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  • Yen Ticks Down as Economy Watcher Sentiment Sours

    Talking Points

    The Yen slipped a little after a less-upbeat December assessment from Japan’s “economy watchers”
    However, the previous month had marked 2016’s highs, so there was probably room for a pullback
    The Asia session’s general US Dollar weakness is already creeping back to USD/JPY

    The Japanese Yen ticked lower against the US Dollar following the release of a slightly more downbeat assessment of economic conditions in the world’s number three economy.

    The December “Economy Watchers” index out of Japan scored the economic outlook at 50.9. This was below November’s 53.0 print. Current conditions, meanwhile, were assessed at 51.4. That was the same as the previous month’s revised score, but well below the initial assessment of 52.5.

    This survey aims to get an accurate grip on Japanese activity by polling workers whose jobs tend to closely align to the economic cycle. These include retail employees, restaurant workers and the like. December’s numbers were a clear step back, but it’s probably worth bearing in mind that November’s assessment of current conditions was the highest score for 2016.

    USD/JPY managed a mild rise just after the figures, in an Asian session that has been generally hard going for the US currency. President-elect Donald Trump failed to answer many of the markets’ burning questions about his policy agenda when he met the press in the US on Wednesday, with greenback weakness the result across the region.

    That weakness already seems to be reasserting itself very soon after the figures, although USD/JPY did get up to 114.761 after the Japanese data, from 114.616 before their release.

    Modest gains in a tough USD session. USD/JPY


    • Dollar Extends Correction After Trump Press Conference

      Rates: Reflation trade (temporarily) on hold?
      Investors will further digest yesterday's Trump comments. Or better: they'll remember what he didn't touch upon: details of his fiscal stimulus plans. The US Note future is back near 125-09 resistance. We await the outcome of the test, but expect that some investors are willing to put the “reflation trade” at least temporary on hold.
      Currencies: Dollar extends correction after Trump press conference
      Yesterday, the dollar traded strong early in the session, but lost ground as president elect Trump failed to given concrete guidance on its policy. Today, the eco calendar is again thin. If investors turn more cautions on the post-Trump reflation trade, the dollar correction might still go further.

      US equities recovered initial losses on disappointment about Trump and closed with modest to moderate gains. Asian stocks trade mixed with Japanese equities in the red on a stronger yen. China underperforms as well.
      The US dollar closed lower overnight as president-elect Donald Trump, in a press conference, gave no further clarification about his proposed fiscal stimulus and infrastructure spending plans.
      Brent crude rose 2.7% to $55.08/barrel, after two days of heavy selling. A weaker dollar and record amount of processed oil apparently trumped the higher inventories, suggesting that sentiment and technicals played a role.
      The Brazilian central bank cut its policy rate by 75 bps, exceeding the consensus call for a 50 bps cut and sharply picking up the pace on an easing cycle it began with 2 cuts of 25 bps each in October and November.
      Japan's trade surplus shrank to ¥313.4B in November from ¥587.6bn in October, driven by an 8.1% rise in imports. Exports still managed to carve out a 2.5% gain, suggesting overseas demand for Japanese products is still solid.
      The political deadlock in Poland extended into the new parliamentary term that began on Wednesday, amid continued failure to reach a compromise deal that would end a sit-in by opposition MPs that has lasted throughout the break.
      US Secretary of State nominee Tillerson has set the stage for a major diplomatic clash between Washington and Beijing after he said China should not be allowed to access islands it has built in the South China Sea. Trump also criticized China in harsh wordings.
      Today's eco calendar remains thin with EMU production, US import & initial claims. There is a barrage of Fed speakers and Dec. ECB Minutes

