Welcome to our Weekly Outlook for the week of Jan 30th to Feb 5th.
First, let us recap of what happened last week.
From Monday Jan 23rd we had ECB Draghi spoke which didn’t provide too much insight and the ECB stance had been very consistent and firm throughout the week in regards to their easing policies. This signalled a strong determination to continue keep the low interest rate environment regardless of the protest from nations such as Germany.
Because of this fact, we continue to place our outlook for Euro in a fundamental weak currency.
However, because of the current unstable outlook of U.S policies from the new president Donald Trump, whenever we had pressures into USD, that would also transfer to strength into EURO.
Tuesday we had consecutive manufacturing and service PMIs from German, fFrance and Eurozone, which all came out in line or positive, and have given an early sign of economic recovery in the Eurozone. Although not long enough to signal any strong rally, but future looks bright according to the datas for Eurozone - economically speaking. As mentioned, the major risk for 2017 is not economy but the geopolitical events in Eurozone.
We also had the High Court Ruling for UK in regards to the referendum, and the result was as expected a favour for the Parliament. This has pushed GBP further to the upside from the existing positive sentiment ever since PM May has laid out her Brexit plan on Jan 17th. The current “Hard Brexit” has completely become “soft”, now we not only know the detailed plan of Brexit, the major consequences, and the approach wit the involvement of the Parliament has shifted the tone from a radical divorce to a mild separation.
Because of this fact, GBP has enjoyed a really good ride of the sentiment strength and we continue to put GBP as a buy in our Daily Trades or intraday trades. However, UK still faces an economic uncertainty and the devaluation of GBP has already reflected in their higher inflation data, which in theory will drive down their consumer spending - which is 70% of the UK GDP.
Because of this, GBP remains to be a fundamental weak currency and will be very attractive to sell at a higher zone.
Later at Asian session we had AUD CPI and Trimmed mean CPI all came out as soft. Although not largely negative, but this result did signal a further possibility for RBA to ease and cut rate in the next meeting.
However, AUD did not drop for the week, instead, it had enjoyed a good ride and had been enjoyed a good ride since 2017. AUD has been the best performing currency so far in this year and it’s largely due to the higher commodities prices from continued growth of Chinese economy.
The equity markets also made new high this week to signal a global risk on appetite, this has also helped AUD tremendously.
However, because AUD is highly sensitive to the outer environment and once Chinese economy slows down or if commodities price has been pushed down from supply & demand or simply government curbing for speculative activities - which we had seen last year from China, this all could tank AUD immediately.
As people said, the higher you climb, the faster you fall.
But most importantly, the economic situation of AUD has not proven to be strong enough to sustain itself, that will be an ongoing risk for buying AUD.
Then on Wednesday the neighbour country NZD also released the inflation datas which was a huge positive surprise, the element of internal strength of NZD and on top of the negative sentiment of AUD plus risk on sentiment of global market have shifted NZD to become the strongest currency for last week.
Unlike AUD, NZD is more immune to the commodities price volatilities, and NZD has also proven to the world that their monetary policy is working well and the business activities are picking up, the dairy price is also picking up.
The fundamental side of NZD is looking very bright as RBNZ now has very little possibility to ease further in the next meeting.
NZD has already been the highest yield currency among all major 8 countries, and now with the absence of AUD and the global risk on sentiment, we continue to be confident in NZD both fundamentally and sentimentally.
Wednesday we also saw the Crude Oil Inventories which came out as a large built up. The inventories continued to be a built ever since the recovery of oil market and the agreement of OPEC.
This of course will pressure oil market but because of the OPEC output curb which has been working out well with 80% target reached in Jan so far, we do expect oil price to continue climbing to $60 per barrel minimum.
Although U.S shale producer will threaten the price, but OPEC is nevertheless a much bigger and influential driver force of the oil market.
The risk remains on the OPEC members agreement from now onto Feb and March.
This of course has supported CAD which has a mix economic condition and a very negative sentiment from the renegotiation of NAFTA.
We have already seen what happens in Mexcio and their currency, as U.S is the largest trading partner of Canada, a bad trade deal is going to hurt both countries but more for the Canadian.
However, from the fundamental point of view, we really don’t think there will be much changes for U.S and Canada because unlike U.S and Mexico, a lot of Canadian imports are not replaceable because it’s all energy resources.
From oil, forestry, to water, and antiterrorism cooperations, with the very fact that both nations share such a similar cultures, racial dimensions and exactly same language.
