Market Overview:

It has been a quiet start to the week as US markets were closed Monday to mark Martin Luther King Day. CPI data for the US released Friday, showed that although headline inflation data was below market expectations, increasing by 0.1%, after a 0.4% increase in November and under economists’ estimates of 0.2% for the month, the core inflation rate was stronger than forecast increasing 0.3% on the month. US retail sales data for the December period increased, also released on Friday, printed in line with expectations coming in up 0.4% following an upward revision of 0.9% for the November figures. Friday’s inflation data should underscore the view that the Fed will continue to normalise interest rates over the course of 2018. The EUR surged higher as news emerged that German Chancellor Angela Merkel is likely going to be able to form a ‘grand collation’, with the SDP solidifying her position. The SDP has to has to approve the deal at a special party conference but the removal of the risk of another election saw buyers pile into the EUR. On the local scene there has been little in the way of data this week, but there is another Global Dairy auction on Wednesday morning with farmers looking for another rise to build on the previous hike in prices at the last auction.

Australia (AUD)

There is not much in the way of economic news over the next two days, until the Australian employment figures on Thursday. Overnight the Australian dollar has enjoyed gains over the US dollar as the USD remains under pressure not helped by US markets being closed for the Martin Luther King holiday. Tomorrow will see the release of Westpac consumer confidence data for January which is expected to be mildly positive. Market expectations for the employment data on Thursday is upbeat, with the longest run of job creation since 1994 set to continue with forecasts of +15,000 jobs created for the month of December, with some forecasts at a +35,000 increase. The unemployment rate is expected to remain unchanged at 5.4%. A solid result would underpin further gains for the AUD against its trading partners.

New Zealand (NZD)

The main news this week will be tomorrow morning’s Global Dairy auction results where expectations are for a further increase following on from the last more positive result. That this year may be tougher, as the New Zealand economy growth rate cools seemed to be reinforced by this morning’s NZIER business confidence survey results for 2017 Q4, which saw seasonally adjust business confidence -11 to its lowest since the third quarter of 2015. The NZIER commented “A worrying development is the continued weakening in profitability, with a net 7 percent of businesses reporting a decline in profitability over the past quarter. Businesses expect further deterioration in the next quarter, in contrast to the trend over the past year where businesses had remained optimistic about a recovery despite weak profitability.” The weaker confidence and profitability is starting to weigh on business expansion plans and hiring intentions which will lead to a softening in growth over the coming year. These concerns appear to have been shrugged off by the New Zealand dollar which has continued to strengthen, especially against the US dollar, but we view the NZD as outpacing fundamentals and is now looking increasingly overstretched against both the USD and AUD.

United States (USD)

A quiet start to the week for US markets due to the US holiday yesterday for Martin Luther King Day. US equity markets closed the week on Friday holding on to previous highs as inflation data showed that although growing, was below expectations. The USD remains unloved, dropping significantly against both the EUR and Japanese Yen (JPY), under pressure after capping five straight weeks of declines, even against a backdrop of solid U.S. growth. Focus has shifted to more potentially hawkish policy shifts from central banks in Europe and Japan, the improving political stability in the euro area, and the synchronized nature of global expansion that is also providing a lift for emerging-market economies and assets. The Bundesbank decision to include the Chinese yuan in its own reserve was another factor weighing on the US dollar. It looks as if the market has already priced in the March Fed rate hike and there is also the potential uncertainty for a budget screw-up shutting down the US government which is also weighing on US dollar values.