      USD profit taking after Trump press conference
      On Wednesday, the dollar set intraday highs against the euro and the yen just before the press conference of President elect Donald Trump. Trump didn't provide much detail on the economic policy he wants to implement. The reaction on various markets differed. Equities held up well, while the dollar declined as some FX investors took some profit on the reflation trade. EUR/USD closed the session at 1.0582 from 1.0554 (but compared to an intraday low of 1.0454). USD/JPY finished the session at 115.41 (from 115.77).
      Overnight, Asian equities trade mixed. Japanese and Chinese markets trade in negative territory. The dollar remains in the defensive. However it is not sure whether this is due to investors' disappointment after the Trump press conference. US yields are also declining after yesterday's late session rebound. USD/JPY trades currently at 114.34/40, near the recent low. The dollar is also in the defensive against the euro (1.0625).
      Today, the EMU November industrial production is expected to have rebounded by 0.6% M/M and 1.6% Y/Y. In the US, import prices are expected to have recovered further in December, while initial claims are expected to have jumped higher by 20K to 255K after an extremely low figure in the previous week. In addition, several Fed members will speak. The eco data will only be of second tier importance for currency trading. We also keep an eye how markets react to the communication from the president elect Trump. For now, there is no clear sign that the markets are already at of point of aggressively reversing bets on the reflation trade. Even so, there might be a growing risk that markets, including the dollar, turn more cautious on the Trump trade, at least until the administration provides better information on its policy. Over the previous days, the dollar was already a bit in the defensive even after decent US payrolls. This correction might go a bit further. In this respect, we keep an eye on the interest rate developments as spreads between the US and Europe show signs of topping out.
      Global context: EUR/USD touched a multi-year low at 1.0341 last week. After the Trump rally, there is a lot good USD news discounted. Interest rate differentials between the dollar and the euro remain very high, but didn't widen anymore of late, slowing the rise of the dollar.The absolute interest rate support should provide a USD floor as long as US data remain good and as there are no profound doubts on the ability of the new government to execute its pro-growth agenda. A buy the dollar on dips strategy remains preferred. EUR/USD 1.0653/70 is a first resistance. A return north of 1.0874 would question the USD positive momentum. On the downside, EUR/USD 1.0341 is still the first key support. A test of parity remains possible MT. USD/JPY started a correction last week and remains in the defensive. A fist important support at 114.74/115.07 has been broken, if confirmed this is a USD/negative short-term. We stay USD/JPY positive long-term, but are in no hurry to rush in right now. An equity correction or a further decline in core yields might be a short-term negatives for USD/JPY.


      EUR/GBP holding in the 0.86/0.87 area.
      On Wednesday, UK November production data printed stronger than expected, but the trade deficit widened much more than expected as imports rose more than exports. Sterling lost temporary ground after the trade data and EUR/GBP returned to the 0.87 area, but the move had no strong legs. The intraday decline of EUR/USD also capped the topside of EUR/GBP. BoE's Carney suggested that the BoE could raise its growth forecast, but still saw risks to the Brexit process. Sterling didn't react much to the comments. Sterling basically followed the USD movements post-Trump. Cable and EUR/USD rebounded. Cable closed the session at 1.2213. EUR/GBP finished the session at 0.8665
      Today, there are no important UK eco data. So, trading in the major sterling cross rates will be driven by the global market context. EUR/USD is well bid this morning. The global reflation trade, which supported sterling more than the euro, is a bit in the defensive. This context might be more favourable for the euro than for sterling short-term. Sterling held strong in November and December, but lost some momentum in the second half of last month. EUR/GBP held a sideways trading pattern in the 0.85 area. Uncertainty on the next steps in the Brexit debate are again weighing on sterling in the run-up to the end of March article 50 deadline. We prefer a buy-on-dips strategy for EUR/GBP. If the break beyond 0.8668 is confirmed, it would improve the EUR/GBP picture.



      • Forex Trading Guide: U.S. Retail Sales (Dec.)

        Greetings, forex buddies! The Greenback has been taking a beating this week, thanks mainly to the hard slump in U.S. bond yields on Monday and disappointment over Trump’s press conference yesterday, given that expectations were high that the Donald would lay out the details of his fiscal stimulus plans. Instead, we got entertained with some “fake news” media bashing (*cough* CNN and BuzzFeed *cough*) and other fun stuff.