Because of that, we do think CAD remains to be fundamentally neutral and also sentimentally neutral as now the two driving force of sentiment from oil market and NAFTA will hedge out each other to push & pull CAD day to day with lots volatility.
Thursday we had UK GDP q/q which came out more positive than the expected number and in line with the previous number. This has once again been a new fresh driver to push GBP even further up.
The reason is because as the inflation went higher, in theory it should discourage the consumption hence diminish the GDP number. However, this had not happened yet and British people might behave differently and much confident in from of the devaluated currency and future uncertainty of Brexit.
To think about it, after all the referendum was a win for the Exit, and many British people have prepared for the economic hardships. The truth is, the economic theory can only explain the possible outcome but not the actual human behaviour as we are evolving every single day.
We still think the fundamental side of UK will suffer largely due to the currency issue. but then with the new U.S president, UK might actually come out fine with a better deal.
We also don’t know what’s going to happen to Eurozone for this year as the elections from Germany, France and Holland unfold.
The sure thing is that sentimentally speaking, GBP is gong to surge up as long as the good news continue.
Finally on Friday we had the Advance GDP from U.S which was a disappointed data especially it came out after the positive data from UK, a global equities run and an already negative sentiment of dollar.
This has further pressured USD to the downside. However, this signal piece of data will not change the fact that U.S still enjoys a strong and solid economic recovery now.
The fundamental fact is that US will continue to grow with the expansions, and FED will have to tighten up the interest rate.
The Donald Trump effect will drive the market day to day, but it is not all to the downside as his other economic plans will heat up the economy fairly well.
We will put our bet in buying USD especially for long-term perspective as among 8 major nations, there are no other nations with a possible outlook to raise interest rate in 2017 but only USA.
The fact is that the sentiment will be a good driver for traders to short USD day to day in the intraday base, but whenever it drops to an attractive zone, that’s where you can expect fundamental buyers to come in and push the price up.
Then today Jan 29th, we had NZD trade balance came out as positive. We expect NZD to continue enjoying the ride up for next week but the volatility is large because of many central banks’ decision are out. If the risk sentiment is shifted to off, this will halt the surge of NZD.
The retail sales also came out today from Japan which was lower than previous and expected. This of course will continue to pressure JPY as they have already delayed their sales tax rise last year to 2019. This also put BOJ at a further easing position than any possible tapering.
Nevertheless, as we have a volatility week to come, JPY might enjoys some safe heaven effect so be careful when shorting it.
For this Week of Jan 30th to Feb 5th,
Monday was a quiet day without any tier one datas in London & NY session, however, we do have some important datas although not tradable but are definitely worthwhile to take a look; German Prelim CPI, U.S Core PCE, Personal spending, Pending Home Sales.
In Asian session, we will have BOJ rate decision which often will cause some volatility in the market. Right now the expectation is unchanged but the press conference will come out in few hours to provide more insight.
Tuesday we will start the day with BOJ press conference, then ECB Draghi will speak following by CPI datas and GDP datas for Eurozone.
In NY session we will have GDP data from CAD and US consumer confidence.
Finally we wrap up the day with employment datas from NZD.
Then BOC Poloz speaks after NY session with later on a Chinese Manufacturing PMI to come out during Asian session.
Wednesday we have many Manufacturing PMI from European countries following by UK Manufacturing PMI.
Then in NY session we have ADP Non Farm employment change from USD following by ISM Manufacturing PMI.
Crude oil inventories will also come out following by FED rate decision in the afternoon.
Later on in Asian session we will have Building approval and Trade Balance from AUD.
On Thursday we will have UK Construction PMI during London session following by BOE rate decision.
Then both ECB Draghi and BOE Carney will speak consecutively afterward.
In NY session the usual U.S unemployment claims will come out and finally another Chinese Manufacturing PMI will be out during Asian session.
Friday we will start the London session with UK Service PMI and later on in NY session with US Non Farm Payroll.
Finally we will end the week with US ISM Non-Manufacturing PMI.
So as you can see, it is very busy week full of economic datas and tradable risk events which I will put the numbers of deviations below.
Our current view for each currencies will change possibility because of the fundamental datas and central banks policies this week.
As for now, here is our outlook for this week:
EUR - fundamentally bearish & sentimentally neutral
we think very little will happen as ECB will still keep their stance for the policies, and datas from European nations will not change ECB’s plan no matter how good they are. On the contrary, if the datas from European nations this week are negative, then that will further push EUR down.
