month, we are closely watching for the discussion of potential monetary policy changes as Trump takes office. The president-elect has been proposing pro-growth fiscal policy. We would also look for the rationale behind the more hawkish shift in the dot plot which signals 3 rate hikes in 2017. Currently, fed fund futures are pricing in around 70% chance of another rate hike by June this year.

Oil price will be another development to watch. WTI crude oil jumped to 18 month high at 55.24 but reversed since then. It's currently trading at around 52.50 at the time of writing. WTI was initially lifted by news that Kuwait and Oman indicated that OPEC members are delivering the agreement of production cut. But it reversed as doubt re-surfaced as Libya is seen ramping up output again. The reversal in oil price was seen as a key factor in dragging down stocks yesterday.

On the data front, Eurozone will release PMI services in European session. Also, Eurozone will release December CPI flash. UK will release construction PMI, mortgage approvals and M4 money supply. No key economic data is scheduled for US and focus will be on FOMC minutes.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.2187; (P) 1.2247; (R1) 1.2296; More...

GBP/USD recovered ahead of 1.2200 and intraday bias stays neutral. Consolidation there could extend with another rise. But overall outlook is unchanged. That is, corrective rise from 1.1946 has completed at 1.2774. Recovery from 1.2200 should be limited 1.2509 resistance and bring fall resumption. Below 1.2200 will target a test on 1.1946 low. Decisive break there will confirm larger down trend resumption.

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.

Economic Indicators Update

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EUR/GBP - 0.8486

Recent wave: Major double three (A)-(B)-(C)-(X)-(A)-(B)-(C) is unfolding and 2nd (A) has possibly ended at 0.6936.

Trend: Near term up

New strategy :

Stop : -

Although the single currency rallied to 0.8669 late last week, the subsequent sharp retreat suggests top has possibly been formed there and consolidation with downside bias is seen for weakness to 0.8450, then 0.8420-30, however, break of 0.8375 is needed to signal the rebound from 0.8304 (last month's low) has ended, bring further subsequent decline to 0.8332 support.

In view of this, we are looking to sell euro on recovery as 0.8550-60 should limit upside. Only break of 0.8605-10 would abort and suggest the retreat from 0.8669 has ended instead, risk retest of this last week's high later.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.3436

Recent wave: Only wave v of c has ended at 0.9407 and wave C of major A-B-C correction is underway for headway to 1.4700

Trend: Near term up

New strategy :

Stop:-

Although the greenback retreated after rising to 1.3599 last week, suggesting top has possibly been formed there and consolidation with mild downside bias is seen for retracement of recent rise, below 1.3385-90 would add credence to this view and extend weakness to 1.3355-60, then towards 1.3300-10 later which is likely to contain downside.

In view of this, we are looking to sell on recovery as 1.3500-10 should limit upside. Only above resistance at 1.3558 would abort and signal the retreat from 1.3599 has ended, bring retest of this level first, once this resistance is penetrated, this would extend recent upmove to 1.3650-60 first.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

Daily Pivots: (S1) 1.2262; (P) 1.2324; (R1) 1.2405; More...

Intraday bias in GBP/USD remains neutral for consolidation above 1.2200. Overall outlook is unchanged. That is, corrective rise from 1.1946 has completed at 1.2774. Recovery from 1.2200 should be limited 1.2509 resistance and bring fall resumption. Below 1.2200 will target a test on 1.1946 low. Decisive break there will confirm larger down trend resumption.

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.

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Daily Pivots: (S1) 1.0078; (P) 1.0155; (R1) 1.0255; More.....

USD/CHF rises sharply today and focus is back on 1.0342 resistance. Break will confirm resumption of recent up trend. In that case, intraday bias will be turned back to the upside for 61.8% projection of 0.9548 to 1.0342 from 1.0056 at 1.0547. In case of another retreat, we'd expect downside to be contained by 1.0019 support and bring rebound.

In the bigger picture, the corrective fall from 1.0327 should have completed at 0.9443 already. Rise from 0.9443 could be resuming the long term rally from 2011 low at 0.7065. But decisive break of 1.0327 is needed to confirm. In that case, next medium term upside target will be 38.2% retracement of 1.8305 to 0.7065 at 1.1359. Rejection from 1.0327 will extend the sideway pattern with another fall back to 0.9443/9540 support zone.