        Anyhow, the U.S. retail sales report is scheduled for release this Friday (January 13, 1:30 pm GMT), so if you’re looking for a post-NFP and post-Trump catalyst that will likely allow the Greenback to recover (or drive it even lower), then you better gear up by reading up on today’s Forex Trading Guide.
        What is this report all about?

        The retail sales report shows the total estimated value of sales at the retail level. As such, it gives forex traders and decision makers alike a snapshot of the level of consumer spending or “personal consumption expenditure” in the U.S. economy.

        And consumer spending, in turn, is very important because it is the backbone of the U.S. economy. Q3 U.S. GDP, for example, expanded by 3.5% quarter-on-quarter annualized. And the 3.0% growth in consumer spending accounted for 58% of total GDP growth, thanks to its positive contribution of 2.03%.

        Also healthy levels of consumer spending mean that domestic demand is high. And high domestic demand usually means higher inflationary pressure. And higher inflation and faster GDP growth, while being inherently positive by themselves, also mean higher odds of a rate hike.

        And as we now know from the December FOMC statement, the Fed projects 2-3 rate hikes this year. And rate hike expectations will likely remain alive, so long as the stream of economic reports remain positive.

        Oh, also note that there are two readings: (1) the headline reading and (2) the core reading. The headline reading includes all retail store types while while the core reading excludes sales from motor vehicles and parts dealers since sales from such stores tend to be very volatile.

        Some forex traders tend to focus more on the core reading, since it is believed to be a better gauge for the underlying trend in consumer spending. However, it is the headline reading that goes into the GDP report.
        What happened last time?

        Headline reading m/m: 0.1% vs. 0.3% expected, 0.6% previous
        Core reading m/m: 0.2% vs. 0.4% expected, 0.6% previous

        The headline reading for the total value of retail sales in November printed a measly 0.1% month-on-month increase, which is a way off the expected 0.3% increase.

        In addition, October’s reading was downgraded from a lofty +0.8% to +0.6%. Trend-wise, retail sales grew at a slower pace for the second consecutive month after peaking at +1.0% back in September.

        Moving on, the core reading slowed from +0.6% to +0.2%. This also marks the second consecutive month of slowing growth after peaking at 0.7% back in September.

        Looking at the details of the retail sales report, 10 of the 13 major retail store types reported growth. However, the fall in retail sales from the motor and vehicle parts dealers (-0.5% vs. +0.5% previous), sporting goods, hobby, books, and music stores (-1.0% vs. +0.7% previous), and miscellaneous stores (-0.8% vs. +0.6% previous) took their toll on overall retail sales.

        Overall, the November retail sales report was a disappointment. However, the retail sales report barely caused the Greenback to budge and was ultimately a dud. And that was very likely because forex traders were hunkering down for the December FOMC statement, which just a few short hours away.


        What is expected this time?

        Headline reading m/m: 0.7% expected vs. 0.1% previous
        Core reading m/m: 0.5% expected vs. 0.2% previous

        For the month of December, the general consensus among economists is that the headline value of retail sales will increase by 0.7% month-on-month. If vehicle sales are stripped to get at the core reading, then the consensus is for a 0.5% increase. Economists are therefore expecting both the headline and the core readings to show an acceleration in retail sales, breaking the current downtrend on the two readings.

        Looking at some of the available leading indicators, total vehicle sales in December climbed by an annualized rate of 18.4 million, more than the 17.9 million printed in November. This means that the headline retail sales reading will likely get a nice, solid boost.

        Next, ISM’s non-manufacturing PMI for December held steady at 57.2, which is the best reading since October 2015. And according to the details of the PMI report, the retail trade industry is one of the industries that reported an increase in growth, higher business activity, employment, and new orders in December, thanks to the Christmas holiday.