Because of that, we put EUR as fundamentally bearish and sentimentally neutral.
Remember, the sentiment might shift due to global events as EUR has become one of the safe haven currency.
GBP - fundamentally bearish & sentimentally bullish
we think the BOE is going to keep everything unchanged as the current situation is directionless without a clear & actual plan for Brexit. The Parliament still has to debate the Bill and as for now, the central bank is unlikely to do anything providing the past fundamental datas of UK have been quiet positive.
If this week’s fundamental datas especially Service PMI is positive, then this will further push the GBP upward.
USD - fundamentally bullish & sentimentally neutral
we think FED will keep the rate unchanged this week with the same stance on the economic outlook. Because of the new policies from President Trump, FED is most likely to keep a cautious tone to not hype up the market too much.
The President himself is the current sentimental driver for USD and the global economy, however, once people are used to his mood, the market is going to calm down in front of any drastic comments of Trump.
We have seen how market reacted drastically to the very first terrorist attacks in 2015 and 2016 to flow into safe haven currency such as JPY, only to become immune and non reactive later on with any new terrorist attacks.
We think the same effect will happen to Trump’s comments.
The NFP this week will also be a very strong driver for USD to either go up or down.
CAD - fundamentally neutral & sentimentally neutral
Oil market is expected to have another volatile week as usual, and the main driver for CAD will be Trump’s action on NAFTA if we have any updates, and the GDP data of CAD.
We don’t have any stance on CAD as it can go either way fundamentally or sentimentally for now.
AUD - fundamentally bearish & sentimentally bullish
Last week’s CPI datas have revealed the fundamental weakness of AUD and the current strength has largely come from the risk on sentiment and commodities price speculation.
Once the sentiment is shifted, AUD will be bare to face its own economic strength which we think is not really promising. Last year the GDP also shrank for first time in 5 years by 0.5%. The GDP has shrank 2 times consecutively to signal a technical recession.
Although still a strong nation fundamentally, RBA will have to cut interest rate further to boost the economy while the slowdown of Chinese growth will also impact it.
NZD - fundamentally bullish & sentimentally bullish
NZD ended 2016 with growing GDP, lower unemployment and the downside was the low inflation, but last week’s surprise CPI has now removed that factor to put NZD at a fundamentally strong spot.
Geographically seated in an isolated place, NZD has benefited largely by not participating in the current geopolitical event globally from U.S to European nations, Canada, UK, Japan, China etc.
Meanwhile, GDT has also picked up from the low last year to 0.6% last time.
JPY - fundamentally bearish & sentimentally neutral
Japan still suffers in the deflationary environment and although inflation has picked up last year, but still far below their target. Meanwhile, the current U.S policy might effect the trade with Japan which will provide uncertainty for its economic future.
However, Japan still benefits largely by its safe heaven status and sentimentally speaking, it will still be a neutral currency with occasional strength.
CHF - fundamentally bearish & sentimentally neutral
Without any major events happened in Switzerland, the low inflation market continues with low GDP growth and low unemployment. CHF is in the exact same spot as Japan which still suffers fundamentally but will always enjoy the safe heaven status with occasional inflows of money.
However, SNB is more notorious for their intervention so always be careful when buy CHF.
Tradable Risk Events for Jan 30th - Feb 3rd
- BOJ Policy Rate
- Annual increase in JGB target
Min 80 trillion yen
- BOJ Press Conference
- ECB Draghi Speaks
- CPI Flash Estimate y/y
- Core CPI Flash Estimate y/y
- Flash Prelim GDP q/q
- Unemployment Rate
- GDP m/m
- Employment Change q/q
- Unemployment Rate
CNY (tradable for AUD) - Manufacturing PMI
- Manufacturing PMI
- ADP National Employment
- ISM Manufacturing PMI
- Fed Fund Target Rate
- FOMC Statement
- Construction PMI
- BOE Bank Rate
- BOE Inflation Report
- MPC Official Bank Rate Votes
- Monetary Policy Summary
- ECB Draghi Speaks
- BOE Carney Speaks
CNY (tradable for AUD)
- Caixin Manufacturing PMI
- Service PMI
- Non Farm Payrolls
- Unemployment Rate
- Average Earnings m/m
- Average Workweek Hrs
- Labor Force Participation Rate
- ISM Non-Manufacturing PMI
- Factory Orders m/m
- Retail Sales m/m