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Daily Pivots: (S1) 116.28; (P) 116.73; (R1) 117.44; More...

USD/JPY's rebound continues and focus is back on 118.65 resistance. Break will confirm resumption of whole rise from 98.97. In such case, intraday bias will be turned back to the upside for retesting 125.85 high. We'd be cautious on topping at 125.85 on first attempt. In case of another retreat, downside should be contained by 114.76 support and bring rally resumption finally.

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 corrective 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.

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Daily Pivots: (S1) 1.0449; (P) 1.0551 (R1) 1.0620; More.....

EUR/USD drops sharply today and focus is back on 1.0351 low. Break will resume the larger down trend and target parity next. In case of another recovery, we'd expect upside to be limited by 1.0669 resistance and bring down trend resumption. However, firm break of 1.0669 will argue that stronger recovery is underway back to 1.0872 resistance instead.

In the bigger picture, break of 1.0461 key support indicates that consolidation from there has completed as a triangle at 1.1298. And, the down trend from 1.6039 (2008 high) is resuming. Current downtrend is now expected to target 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.

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Quick update: ISM manufacturing jumped to 54.7 in December, above expectation of 53.7 and hit the highest level since December 2014. Price paid surged to 65.5. Employment also improved to 53.1. Dollar index breaks recent high and hits 103.82 so far.

Dollar surges broadly today, except versus Aussie, as helped by the selloff in Euro. Dollar index reaches as high as 103.52 and is set to test recent high at 103.65. Nonetheless, Dollar bulls could stay cautious ahead of key economic data to be released this week, including Friday's non-farm payroll, as well as FOMC Minutes. Euro is weighed down by talk that Italy might eventually leave the Eurozone, and receives little help from better than expected German data. Oil price resumes rally as the agreement of OPEC and non-OPEC countries on production cut kicks start. WTI crude oil surges to 18-month high at 55.24. Gold is weighed down by the strength in dollar and dips below 1150 handle.

UK PMI manufacturing jumped to 56.1 in December, up from 53.6 and beat expectation of 56.1. That's the highest level in 30 months. Markit noted that "the UK manufacturing sector starts 2017 on a strong footing. The headline PMI hit a two-and-a-half year high in December, with rates of expansion in output and new orders among the fastest seen during the survey's 25-year history." And, "a plus point from the December survey was that the expansion was led by the investment and intermediate goods sectors, suggesting capital spending and corporate demand took the reins from the consumer in driving industrial growth forward."

Ifo head Clemens Fuest said to a German newspaper Tagesspiegel that "the standard of living in Italy is at the same level as in 2000. If that does not change, the Italians will at some stage say: 'We don't want this euro zone any more'." German unemployment dropped -17k in December, much better than expectation of -5k. Unemployment rate was unchanged at 6.0%, staying at the lowest level since the beginning of the data series back in 1992. German CPI rose 0.7% mom, 1.7% yoy in December, above expectation of 0.6% mom, 1.4% yoy. Also from Europe, Swiss SVME PMI dropped to 56.0 in December, down from 56.6, in line with consensus.

The Caixin PMI manufacturing for China rose to 51.9 in December, much better than expectation of being unchanged at 50.9. That's the best reading in three years since January 2013. Caixin noted that "a further rise in production at Chinese manufacturers supported the higher PMI reading in December. Notably, the rate of output growth accelerated to a 71-month high, with a number of panelists commenting on stronger underlying demand and new client wins." And, "data indicated that improved domestic demand was the key driver of new business growth, however, as new export sales were unchanged in December." Nonetheless, released earlier in the week, the official PMI manufacturing dropped to 51.4, down from 51.7 and below expectation of 51.6.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0449; (P) 1.0551 (R1) 1.0620; More.....

EUR/USD drops sharply today and focus is back on 1.0351 low. Break will resume the larger down trend and target parity next. In case of another recovery, we'd expect upside to be limited by 1.0669 resistance and bring down trend resumption. However, firm break of 1.0669 will argue that stronger recovery is underway back to 1.0872 resistance instead.

In the bigger picture, break of 1.0461 key support indicates that consolidation from there has completed as a triangle at 1.1298. And, the down trend from 1.6039 (2008 high) is resuming. Current downtrend is now expected to target 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

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