        Moving on, the December NFP reading was a miss, but the 156K non-farm jobs generated in December is still above the 100K needed to keep up with working-age population growth. Furthermore, the labor force participation rate ticked higher from 62.6% to 62.7% while wage growth accelerated by 0.4%, beating expectations of a 0.3% rate of increase. Hopefully, these translate to higher levels of consumer spending.

        Finally, the University of Michigan’s Index of Consumer Sentiment climbed from 93.8 to 98.2 in December, the highest reading since January 2016. Hopefully, this also translates to higher levels of consumer spending.

        Overall, the available leading indicators appear to be pointing to stronger retail sales reading in December. The consensus readings therefore look about right.

        As for historical tendencies, the unadjusted headline reading always gets double-digit growth in December, obviously because of the Christmas season. However, the smoothing effect of seasonal adjustments mean that the seasonally-adjusted reading is always much lower and negative readings are not uncommon.


        • BCB Cuts Rates, Trump's Speech Triggers USD Sell-Off

          BCB Cuts Rates, Trump's Speech Triggers USD Sell-Off

          News and Events:
          Carry traders back in business as fears ease
          As expected, the Brazilian central bank eased its monetary policy yesterday as it cut the Selic rate. However, the BCB surprised market participants by lowering its benchmark interest rate by 75 basis points, while the market was expecting a cut of 50bps, which brought the Selic down to 13%. The market did not have the opportunity to react to this decision as it occurred after the market had closed. Yesterday's session was therefore more about digesting Donald Trump’s statements at his first press conference as President-elect.
          The real appreciated sharply against the dollar as The Donald took the stage to outline his presidential programme. USD/BRL slid 1.40%, down to 3.1796, its lowest level since early November last year. Given the fact that the dollar is suffering a heavy sell-off today, the real should also benefit from this broad-based move. In addition, we believe that the rate will actually be welcomed by investors as it gives a much-needed breath of fresh air to the economy, which is facing one of its worst recessions. Against the backdrop of low volatility and easing fears regarding the negative impact on EM of a Trump presidency, it should create a positive environment for carry trades as investor risk tolerance should improve. USD/BRL should continue heading toward the 3.10 threshold that was reached last October.
          Europe quietly moves forward
          Political fireworks in the US have captured the market's full attention. Away from the current misdirection in the background are real economic developments. Developments, which in our view will have a large and real impact on asset prices than the political showmanship on display in the US. As discussed in our Outlook 2017, the hype machine will distort markets and drive volatility but sustainable trends will be based on traditional fundamentals.
          In Europe, we should see steady economic improvement and a slow shift by the ECB towards nominalization. Headline Euro area industrial production is expected to come in at 1.6% y/y from 0.6% y/y prior read, confirming the strong performance seen in the summer. The three-month moving average suggests a reversal of the downward trend. This data read provides further evidence of a steady economic improvement. Also, the ECB will release monetary policy minutes from the December meeting, which should provide insight on the rationale to extend asset purchases, yet reduce the monthly purchases to €60bn. Markets are expecting a lively debate between peripheral countries wanting additional three-month extensions and Germany wanting further tightening. Finally, we will watch for any discussion on potential adjustments to the parameters of the program as we do not anticipate a linear QE program decommission. Given the historically overextended USD positioning, we expect further improvement in EURUSD. Break of 1.0640/45 indicates a bullish extension to 1.0800 resistance.
          Gold enjoys the end of the Trump honeymoon
          Gold had a great year in 2016, that is, until Trump's election, when, through a series of declarations about fiscal stimulus the President-elect pushed the dollar and the stock market to new highs.
          Now that uncertainty has come roaring back, gold is trading at its highest level since mid-November - around $1200 an ounce. Indeed, the Fed's path normalisation no longer seems so straightforward. In December, financial markets were betting on four or five rate hikes, now even two or three look uncertain. Logically, if anticipation for rates lowers, then gold appreciates. Further concerns on the future of Brexit may be favourable for the yellow metal. Also, in France, for now, there is no clear leading candidate in the election.
          Technically, the precious metal has broken the 50-day moving average and we believe that there is some further upside room.
          The Risk Today:
          EUR/USD has finally broken resistance at 1.0653 (30/12/2016 reaction high). Hourly support lies at 1.0341 (03/01/2017 low). Expected to see continued increase. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
          GBP/USD has bounced back after breaking hourly support at 1.2083 (25/10/2016 low). Hourly resistance at 1.2268 (11/01/2016 reaction high) has been broken. However, the technical structure still looks bearish. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
          USD/JPY has sharply declined over the last few days. after bouncing between 116.12 and 118.66 for two months. Hourly support at 114.74 (12/12/2016 low) has been broken. Expected to see further downside moves.. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
          USD/CHF continues to weaken. Yet, the pair is still moving between hourly resistance given at 1.0344 (15/12/2016 high) and support at 1.0021 (08/12/2016 low). Key support is given at the parity. Expected to decline towards 1.0021. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
          1.1300 1.3121 1.1731 125.86
          1.0954 1.2775 1.0652 121.69
          1.0874 1.2432 1.0344 118.66
          1.0627 1.2255 1.0091 114.31
          1.0341 1.2083 1.0021 112.88
          1.0000 1.1841 0.9632 111.36
          0.9613 1.0520 0.9522 101.20


