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19 / 12 / 2017 | Market News

Fundamental Analysis 19.12.2017 - Market Outlook

CHF gained overnight and NZD fell during the European and US days yesterday. NZD is firming this morning in Asia ahead of the upcoming dairy auctions. Other currencies largely moved in a narrow range.

The full UK Cabinet meets today to discuss Brexit. There was a small Cabinet meeting yesterday of key figures involved in the negotiations. According to press reports, UK Prime Minister Theresa May argued that Britain should continue to press for a “bespoke and ambitious” trade deal that would give Britain the benefits of a Canada-style free trade agreement but with some additional elements that are of importance to the UK, such as services. This is despite the fact that the EU’s lead negotiator, Michel Barnier, has ruled out “sector-by-sector” participation in the single market. Cabinet members still seem to disagree on how closely Britain should align itself with EU regulations following Brexit.

The US House of Representatives is scheduled to vote on the Republican tax bill today. The bill’s ultimate passage seems assured after the last two holdouts in the Senate yesterday said that they would vote for it.

Germany’s Ifo Institute for Economic Research Index starts the day off. The business climate is at a record high, the current assessment is near its record high, and the expectations index is the highest it’s been in seven years, so even staying around those levels could be positive for EUR. 

US housing starts and building permits are forecast to be lower in November 2017. That’s not too much of a surprise, because there was a surge in starts following the interruption to building caused by the hurricanes in August 2017 and September 2017. Apparently the market expects activity to calm down a bit, especially as both labor and materials are in short supply. Nonetheless both would still be above the pre-hurricane trend, which could be positive for USD. The market seems to pay a bit more attention to the starts figure than to the permits figure.



The US current account balance is forecast to have narrowed slightly in Q3. The market consensus figure (-$116.4bn) is what the 4Q moving average would be if indeed it comes out at that amount (-$116.8bn).



Overnight, New Zealand announces its trade data. The figures aren’t seasonally adjusted, so in this case it definitely is important to look at the moving average. Meat and dairy exports are picking up and so the forecast figure would imply a continued narrowing of the deficit on a 12-month moving average trend, which could be positive for NZD. 



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 

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18 / 12 / 2017 | Technical Analysis

Technical Analysis 18.12.2017 - AUD/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is above Kijun-sen, the red line is directed downwards, while the blue one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is Tenkan-sen line (86.148). One of the previous maximums of Chikou Span line is expected to be a resistance level (86.362).



On the daily chart Tenkan-sen line is below Kijun-sen, the blue line is directed downwards, while the red one remains horizontal. Confirmative line Chikou Span is approaching the price chart from below, current cloud is descending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is Kijun-sen line (85.710). The closest resistance level is the upper border of the cloud (87.631).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

 
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18 / 12 / 2017 | Market News

Fundamental Analysis 18.12.2017 - Market Outlook

The dollar is starting the week stronger against most of the other major currencies. Reports that several of the Republican holdouts against the tax bill have capitulated and will vote for it have raised hopes that the bill will pass. 

As for other currencies, GBP fell after both European Commission President Jean-Claude Juncker and EU President Donald Tusk warned that the second stage of negotiations, to determine the trade relationship between Britain and the EU after Brexit, would be even more difficult than the first stage. We’ll learn more this week as the Cabinet meets to discuss the agreement so far (today and tomorrow) and the European Commission publishes its directives for the Brexit transition phase (Wednesday 20th December 2017).

EUR gained overall after the leaders of the Social Democratic Party (SPD)  voted unanimously on Friday 15th Decemebr 2017 to start exploratory talks with Chancellor Merkel’s Christian Democratic Union (CDU) on forming a new coalition. The Social Democratic Party (SPD) refused to enter into a new coalition, thereby making it difficult to form a government. The agreement suggests that now it’s just a matter of haggling over the details before a new coalition similar to the one that they had before is formed.

