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Trump Intervenes With Dollar Rhetoric

Tuesday January 17: Five things the markets are talking about

Investor nervousness over U.S President elect Trump’s policies and the U.K.’s position in the E.U has encouraged a move towards safer assets, sending the ‘mighty’ dollar tumbling, while rallies in haven assets, like gold and the yen, have stretched into another trading session. Global sovereign bond yields again have fallen while equity indexes are making a tough go of it.

The markets focus will be on U.K PM Theresa May’s speech in a few hours (06:45 am EST) where she will say that the U.K. is likely to pull out of the E.U’s single market for goods and services and seek a completely new trading relationship with the bloc and will not settle for partial membership in the E.U.

When rumors of PM May’s speech surfaced over the weekend, it pushed the pound to trade atop of its 31-year lows outright, akin to last October’s “flash” crash levels (£1.1987). Sterling since then has made a resounding recovery, gaining another +1% this morning as the market covers ‘short’ positions (£1.2170) on the back of stronger inflation data (see below).

Details from this morning’s speech from PM May are expected to determine the direction of GBP over the coming days and weeks.

1. Equities continue to embrace the negative trade

Asian shares were mixed overnight ahead of this morning’s crucial speech by U.K. Prime Minister Theresa May, with stocks in China reversing early declines in another roller-coaster session.

In China, the Shenzhen Composite Index ended up +1.2%, after dropping as much as -1.5% intraday, while the Shanghai Composite Index edged up +0.2%, reversing from losses of as much as -1%. Despite ending in positive territory, overall sentiment remains weak on the fact that Beijing seems committed to accelerating the approval of new listings.

Note: Analysts believe government-backed funds intervention by Chinese authorities contributed to the aggressive intraday turnaround.

Elsewhere, the Nikkei Stock Average ended down -1.5% on the back of a stronger yen (¥113.17) hurting exporters. The Aussies ASX 200 was off -0.9% while the Singapore’s Straits Times Index fell -0.3%.

In Europe, it’s no surprise to see equities trade lower ahead of PM Theresa May’s speech. Major banking stocks in the Eurostoxx are trading mixed, while commodity and mining stocks are weighing in the FTSE 100 with copper prices continue its sell off.

U.S futures are set to open in the ‘red’ (-0.4%).

Indices: Stoxx50 -0.6% at 3,279, FTSE -0.3% at 7,304, DAX -0.7% at 11,473, CAC-40 -0.5% at 4,857, IBEX-35 -0.1% at 9,401, FTSE MIB +0.2% at 19,276, SMI -0.5% at 8,320, SP 500 Futures -0.4%

2. Oil prices mixed, investors look to inventories for direction

Oil prices are mixed ahead of the U.S open, supported by the Saudis saying they would adhere to a commitment to cut output, but held back by rising U.S. production and skepticism that OPEC would comply with its commitments to reduce supplies.

Brent futures are at +$55.76 per barrel, down -10c from Monday’s close, while U.S. West Texas Intermediate (WTI) crude futures are up +15c at +$52.51 per barrel.

Note: Under the November agreement, OPEC, Russia, and other non-OPEC producers have pledged to cut oil output by nearly -1.8m bpd, initially for six-months to bring supplies back in line with consumption.

The market continues to eye U.S. output with interest, as this could offset supply cuts elsewhere.

Gold has climbed +0.9% to +$1,212.91 per ounce, extending its winning streak to seven-days, the longest since November 23.

Note: If the market continues to price in three to four Fed rate hikes for this year, it will likely be the crippling factor for gold ‘bulls’, as real yields start to rise, particularly if inflation remains modest.

3. Tweaking allows ECB to move down the curve

The ECB bought a record-breaking €24.7B worth of debt last week, taking advantage of a bumper supply of bank bonds to boost its economic stimulus program.

It’s expected that the new ‘flexibility’ powers given to ECB policy makers will allow them to shift down the Euro curve to the short-end, affecting long-end eurozone government bond yields (30-years at +1.06%). New powers allows authorities to avoid having to buy much more of the 30-year, if there is flexibility on the short-end.

With the ECB tweaking, Germany secured the lowest on record two-year average allotment yield this morning (the terms now allow for buying bonds at yields below the -0.40% deposit rate and for bonds with one-year maturity).

Germany sold €4B December 2018 Schatz (Two-year Treasuries) with an average yield of -0.75% vs. -0.71% December 7. The bid-to-cover was 1.3 vs. 1.8.

