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Fundamental Analysis 16.01.2018 - Market Outlook

Market Recap

Dollar's weakness and euro's strength were the main themes overnight.

The main feature of the market then was the fall in JPY, the only major currency to weaken vs the weak dollar.

The 110-level for USD/JPY is an important psychological support, as is often the case for round numbers, plus the tankan showed that companies are estimating an average rate of 110.69 for the second half of FY2017 (Oct. 2017 through March 2018) is 109.66. If USD/JPY breaks that level, then companies would probably come in to cover their positions in order to make budget, which might set off a “snowball effect” as they chase the market.

However, I doubt the government is planning on doing anything about the yen at these levels. They haven’t intervened in the market since Q4 2011.

It is true that back in 2003/04, the period when Japan was intervening, USD/JPY was at or even above these levels. However, this is just an optical illusion caused by using the nominal exchange rate. USD/JPY at ¥110 now and back then were totally different. If we look at the real effective exchange rate (REER), which takes into account the difference in inflation in different countries, the yen is around the weakest it’s been since the early 1970s.

Today’s market

The day starts off with the UK inflation data.

The UK inflation indicators are expected to show inflation slowing. The main reason the inflation rate rose so high was the collapse in sterling after the Brexit vote in June 2016, which drove up the price of imports. But of course that event is now far in the past and its impact on prices is fading. Slowing inflation is in line with the Bank of England’s forecasts; the November 2017 inflation report forecast that CPI would be 3.0% yoy in Q4 2017 but drop to 2.4% yoy by Q4 2018. Nonetheless, the figures could still prove slightly negative for sterling.

The British house price index will also be released at the same time. This is published by the UK Land Registry and tracks the average price of all houses in the country. The yoy rate of increase is expected to slow notably. This too could be seen as a negative for Britain.

Next up is the Empire State manufacturing index, the first of the regional Federal Reserve's indices. It has come down substantially from its peak in October 2017, but is expected to rebound slightly.

Swiss National Bank (SNB) President Thomas Jordan will speak in Zurich on "How Money is Made by the Central Bank and the Banking System."

Overnight, we get Japan’s machinery orders. This is an important economic indicator, but the problem is that it's hard to forecast it. In any case, economists are forecasting that the pace of growth will slow down. They expect a fall on both a mom and yoy basis, which could be negative for the yen.

Australia’s home loans are expected to be unchanged from the previous month. That would be better than the falls in the previous two months, but it certainly wouldn’t show any improvement in the country’s slowing housing market. That’s why this could be negative for AUD.

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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