Today’s market

Perhaps the main event of the day was the beginning of the three-day Central Economic Work Conference in China. Party leaders will discuss economic policies for the next year at this conference. The main point of interest for the market will be the key GDP growth target. Some analysts expect that they will explicitly lower it to 6% from 6.5%, or failing that, lower it implicitly by fine-tuning the wording to reflect greater tolerance for slower growth. A reduction in the growth target could be negative for AUD.

There will be a small meeting of certain ministers of the Cabinet of the United Kingdom and Prime Minister Theresa May today to discuss what relationship the UK should have with the EU after Brexit. The full Cabinet will then meet on Tuesday 19th Decemebr 2017.

The US Senate may vote today or tomorrow on the revised tax bill.  If it does pass, it could be slightly USD-positive.

The Confederation of British Industry (CBI) trends survey is a second-tier indicator at best, but I include it because of the intense focus on the UK economy nowadays. The diffusion index for total orders went up last month; it’s expected to come down a bit this month but still remain at an elevated level, which could be positive for the pound. No forecast is available for the selling prices DI. 

The US National Association of Home Builders’ (NAHB) survey is also a second-tier indicator. EUR/USD does sometimes show a significant (>0.1%) change in the house following the indicator, but it’s unclear how closely related that move is to the NAHB itself, because the movement is not closely correlated to the change in the index. In any event, the index is expected to be unchanged this month, it probably won’t affect the market much. 

Overnight, the Reserve Bank of Australia (RBA) releases the minutes of its recent policy meeting. However, since that meeting was accompanied by a Monetary Policy Statement, I wonder just how much more there is to learn about the RBA’s views and how much impact this report is likely to have. The minutes could shed some light on why they changed their comments about AUD  and dropped the expressions of concern about an appreciating currency. For the record, the 5 December 2017 meeting sent AUD/USD sharply higher, but by the end of the day it was back down to where it started from. That suggests the minutes could be AUD-positive. 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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15 / 12 / 2017 | Technical Analysis

Technical Analysis 15.12.2017 - AUD/CAD: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is above Kijun-sen, the red line is directed upwards, while the blue one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading between Tenkan-sen and Kijun-sen lines. The closest support level is the upper border of the cloud (0.9777). The closest resistance level is Tenkan-sen line (0.9808).



On the daily chart Tenkan-sen line is crossing Kijun-sen from below, the red line is directed upwards, while the blue one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is descending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is the upper border of the cloud (0.9745). The closest resistance level is Tenkan-sen line (0.9815).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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15 / 12 / 2017 | Market News

Fundamental Analysis 15.12.2017 - Market Outlook

The new forecasts for 2020 that the European Central Bank (ECB) revealed yesterday showed that the Bank doesn’t expect to hit its 2% inflation target even then (only 1.7%). The news suggested that European Central Bank interest rates would have to be held low for longer than the market expected and sent the EUR lower.



European Central Bank President Mario Draghi said inflation had “yet to show convincing signs of a sustained upward trend” and that “an ample degree of monetary stimulus therefore remains necessary,” such as continuing the Bank’s asset purchase program. In fact, the market now sees a rate cut as about as likely as a rate hike over the next 10 months – both improbable, but nonetheless equally improbable. This is a stark contrast with the Federal Reserve, which revised up its forecasts for interest rates on Wednesday 13th December 2017, particularly in 2020. The return of “monetary policy divergence” is likely to weigh on EUR/USD.

The Bank of England said that “further modest increases” in interest rates are likely, but not yet as the Monetary Policy Committee voted unanimously to keep rates steady. GBP was buoyed less by the Bank of England meeting than by the many favorable comments about UK Prime Minister Theresa May emanating from the EU Summit, where a number of national leaders voiced their support for Theresa May.

JPY rallied sharply in early US trading, apparently as a result of the dovish European Central Bank meeting, which diminished the yield disadvantage of JPY relative to EUR. Weak stock markets also helped JPY. The mixed results of the tankan had little effect on the currency; large manufacturers did better than expected, but large non-manufacturers – which tend to have more of an impact on the currency – did worse. 