          • European Market Update: Trump Optimism Recedes

            European Market Update: Trump Optimism Recedes

            Trump optimism recedes
            Trump optimism recedes after his 1st press conference provided nothing substantive in terms of fiscal, regulatory, tax reform issues
            Brazil Central Bank picks up pace of rate cuts with additional 75bps easing (largest cut since Apr 2012)
            China Commerce Ministry (MOFCOM) spokesman Sun Jiwen reiterated view that China faces big trade downward pressure in 2017 and would try all methods to stabilize trade
            China NDRC Chairman Xu Shaoshi: Domestic economy was generally stable and continuing momentum from H2 2016. Reiterated govt view that China's economy faced a complex and severe internal and external environment
            France POP Presidential 2017 poll: Fillon will beat far-right leader Marine Le Pen by 63% to 37%
            Economic data
            (JP) Japan Dec Eco Watchers Current Survey: 51.4 v 51.4 prior; Outlook Survey: 50.9 v 51.3 prior
            (SE) Sweden Dec PES Unemployment Rate: 4.1% v 3.9% prior
            (FR) France Dec Final CPI M/M: 0.3% v 0.3%e; Y/Y: 0.6% v 0.6%e
            (FR) France Dec Final CPI EU Harmonized M/M: 0.3% v 0.3%e; Y/Y: 0.8% v 0.8%e; CPI Ex-Tobacco Index: 100.67 v 100.67e
            (SE) Sweden Dec CPI (beat) M/M: 0.5% v 0.4%e; Y/Y: 1.7% v 1.6%e
            (SE) Sweden Dec CPI CPIF M/M: 0.5% v 0.4%e; Y/Y: 1.9% v 1.8%e; CPI Level: 319.68 v 319.60e
            (DE) Germany 2016 Overall GDP (beat) Y/Y: 1.9% v 1.8%e; Maastricht Budget Surplus to GDP Ratio: 0.6% v 0.6%e
            (IT) Italy Nov Industrial Production M/M: 0.7% v 0.2%e; Y/Y: +3.2% v -1.8% prior; Industrial Production WDA Y/Y: 3.2% v 1.9%e
            (CN) China Dec M2 Money Supply Y/Y: 11.3% v 11.4%e; M1 Money Supply Y/Y: 21.4% v 22.0%e, M0 Money Supply Y/Y: 8.1% v 7.0%e
            (CN) China Dec Aggregate Financing (CNY): 1.63T v 1.300Te
            (CN) China Dec New Yuan Loans (CNY): 1.04T v 0.7Te
            (EU) Euro Zone Nov Industrial Production M/M: 1.5% v 0.6%e; Y/Y: 3.2% v 1.6%e
            Fixed Income Issuance:
            (IT) Italy Debt Agency (Tesoro) sold total €7.25B va. €5.75-7.25B indicate range in 2019, 2023 and 2036 BTP Bonds
            Sold €3.0B vs. €2.50-3.0B indicated in 0.05% Oct 2019 BTP; Avg Yield: 0.06% v 0.30% prior; Bid-to-cover: 1.46x v 1.55x prior
            Sold €2.75B vs. €2.25-2.75B indicated range in 0.65% Oct 2023 BTP; Avg Yield: 1.15% v 1.37% prior; Bid-to-cover: 1.47x v 1.45x prior
            Sold €1.5B vs €1.0-1.5B in 2.25% 2036 BTP: Avg Yield: 2.53% v 1.91% prior; Bid-to-cover: 1.46x v 1.34x prior
            Index snapshot (as of 10:00 GMT)
