There was little new of note from Trump’s speech at Davos, with the main comments being that “America first” did not mean “America alone”. There was no comment around the NAFTA talks, although he did allay some fears around the potential for trade or currency wars. It will be an interesting week for the US (USD) this week with President Trump’s first State of the Union speech tomorrow, the Fed meeting on Thursday and then January Non-farm payrolls on Friday, all having potential to move the market. The Federal Open Market Committee meeting this week is likely to reinforce broad market expectations of three hikes this year thanks to a more upbeat outlook for the US and global economies, and somewhat diminished concern about low inflation. This Fed meeting will be the last with Janet Yellen as Chair, having been succeeded by Jerome Powell. The market will be focused on the tone of any press -release afterwards to see whether the slow and steady pace of rate hikes will continue as per under Yellen’s stewardship, or something different. Currently the market is anticipating that interest rates will increase 3 times over the 2018 calendar with some outliers picking 4 Fed rate increases. This week will also bring Australian CPI data on Wednesday and a raft of data for China over the week.
The main events this week for Australia will be December business confidence data later today, then tomorrow’s Q4 CPI figures. The CPI data will be a core focus for markets, if inflation remains below 2% as expected, it will be two years since it dropped below RBA’s 2-3% target band. Obviously, this is not an enviable milestone for the RBA, but look for quite a bullish follow-through if inflation was to sneak back within the band. However, if the CPI softens, it will push back rate hike expectations well into 2019. Either way, we expect a jump in volatility regardless of which side of the consensus it arrives at. The Australian dollar (AUD) remains well supported back within striking distance of 0.8100 against the USD after a high of 0.8134 on Friday, the highest level since May 2015, helped by the ongoing US weakness.
New Zealand (NZD)
There is little in the way of major data releases for the local market this week and the NZ market is likely to take direction from offshore markets over the week. NZ trade data released this morning came in better than expected with a trade surplus of $640m in December, much stronger than market expectations of a small deficit. The main surprise was a surge in exports to a new record high, though this is likely to be short-lived. The rise was largely driven by increases in dairy export volumes, expected to be unable to be sustained given the recent unseasonably dry weather. The New Zealand dollar (NZD) is overdue for a healthy correction, given the last week’s toppy price action after dismal NZ Q4 CPI reading. Also with a raft of data emerging from the US, look for downside pressure to intensify against both the USD and AUD as the week progresses.
United States (USD)
A mild reprieve for the USD after the Trump Davos speech appeared to dampen down fears over potential for currency or trade wars. The S&P500 and Dow indices posted the largest declines since September and yields on benchmark Treasuries touched the highest levels since early 2014 as traders geared up for a hectic week of data and policy announcements. The dollar strengthened a touch against all its major rivals. This week will also see earnings reports from tech heavyweights, Microsoft Corp., Facebook Inc., SAP SE, Alibaba Group Holding Ltd., Apple Inc., Alphabet Inc. and Amazon.com Inc. Other major corporate reports will include results from McDonald’s Corp., Exxon Mobil Corp., Merck & Co. Inc., Roche Holding AG, Daimler AG, Deutsche Bank AG and Boeing Co. These results should provide a solid indicator if further extensions in equity values are warranted after the already large gains seen over the last 6-9 month period. The main concentration will be on the raft of US data over the week, along with the Fed meeting on Thursday and Non-farm payroll data on Friday being pivotal events. Of particular note will be any press release following the Fed Interest rate decision (expected to leave rates unchanged) as a gauge on forward expectations for rate sets over the rest of the 2018 calendar year. It will also be the last meeting with Janet Yellen present.
This week will bring plenty of Eurozone data with GDP growth figures for Q4 17 due for release tonight. Growth was strong in the first three quarters of 2017, with the latest print for Q3 at 0.7% q/q. Both survey and activity indications have pointed towards continued strong growth. Composite PMI averaged 57.2 in Q4 (up from 56.0 in Q3), unemployment has edged below 9% and industrial production has showed further expansion. Look for Q4 GDP growth to come in around 0.6% q/q. On Wednesday there will be inflation figures, with headline inflation flatlining around 1.4-1.5% y/y in recent months look for a temporary fall to 1.1% in January on energy price drops, but then a bounce back to the 1.4% level shortly after. But, we do not foresee a significant pick up in headline inflation from 1.4% before 2019 despite higher expected energy price inflation. Wage growth remains subdued, so underlying inflation pressure is still not strong enough to lift headline inflation towards the ECB’s 2% target. However, growth momentum is high enough to sustain core inflation above 1%, which we believe will be key for the ECB if it ends the QE programme. Look for core inflation to be 1% in January.
United Kingdom (GBP)
After surging to a post Brexit referendum high of 1.4344 against the USD, the UK pound has fallen back against the greenback. This is on rumours that PM May’s leadership could be challenged by her own fellow conservative MP’s. The criticism against the PM comes from Conservative representatives, about the government’s lack of definitions about the Brexit transition, or the future relationship with the EU, after comments from UK Chancellor Philip Hammond, who called for a softer Brexit that involved “very modest” changes to the UK’s current relationship with the EU. Earlier Q4 GDP data showed a rise of 1.5 % year over year, led by a solid increase in overall production, yet likely only modest growth in consumer spending. The initial slowdown is starting to reverse as inflation begins to recede, wage growth slowly begins to pick up and investment intentions strengthen. However not helping the GBP is a leaked Whitehall briefing paper that says the UK would be worse off outside the European Union under every scenario modelled. Currently the GBP/USD is trading around 1.4070 having been as low as 1.4025, although it would take a break below 1.4000 to confirm additional declines ahead, toward 1.3915, the September 23rd daily low.
Comments from Japan’s Finance Minister on Friday that FX levels will be determined partly by strong fundamentals and trust in fiscal policy and that he expected the Bank of Japan (BoJ) to take steps to achieve price stability, saw the JPY hold modest gains against the US unit. Later today Japan will release December sales and employment data, which could give further support to the Japanese yen (JPY) if they come above expectations. Currently the USD/JPY is back at 108.95, with the highs around 109.70/80 level forming a resistance area that the pair needs to overcome to confirm a steeper recovery. Immediate support is at 108.70 then 108.25.
NAFTA talks have concluded yesterday, but there is little sign of agreement on the toughest U.S. proposals to overhaul the $1.2 trillion trade pact. Currently the USD/CAD is trading around the 1.2340 level, after dropping to fresh 4- month lows in sub-1.2300 levels seen on Thursday 25. The next relevant Canadian event will be November’s GDP figures, to be released this Friday. Immediate support is at 1.2281 then 1.2119, upside is 1.2390 then 1.2402. Look for trading around current levels ahead of the US Fed meeting on Wednesday.
Major Announcements last week:
• UK Average Earnings Index 2.5% as expected
• NZ CPI 0.1% vs 0.4% expected
• ECB left interest rates unchanged, as expected
• Canadian Retails Sales 1.6% vs 0.8% expected
• UK Prelim GDP 0.5% vs 0.4% expected
• Canadian CPI -0.4% vs -0.3% expected
• US Advance GDP 2.6% vs 3.0% expected
• US Core Durable Goods Orders 0.6% vs 0.5% expected