Today’s market

The morning will be taken up by the end of the EU summit and the various press conferences afterwards. Of course Brexit will dominate the discussions.

Canadian manufacturing sales are forecast to rise past what the recent trend would suggest. That could be positive for CAD, but this second-tier indicator doesn’t have such a strong correlation with the currency’s movement. 



The Empire State Manufacturing Index is the first of the several regional Federal Reserve indices to be announced. The index is expected to be down somewhat. This would be contrary to the recently announced Markit Purchasing Managers' Index for the month, which rose sharply to 55.0 from 53.9.



US industrial production for November 2017 is forecast to rise at an above-trend pace. It will almost certainly be below October 2017’s increase, but that month was distorted by the return to normal after the hurricanes depressed output in August 2017 and September 2017. The industrial production figures should show the results of the large increase in factory hours worked that appeared in the November 2017 employment report. .



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.




 

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14 / 12 / 2017 | Technical Analysis

Technical Analysis 14.12.2017 - AUD/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is above Kijun-sen, the blue line is directed upwards, while the red one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading above Tenkan-sen and Kijun-sen lines; the Bullish trend is still strong. The closest support level is Tenkan-sen line (86.036). One of the previous maximums of Chikou Span line is expected to be a resistance level (86.546).



On the daily chart Tenkan-sen line is below Kijun-sen, the red line is directed downwards, while the blue one remains horizontal. Confirmative line Chikou Span is below the price chart, current cloud is descending. The instrument has broken through Tenkan-sen and Kijun-sen lines. The closest support level is Tenkan-sen line (85.549). The closest resistance level is the upper border of the cloud (87.561).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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14 / 12 / 2017 | Market News

Fundamental Analysis 14.12.2017 - Market Outlook

The Federal Open Market Committee (FOMC) raised rates as expected, and also slightly increased their estimates of future interest rates as they upped their forecasts for the economy. Looking at the “dot plot,” both the bottom and the top dots moved up for 2019 and 2020, while the median also for 2020. Nonetheless, the overall impression was dovish. GDP was revised up and unemployment was revised down to the 3% area. Nonetheless core inflation was not revised up, presumeably under the assumption that some fiscal stimulus would expand the supply side of the economy at the same time as demand was increasing. The overall impression was therefore dovish, particularly after Chair of the Board of Governors of the Federal Reserve System Janet Yellen reiterated that faster growth probably wouldn’t mean greater price pressures anytime soon. Bond yields fell with the yield curve steepening and the dollar declined as a result. We could see further dollar weakness as the market searches for a new reason to buy. The main risk to that forecast is simply year-end demand and position-closing, particularly with regards to USD/JPY. 

AUD was the main gainer after Australia’s employment data far exceeded estimates. Employment rose 61.6k in November 2017 vs 19k expected (7.8k previous). The resulting shift in rate hike probabilities could keep AUD underpinned today. 

Today’s market

Today is a busy day – three central bank meetings, the start of the EU summit, plus the preliminary Purchasing Managers' Indices, then overnight Japan’s tankan report.

The EU summit is widely expected to certify that talks between the EU and Britain have made “sufficient progress” that they can move onto the next stage of the negotiations:  the nature of the trade relationship between the two after Brexit.

The other important point for GBP today is of course the Bank of England meeting. The market isn’t looking for a rate hike any time soon. Investors see only a 50% chance of a hike by June 2018, and some possibility that there won’t be any hike at all next year. If the Bank of England is really on hold for that long, there should be little market reaction to today’s meeting. The main point of interest will be what comments, if any, they make about the Brexit process. Governor of the Bank of England Mark Carney has said that a recalibration of monetary policy would be warranted once an agreement on transition was reached. I doubt however whether simply agreeing to start talks on that transition would qualify. This meeting may be neutral for GBP. 

