Market Overview:
The main news of the week is the continued shutdown of the US government which has seen the USD remain under pressure. Funding for the federal agencies ran out on Saturday with Trump and Republican lawmakers locked in a standoff with Democrats. As the shutdown entered its second day, there appeared to be no clear path for a quick end to the crisis, however at the last minute a stop-gap deal was cobbled together that would fund the government through Feb. 8th. Advancing the spending bill clears the way to reopen the government after a three-day shutdown, although that could merely delay the fight over immigration, which has been the major point of contention for several weeks. In an update to its forecasts presented to the World Economic Forum at Davos in Switzerland, the International Monetary Fund (IMF) has raised global economic growth to 3.9% in 2018 and 2019, up from the 3.7% per year it forecast last October. It lifted its forecasts for US growth from 2.3 % to 2.7% in 2018 and from 1.9 to 2.5 per cent in 2019. It commented that the short-term growth boost brought about by the US tax cuts will have a positive, albeit short-lived, output spill over for US trading partners. However, it also pointed out that it was likely to widen the US current account deficit, strengthen the USD, and affect international investment flows. Later this week there will be an ECB policy meeting and accompanying press statements (Thurs) and of Bank of Japan policy meeting and interest rate decision later today. These are expected to reaffirm the course of winding back monetary stimulus.
Australia (AUD)
The Australian dollar held onto solid gains as the week opened buoyed by last week’s good domestic data. Although Chinese figures were mixed, growth in the world’s second-largest economy continues to show signs of steady growth which help underpin commodity prices and thus AUD strength. The Australian calendar has nothing to offer this week and is a short week as the Australian Day holiday falls on Friday. Australian commodities continue to power ahead including copper, which is the country’s 2nd biggest export and has now risen over 1 % in the last month. The Australian share market jumped more than 1% overnight which was also an additional factor supporting the Australian dollar as it held over the 0.8000 level against its US counterpart.
New Zealand (NZD)
Very light on the data front for New Zealand this week with only Q4 CPI data tomorrow being of note. Market consensus is that the YOY figure will come in around 1.9% in line with the previous release. Last week’s Consumer Confidence figures showed an interesting picture, with confidence in some regions showing sharp drops with weaker agricultural conditions and unease about government policy across a number of fronts being key drivers. Although we believe it is too early to be alarmed about government policy given little of it has yet to be properly formulated and overall, any changes are unlikely to be radical. The NZD is holding above the 0.7300 level against the US, but we view it as being susceptible to any snap-back in US strength which is likely as the next Fed rate hike approaches next month.
United States (USD)
With the government spending stalemate broken and a shaky agreement on the table to kick the can of government funding down the road to the 8th February, US equity markets bounced back overnight with the S&P500 extending gains to another record. Investors are also awaiting about 80 earnings reports for corporates in the benchmark index this week, including from Netflix Inc. and Proctor & Gamble Co. President Trump is scheduled to give a speech at the World economic forum at Davos on Friday, but this is expected to have little effect on either the equity or currency markets, although he is expected to make comments around the recent US tax cut package and perhaps give some indication on future US direction on trade. Later in the week there are data releases for housing starts, jobless claims and on Friday Q4 GDP figures. The week started in slow motion, with the USD under pressure against all of its major rivals amid the political headlines around the government shutdown over the weekend. The EUR/USD gapped higher at the opening but failed to breach the 1.2280 resistance area, retreating to consolidate around the 1.2240/50 level. We expect this level to hold over the next few days awaiting further US data releases to re-establish clear direction.
Europe (EUR)
Talks continue around the formation of a new German government, with a new effort made by the German Social Democrats (SPD) on Sunday to finally end political deadlock. They have voted to proceed with coalition negotiations with Chancellor Merkel’s CDU and talks are scheduled to begin tonight. This Thursday’s ECB meeting is likely to be interesting, as expectations of hawkish language in the ECB’s policy statement combined with mixed sentiment seen on European equity markets keep the sentiment buoyed around the common currency. The growth outlook has improved in recent months for the Eurozone region with the ECB has repeatedly increasing its growth forecast for the Eurozone. The positive outlook for the Eurozone has also been confirmed by the World Economic Outlook from the International Monetary Fund that has increased the GDP growth estimate for 2018 and 2019 by 0.3% upwards to 2.1% and 2.0% respectively. The improved growth forecast is a justification for the previous ECB decision to halve its bond-buying program, but any aggressive pullback on monetary stimulus may be away off. At Thursday’s press briefing we look for ECB President Mario Draghi to talk the Euro down. A strong EUR is a detrimental element to ECB’s main inflation target. While the ECB sees better growth prospects, it still sees signs of the inflation very much subdued and with Euro’s appreciation chances of importing some of that, inflation is diminishing. Look for the EUR/USD values to consolidate at current levels ahead of Thursday’s meeting.
United Kingdom (GBP)
UK retail sales data showed that retailers suffered the weakest Christmas shopping growth for five years as higher prices hit family spending. December’s retail sales rose by 1.4% by volume compared with the same month of 2016, the slowest growth since 2012. The UK pound (GBP) has crept higher as it heads towards the 1.40 level against the USD, it is now sitting comfortably above the $1.39 mark against the dollar and is on course to rack up a fifth consecutive weekly rise, its best weekly winning streak in just under three years. Brexit optimism is gradually creeping higher, with the likelihood of a more convenient trade deal with the EU increasing and lifting sterling against a basket of the leading currencies, but it has been given more than a helping hand by the USD slipping on investors becoming nervous, over sluggish inflation. Earlier comments from French President Macron, also underpinned the Sterling, by saying that the UK should get a better deal than a plain agreement between two independent countries after Brexit. Although acknowledging that it could not have the same benefits as a Union member. The UK calendar will offer some minor figures tonight, with more relevant news on employment and GDP later in the week.
Japan (JPY)
Later today there is the Bank of Japan (BoJ) monetary policy meeting. The central bank is largely expected to maintain its policy unchanged, despite having recently reduced its bond-buying and continued signs of economic strength. As usual, markets will be looking for hints on future moves on monetary policy. Governor Kuroda will offer a press conference after the event although as usual, there’s no certain time for the event. Our expectations are that the current status quo on monetary policy will be maintained. The USD/JPY continues to trade around the 110.90/111.00 level, last week’s high of 111.47 is immediate resistance a break of which would target 112.00, support is back at 110.60. The BoJ decision is unlikely to provide any clearer direction.
Canada (CAD)
NAFTA negotiations are still to the fore as negotiations continue to drag on. There are some rumours that President Trump may use his address at Davos to announce a US withdrawal from NAFTA, which is creating nervousness around USD/CAD trading. Immediate support for the USD/CAD is near the 1.2430 level. Below which the pair is likely to accelerate the fall back towards the 1.2400 handle before eventually dropping to test the 1.2360-55 strong support. Upside immediate resistance is around 1.2500 which if broken would test 1.2545. A break down in the NAFTA agreement would likely see a sharp move to 1.2585 and above.
Major Announcements last week:
• Bank of Canada hikes interest rates 0.25% as expected
• Australian Employment Change 34.7k vs 13.2k expected
• Australian Unemployment Rate 5.5% vs 5.4% expected
• Chinese GDP 6.8% vs 6.7% expected
• US Building Permits 1.30m vs 1.29m expected
• UK Retail Sales -1.5% vs -0.8% expected