Ahead of the U.S open, 10-year Treasuries have dropped -7bps to +2.33%, after dropping -2bps last week. Treasuries are playing catch up after being closed for Martin Luther King Day.

4. Pound finds support, Trump vocal on Dollar strength

Sterling has extended its overnight gains, rising +1% (£1.2178) outright before this mornings Brexit speech by U.K. Prime Minister Theresa May and after U.K’s inflation data (see below) beat forecasts. Unless they are still surprises to be divulged by PM May, dealers are anticipating a further short squeeze higher for the pound supported by vulnerable ‘short’ positions that have been taken.

Mr. Trump has broken with the convention that U.S Presidents do not comment on the USD – the President-elect said the U.S. dollar was already “too strong” in part because China holds down its currency, the yuan. Knowing the new President-elect, the market can expect more ‘off the cuff’ remarks to move currency prices going forth.

JPY (¥113.14) continues to be supported from risk aversion over the past two-sessions over hard Brexit and potential protectionism by the incoming Trump Administration. The EUR/USD (€1.0685) is higher by +0.7% as the pair sets its sights on the psychological €1.0700 handle.

5. U.K Inflation beats expectations

Data this morning shows that U.K consumer prices grew at the fastest annual rate in over two years in December, driven by the pound’s weakening in the aftermath of the Brexit vote.

U.K annual inflation stood at +1.6% – this was +0.4% above the previous month’s annual inflation rate. Compared to November, prices grew by +0.5%.

Analysts note that the surge in inflation came as companies began to pass on rising input costs linked to a weaker pound onto consumers (costs of materials and fuels used in production rose by +15.8% y/y, the fastest rate of growth in six-years).

Euro Jumps to 8-Week Highs, Markets Brace for May’s Brexit Speech

EUR/USD is showing strong gains in the Tuesday session. Currently, the pair is trading at the 1.07 line. On the release front, German and Eurozone ZEW Economic Sentiment reports both improved, but missed their estimates. The markets are keeping a close eye on a crucial speech from Prime Minister Theresa May, who is expected to confirm that the Britain will leave the European Union’s single market. The US will release the Empire State Manufacturing Index, with the indicator expected to dip to 8.1 points.

Anxious investors on both sides of the Channel are bracing for Prime Minister May’s speech later on Tuesday, in which she will provide more details on the government’s Brexit strategy. May is expected to announce that Britain will assume control over its borders and immigration policy, while acknowledging that this will mean an end to Britain’s access to the EU’s single market. She will likely reiterate that Britain is not looking for a “half-in, half out” relationship with the EU, but what new arrangement will be put into place remains unclear. Since the Brexit vote in June, European leaders have argued that Britain cannot have access to the single market without allowing freedom of movement, essentially saying that the Brits cannot have their cake and eat it too. With May’s speech likely to signal a “hard Brexit”, we could see the pound lose ground following the speech.

ZEW expectations improved in January, although the markets were hoping for more. German ZEW Economic Sentiment improved to 16.6, shy of the forecast of 18.9. Eurozone ZEW Economic Sentiment jumped to 23.2 points, short or the estimate of 24.2. These indicators point to optimism about economic conditions from investors and analysts. The ECB will hold its first policy meeting in the New Year on Thursday. Recent numbers from the Eurozone have been encouraging, as growth and inflation numbers have shown improvement. Still, it’s doubtful that the ECB will start the year with significant changes to monetary policy, as plenty of slack remains the Eurozone economy. In December, the bank extended its asset-purchase program until December 2017, but also cut the size of the program from EUR 80 billion to 60 billion. These parameters are unlikely to change until policymakers see a significant improvement in growth and inflation numbers.

Mid-Day Report: Sterling Rebounds as PM May Pledged "Phased Approach" for …

Sterling rebounds today as UK prime minister Theresa May pledged to adopt a “phased approach” to achieve a “smooth and orderly Brexit”. More important, the positive reaction was towards the confirmation that “the government will put the final deal that’s agreed between the U.K. and the EU to a vote in both Houses of Parliament before it comes into force.” May emphasized that UK will not stay as a member of the single market. But She would opt to “have a customs agreement with EU” and reach the country’s “own tariff schedules at the WTO”. GBP/USD’s break of 1.2316 minor support argues that the pair has successfully defended 1.1946 key near term support and opens up the case for further rebound to 1.2774 resistance.