Europe (EUR)

The common currency — which was already bolstered after last week’s progress toward a German government — gained further momentum as economists polled in a monthly Bloomberg survey bumped up their 2018 outlook for euro-area growth to 2.2%, this is close to the decade-high 2.4 % pace estimated for last year. Eurozone data continues to remain solid with a rebound in the region’s goods trade surplus in November suggesting that EUR strength to date is doing little to harm exports. The headline figure was lifted by a 3.4% month-to-month rise in exports – mainly in Germany – offset by a 1.6% increase in imports. Looking ahead, net exports are expected to continue to support growth over the first half of 2018 with global trade looking in good health and PMI survey’s pointing to continuing strong export orders. However, with the EUR/USD hitting a high overnight of 1.2296, the highest level since December 2014, we believe that the bullish EUR tone is becoming overdone, a case of too far-too fast. It should be remembered that the US Fed is still in the tightening path and policymakers still pledge for three rate hikes this year (with some chance of maybe a 4th hike), while easing continues in the rest of the world. Certainly, the ECB has been officially reducing QE and the BOJ is suspected to be doing the same, but both central banks are still far from openly tightening. That said, the decline of the American currency could continue as markets have a history of remaining illogical for longer than rationally expected. Caution is warranted at these EUR/USD levels.

United Kingdom (GBP)

UK news overnight has centred on the collapse of construction company Carillion, a U.K. company with government contracts in everything from hospitals to the HS2 high-speed rail project, which filed for compulsory liquidation after failing in a last-ditch effort to shore up finances and get a government bailout. The company employs 43,000 people worldwide, almost 20,000 of them in the U.K., and has as much as 1.5 billion pounds ($2.1 billion) in outstanding borrowings. It held talks with the government Sunday to ask for the 300 million pounds it needed by the end of the month to stay afloat. The collapse has the potential to affect more than 30,000 business. Their collapse may have political ramifications as the UK government continued to award contracts to Carillion even though their future has looked uncertain for some time. Over £2 billion worth of government contracts were handed to Carillion during the time that the firm gave three profit warnings. This looks like negligence on the behalf of the government and is a costly mistake that the UK government can ill afford and is yet another huge embarrassment for the UK government, which appears to be moving from mishap to mishap. The UK pound (GBP) continues to rally hard versus the dollar, with the GBP/USD at a high of 1.3818, the highest level since June 2016, as investors continue to cheer support of soft Brexit rumours from Spain and Holland and as investors look ahead to UK inflation data tonight. This is expected to show the UK inflation rate peaking in December at a cyclical high of 3.2% y/y as the post-Brexit Sterling’s depreciation, rising oil prices and strong consumer demand just ahead of Christmas holiday feed into the price level in the UK.

Japan (JPY)

Earlier on the day, BOJ head Kuroda, reiterated in a speech that the central bank is determined to maintain its quantitative easing with yield-curve control, but also offered an upbeat outlook of the local economy, increasing speculation that the BOJ could start trimming easing measures sooner rather than later, particularly after substantially reducing its bond-buying earlier this month. Later today, Japan will release its all industry activity index, expected at 0.4% in November from 0.3% in October. The USD/JPY pair plunged to a fresh 4-month low of 110.33, level reached during the US afternoon, as the yen’s appreciation continued. The Japanese currency got a boost from the technical breakout of the 110.80 price zone, where the pair bottomed last November, extending its slide afterward in thin market conditions. Although this move is looking overdone next support for the USD/JPY is at 110.10, upside at 111.20 looks safe over the next few days.

Canada (CAD)

A NAFTA decision is still some time away but talks continue as Canada works behind the scenes to avoid the US withdrawing from the agreement, but this may harder than Trump expects, as NAFTA is also a treaty as well as a trade agreement, posing a more complex set of problems should the US rip up the existing agreement. The Canadian dollar has strengthened over the last few days, mainly on the back of US dollar weakness, but also ahead of the Bank of Canada (BoC) meeting on Wednesday where the market is sure that a rate hike is a done deal. But maybe this may not be the case, as although there is no question that the economy in general has improved with retail sales, GDP growth, CPI and employment activity improving significantly since early December but the BoC has more options than to raise interest rates immediately.

Major Announcements last week:

• Australian Retail Sales 1.2% vs 0.4% expected
• US CPI 0.1% vs 0.2% expected
• US Core CPI 0.3% vs 0.2% expected
• US Retail Sales 0.4% vs 0.4% expected