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Fundamental Analysis 19.01.2018 - Market Outlook
Market Recap

USD is down across the board. The market is obviously worried about the possibility of a US government shut-down at midnight local time tonight (see below).

US Treasury yields rose yesterday, breaching the important 2.60% level on the 10-year, on news of a much larger-than-expected decline in jobless claims, which fell to the lowest level since 1973. The figure outweighed other disappointing data yesterday because the data were collected during the survey week for the nonfarm payrolls, meaning we can probably expect another strong Nonfarm Payroll (NFP) figure for January 2018. Yields later fell slightly on a more secure bid on fears of a government shut-down. Note that even if the government funding bill fails, that only affects discretionary spending by the government. Payment of Treasury obligations is determined by the debt ceiling, a separate problem. That won’t be until March 2018. The higher yields didn’t do much to support the dollar.

AUD was the best-performing G10 currency and NZD the worst-performing (aside from USD) as investors reconsidered their initial strong reaction to the higher Australian unemployment rate and bought AUD/NZD. As I pointed out yesterday, the rising participation rate is a favorable sign for the Australian economy. The optimistic outlook pushed Australia’s benchmark 3-year yield up 3 bps to the highest level since end-2014 and widened the spread over the Reserve Bank of Australia's (RBA) cash rate to the highest level since 2010. The rise in AUD yields is supporting AUD.


Today’s market

Last night the House of Representatives passed the necessary bill to keep the government open through 16 February 2018, but Democrats in the Senate appear ready to block the measure. The New York Times said there was only “a faint glimmer of hope” that the Senate would pass a bill.

The graph below shows the movement of the US Dollar Index (DXY) during the three previous government shutdowns. As you can see, it generally fell during the shutdown, at least at the beginning. However once the shutdown was resolved, the dollar generally rose.

The cliff-hanger over the shutdown will probably be the dominant theme today.


As for the indicators, UK retail sales for December 2018 are expected to show a slowdown on a mom basis but a rapid acceleration on a yoy basis, since there was a big 2.1% mom fall in December 2016. The December 2018 figures are hard to forecast nowadays though because the “Black Friday” sales are tending to shift sales out of December 2018 and into November 2018, thus unsettling the seasonal adjustment. In that case, a 1% mom decline might be taken as “not bad,” particularly compared with the drop in December 2016. When we consider the erosion of real pay (pay raises below the rate of inflation) and the low savings rate in Britain, it’s a wonder anyone has any money left for Christmas presents at all.

I’ve found that the subsequent currency movement correlates most closely with the mom rate of change in the figure including fuel, although obviously a big surprise in one of the other data points could affect rates.

Canadian manufacturing sales for November 2018 are expected to show a solid increase, well above trend, as auto production comes back to normal after retooling shutdowns in November 2018. Higher gasoline prices also mean an increase in the value of sales. The figures should reinforce the Bank of Canada’s view that ”is expected to remain above potential through the first quarter of 2018…” and thereby support CAD. 

The Fundamental Analysis is provided by Marshall Gittler an external service provider of an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.

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