Also from UK, CPI accelerated to 1.6% yoy in December, up from 1.2% yoy and beat expectation of 1.4% yoy. That’s also the highest reading since July 2014. Core CPI rose to 1.6% yoy, above expectation of 1.4% Yoy. Office for National Statistics head of inflation Mike Prestwood noted that “rising airfares and food prices, along with petrol prices falling less than last December, all helped to push up the rate of inflation. Rising raw material costs also continued to push up the prices of goods leaving factories.” Also from UK, PPI input rose to 15.8% yoy, PPI output rose to 2.7% yoy, PPI output core dropped to 2.1% yoy.

From Eurozone, Germany, ZEW economic sentiment rose to 16.6 in January, up from 13.8, but missed expectation of 18.4. Current situation gauge rose to 77.3, up from 63.5, above expectation of 65.0. Eurozone ZEW economic sentiment rose to 23.2, up from 18.1 but missed expectation of 24.2. ZEW president Achim Wambach noted that “the slight increase” in sentiment “is mainly due to the improved economic situation across European countries.” And, “this improvement in expectations can thus also be seen as a leap of faith for 2017.”

Dollar weakens broadly in reaction to US president-elect Donald Trump’s comments on the currency’s strength. He complained that the Dollar’s strength against China’s Yuan “is killing us”. One of his adviser, Anthony Scaramucci of Skybridge Capital, also said in a panel at the World Economic Forum that “we need to be careful about the rising currency.” Released from US, Empire state manufacturing index dropped to 6.5 in January, below expectation of 8.5.

Daily Pivots: (S1) 1.1990; (P) 1.2037; (R1) 1.2089; More

GBP/USD’s strong rebound and break of 1.2316 minor resistance suggests short term bottoming at 1.1986, ahead of 1.1946 key support level. And, fall from 1.2774 is likely completed too. Intraday bias is back on the upside for 1.2432 resistance first. Break will target 1.2774 again. Price actions from 1.1946 are viewed as a consolidation pattern. Thus, we’d expect strong resistance at 1.2774 to limit upside and bring down trend resumption eventually.

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.

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
00:30
AUD
Home Loans Nov
0.90%
0.00%
-0.80%
-0.60%
04:30
JPY
Industrial Production M/M Nov F
1.50%
1.50%
1.50%

09:30
GBP
CPI M/M Dec
0.50%
0.30%
0.20%

09:30
GBP
CPI Y/Y Dec
1.60%
1.40%
1.20%

09:30
GBP
RPI M/M Dec
0.60%
0.40%
0.30%

09:30
GBP
RPI Y/Y Dec
2.50%
2.30%
2.20%

09:30
GBP
PPI Input M/M Dec
1.80%
2.40%
-1.10%
-0.60%
09:30
GBP
PPI Input Y/Y Dec
15.80%
15.50%
12.90%
13.30%
09:30
GBP
PPI Output M/M Dec
0.10%
0.40%
0.00%
0.10%
09:30
GBP
PPI Output Y/Y Dec
2.70%
2.90%
2.30%
2.40%
09:30
GBP
PPI Output Core M/M Dec
0.00%
0.20%
0.00%
0.10%
09:30
GBP
PPI Output Core Y/Y Dec
2.10%
2.20%
2.20%
2.30%
09:30
GBP
House Price Index Y/Y Nov
6.70%
6.10%
6.90%

10:00
EUR
German ZEW (Economic Sentiment) Jan
16.6
18.4
13.8

10:00
EUR
Eurozone ZEW Survey (Economic Sentiment) Jan
23.2
24.2
18.1

10:00
EUR
German ZEW (Current Situation) Jan
77.3
65
63.5

13:30
USD
Empire State Manufacturing Jan
6.5
8.5
9

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Sterling Slides on Theresa Effect

The heightened hard Brexit fears have triggered a steep Sterling selloff during the early trading hours of Monday with the GBPUSD tumbling to a fresh three-month low at $1.1983. Although the cause behind the renewed selling pressures on the Pound was attributed to reports of Theresa May standing firm and moving forward with her hard Brexit plans during Tuesday’s pending speech, the frightening low buying sentiment continues to play a critical part. It is becoming quite clear that the persistent Brexit woes and ongoing uncertainty have left the Pound vulnerable to extreme losses with anxiety over a rigid divorce from the European Union exposing the currency to further downside risks in the future.