The European Central Bank meeting should also not result in any major surprises, now that they’ve made their announcement about when they’ll start tapering down their bond purchases. The main point of interest will be the latest macroeconomic forecasts, which will include the first forecasts for 2020. I’d expect European Central Bank (ECB) President Mario Draghi to get several questions about the divisions among ECB Board members about the tapering process and the forward guidance. One curious point: note from the graph that recently, the market has started to price in less possibility of a rate hike before the end of next year (the red line) and a small probability of a rate cut (the purple line).



The Swiss National Bank also meets, but they’re expected to be on hold until the European Central Bank starts to raise rates. The overnight index swaps estimate it’ll be about 5 years before we get even a 25 bps move from the Swiss National Bank.



As for the indicators, the Eurozone Purchasing Managers’ Indices (PMIs) are expected to be generally lower. This is not a catastrophe by any means, seeing as they are at the highest level in years (the EU-wide manufacturing PMI has only been higher once in the 20 years that it’s been calculated).Markit calculated that last month’s data was consistent with 0.8% qoq GDP growth in the Eurozone. Even if these figures lowered that to 0.7%, that would still be an acceleration from 0.6% qoq in Q3. In other words, I think a modest decline from these high levels would not be particularly negative for the euro, although of course it probably wouldn’t help much, either. This could be neutral to slightly EUR-negative.

UK retail sales are expected to be modestly higher than in the previous month. Markets are concerned about the health of the British consumer as prices rise faster than wages. A figure such as this, showing at least modest improvement in consumption, should reassure investors somewhat and could help to boost the pound, bearing in mind that Brexit developments and the Bank of England today are probably more important. My research shows that the figure best correlated with the market’s reaction is the month-on-month change in retail sales including gasoline. That seems to be the one the market watches most. 



US retail sales for November 2017 are expected to rise more than they did in October 2017, when growth was depressed after the surge in September 2017. Gasoline prices were up but auto sales were down. The figure isn’t fantastic by any means but nor does it signal any weaking in the consumer demand. As such it could be neutral for the dollar. 



In contrast to Europe, the US Markit PMIs are forecast to remain steady (manufacturing) or to increase (services). Here too they are at a relatively high level, although not as high as Europe. The closely watched Institute of Supply Managers’ manufacturing Purchasing Managers' Index is much higher than Markit’s. The data could be positive for the dollar. 

Finally, overnight the Bank of Japan releases its short-term survey of economic conditions, aka the Tankan report. Household and corporate survey data have generally been improving, and the Tankan is likely to reflect the same trend. However, some of the data, such as industrial production, have been slowing, which suggests the possibility of a downward surprise. Generally speaking, large corporations tend to reduce their capital investment plans in the December Tankan, so it’s likely to see a drop in that indicator.

While much of the press reporting tends to concentrate on the large manufacturers, in fact I’ve found a much better correlation between the results for the non-manufacturers and the subsequent movement of USD/JPY.  This is actually rather strange, because the manufacturers are the major exporters and therefore their health should have a stronger connection to the currency, but that’s the way it is.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.




 
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13 / 12 / 2017 | Technical Analysis

Technical Analysis 13.12.2017 - EUR/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is above Kijun-sen, the blue line is directed upwards, while the red one remains horizontal. Confirmative line Chikou Span is above the price chart, current cloud is descending. The instrument is trading between Tenkan-sen and Kijun-sen lines. The closest support level is Kijun-sen line (133.104). The closest resistance level is Tenkan-sen line (133.411).



On the daily chart Tenkan-sen line is above Kijun-sen, the lines are horizontal . Confirmative line Chikou Span is above the price chart, current cloud is ascending. The instrument is trading between Tenkan-sen and Kijun-sen lines. The closest support level is the upper border of the cloud (132.966). The closest resistance level is Tenkan-sen line (133.313).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
 
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13 / 12 / 2017 | Market News

Fundamental Analysis 13.12.2017 - Market Outlook

Doug Jones, the Democratic candidate for Senate, won in Alabama. US stock futures and the dollar fell on the news, because it could possibly make it harder for the Republicans to pass their agenda next year.

Today the Federal Open Market Committee (FOMC) finishes up its two-day meeting. Today’s meeting will include a press conference by the outgoing Chair of the Board of Governors of the Federal Reserve, Janet Yellen, and an update on the Federal Open Market Committee’s forecasts. The result of the meeting is hardly in doubt. The market puts a 98% probability on a hike.


 

Since the last time they updated the dot plot, in September 2017, Stanley Fischer has left the Federal Open Market Committee and Randal Quarles has joined. Stanley Fischer was a centrist, so if we assume his 2018 dot was at the median rate of 2.125% (where 6 out of the 16 voted last time), if everyone else keeps their 2018 dots unchanged, then mathematically it makes no difference to the median what Randal Quarles votes (obviously the average would change, but the market tends to pay most attention to the median, as that’s the rate with the most votes.) The Federal Open Market Committee is likely to remain far above the market in any case. Then there’s also the question of any changes to their economic forecasts. 

I think that the message of the meeting is likely to be that with growth continuing at an above-potential pace, the unemployment rate below what the Federal Reserve considers to be full employment, overall financial conditions quite easy, some fiscal stimulus likely, and rising inflation, more rate hikes are likely to be necessary – indeed, the Federal Open Market Committee might even have to move more aggressively than it now expects. This is likely to be reflected in some upward movement in the “dots” and upward revisions to the economic forecasts. I think that rather than the Federal Reserve moving towards the market’s forecasts, as has happened in the past, the market could start to move more towards the Federal Reserve’s forecasts.



Before then, Britain announces its employment data. The figures are expected to be a mixed bag for the FX market – on the one hand, a relatively large fall in the number of people employed (although the unemployment rate is expected to remain unchanged), but on the other hand, a tidy acceleration in wage growth to the highest year-on-year rate in almost a year. I expect that the question of wages is highest in peoples’ minds right now and that overall, if the figures come in as expected they would be seen as mildly GBP-supportive, although of course major Brexit news could overwhelm the impact of the data. 





US Consumer Price Index (CPI) is probably the major US data release this week, even though it comes just a few hours before the FOMC decision. Here too the forecasts are mixed:  headline Consumer Price Index (CPI) expected to accelerate, while core Consumer Price Index (CPI) is forecast to remain at the same rate of growth.



Overnight, Australia releases its employment data. The number of new jobs is expected to rise from the previous month (although below the recent average), while the unemployment rate is forecast to remain at the lowest level in four years. The Reserve Bank of Australia (RBA) recently said it expected “solid growth in employment over the period ahead,” and this report should confirm that expectation. Nonetheless the data may prove positive for AUD. 



Finally, China comes in with its monthly announcement of retail sales, industrial production (IP) and fixed asset investment (FIA). The market is forecasting little change in the rate of growth, which as it's shown on the graph is basically what’s been happening for the last several years. In theory these should be important indicators for the Chinese economy.



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.

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12 / 12 / 2017 | Technical Analysis

Technical Analysis 12.12.2017 - AUD/JPY: Ichimoku clouds

Let's look at the four-hour chart. Tenkan-sen line is crossing Kijun-sen from below, the blue line is directed downwards, while the red one remains horizontal. Confirmative line Chikou Span is crossing the price chart from below, current cloud is going to reverse from descending to ascending. The instrument has entered the cloud. The closest support level is Tenkan-sen line (85.31). The closest resistance level is the lower border of the cloud (85.54).



On the daily chart Tenkan-sen line is below Kijun-sen, the lines are horizontal . Confirmative line Chikou Span is below the price chart, current cloud is descending. The instrument is trading between Tenkan-sen and Kijun-sen lines. The closest support level is Tenkan-sen line (85.31). The closest resistance level is Kijun-sen line (86.01).



This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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