Sterling bears have received ample inspiration from the visible lack of clarity the UK government has provided on the Brexit steps and this continues to grate on investor sentiment. With fears on the rise over a tougher EU exit negatively impacting the UK economy, the rising risk aversion, and diminishing buying sentiment may ensure Sterling remains depressed this month. While most anticipate Theresa May to provide some clarity on Tuesday on how the UK plans to move forward with the hard Brexit scenario, there is a threat of the Sterling sinking deeper into the abyss if investors are left empty-handed instead.

If this messy Brexit episode explodes out of control this quarter, there is a possibility of the Bank of England adopting a dovish stance which may spark a divergence in monetary policy between the Fed and BoE. As of now, Sterling weakness remains a recurrent theme with sellers exploiting the technical bounces to drag prices lower. Technical traders may observe how the GBPUSD reacts to the 1.2150 dynamic support which has the ability to transform into a resistance if the selling momentum persists.

Dollar attempts to stabilise

The lingering impacts of last week’s market shaking Dollar selloff can still be seen on the Dollar Index with prices hovering around 101.65 as of writing. Dollar bullish investors have lost their inspiration to propel the Greenback higher following the lack of clarity on fiscal policies at Trump’s news conference. With the initial driver behind the Dollar’s appreciation pinned on the hopes of Trump boosting US growth via fiscal spending, this new cloud of uncertainty could obstruct the Dollar’s upside gains in the short term. The next major event risk for the Greenback this week will be Trump’s inauguration ceremony on the 20th which could cause price sensitivity to intensify as anxious investors are kept on edge.

Commodity spotlight – Gold

The rising Trump fueled uncertainty, persistent Brexit woes and a weak Dollar have elevated Gold prices closer to $1210 during trading on Monday. This yellow metal has unexpectedly regained its safe-haven glimmer in the first trading month of the New Year with further gains expected in the short term if uncertainty becomes a dominant theme. With anxiety and risk aversion set to heighten this week ahead of the inauguration ceremony in the United States, investors may flock to safe-haven assets which should keep Gold buoyed. From a technical standpoint, Gold could explode into further gains towards $1230 if bulls manage to conquer the $1210 resistance level.

Canadian Dollar Subdued as US Markets Closed

The Canadian dollar has posted slight gains in the Monday session. Currently, USD/CAD is trading at 1.3140. On the release front, US markets are closed for Martin Luther King Day. There are no US or Canadian releases on the schedule, so traders can expect limited movement from USD/CAD during the North American session.

The US consumer remains optimistic as we enter 2017. The UoM Consumer Sentiment in January was solid, but the markets had expected a stronger performance from the UoM Consumer Sentiment for January. The indicator was almost unchanged at 98.1, shy of the forecast of 98.6. Despite the optimism, US retail sales were a mix during the December holiday season. Retail Sales improved to 0.6%, edging above the estimate of 0.5%. However, much of the increase in spending was attributable to automobile sales, at the expense of other sectors of the economy. This was reflected in Core Retail Sales (which excludes car sales), which remained stuck at 0.2%, compared to a forecast of 0.5%. Still, analysts are confident that a bullish consumer will translate into strong spending numbers in the next few months. There was good news on the inflation front, as wholesale prices (measured by PPI) rose 0.3%, beating the forecast of 0.1%. This marked the third rise in four months, as inflation is pointing upwards due to higher oil prices. If inflation continues to climb towards the Federal Reserve target of 2.0%, we could see the Fed step in and raise interest rates. On Thursday, FOMC member Patrick Harker took note of the strong US economy and projected three “modest” rates from the Fed in 2017. We’ll get another look at key inflation numbers on Wednesday, with the release of CPI and Core CPI.

As a commodity-sensitive currency, the Canadian dollar is sensitive to fluctuations in oil prices. With crude prices above the $50 level, the Canadian dollar has followed suit and moved higher as well. The currency is up 2.2 percent in January, and on Thursday, USD/CAD dipped to 1.3042, its lowest level since October 19. If the rally continues, we could see the pair drop below the symbolic 1.30 this week. The markets are keeping an eye on the Bank of Canada, which will set the benchmark interest rate on Wednesday. The rate has been pegged at 0.50% since July 2015, and with plenty of slack in the Canadian economy, no change is expected the upcoming rate announcement.