            Indices [Stoxx50 -0.4% at 3,294, FTSE -0.3% at 7,269, DAX -0.6% at 11,579, CAC-40 -0.4% at 4,867, IBEX-35 -0.2% at 9,390, FTSE MIB -0.5% at 19,395, SMI -0.8% at 8,357, S&P 500 Futures -0.3%]
            Market Focal Points/Key Themes: European equity indices are trading lower in the morning session as market participants digest US President-elect Donald Trumps first press conference; Market sentiment weakened after Trump failed to offer details on fiscal policy; Banking stocks trading generally lower as a result; Banking stocks in the FTSE 100 also lower as TheCityUK financial lobby group are said to have given up on efforts to keep full access to EU post Brexit and pushing for a more limited trade deal; Energy, commodity and mining stocks trading notably up in the index as copper prices trade sharply higher; Consumer discretionary stocks mixed after a plethora of trading updates pre-market.
            Upcoming scheduled US earnings (pre-market) include Delta Airlines, Shiloh, Shaw Communications, and Advanced Drainage Systems.
            Equities (as of 09:50 GMT)
            Consumer Discretionary: [Asos ASC.UK -0.5% (4-month sales), Associated British Foods ABF.UK -2.3% (Q1 trading update), Debenhams DEB.UK +4.1% (Q1 sales), Hays HAS.UK -0.1% (Q2 sales), Hella KGaA HLE.DE +2.0% (H1 results), JD Sports Fashion JD.UK +9.1% (Christmas trading update), Marks & Spencer MKS.UK +2.6% (Q3 sales), Moss Bros MOSB.UK +0.8% (23-week sales), Richemont CFR.CH +7.6% (Q3 sales), Sodexo SW.FR -2.2% (Q1 results), SuperGroup SGP.UK +1.8% (H1 results), Tesco TSCO.UK -2.4% (Q3 sales)]
            Consumer Staples: [Hilton Food Group HFG.UK +3.9% (trading statement), Suedzucker SZU.DE +2.7% (Q3 results)]
            Financials: [Barratt Developments BDEV.UK -2.0% (trading update), Paysafe PAYS.UK +0.6% (trading update), Savills SVS.UK +7.8% (trading update)]
            Healthcare: [Spire Healthcare SPI.UK -9.5% (trading update)]
            Sweden Central Bank (Riksbank) Dec Minutes saw Good conditions for inflation to continue rising but risks did remain. Important for inflation that SEK currency (Krona) appreciation was slow but difficult to know how exchange rate would develop. Several members expressed concerns over private debt
            Belgium Fin Min Overtveldt: Eurogroup to go ahead with Greece bailout program with or without IMF involvement. Confident that a solution would be found so that the IMF can join the bailout program
            Italy Senate said to approve fast track measure for banking sector decree noting that decree passed in Dec by the Italian cabinet met prerequisites of necessity and urgency
            Bank of Greece says emergency liquidity assistance (ELA) ceiling lowered to €46.5B from €50.7B
            Israel Central Bank (BOI) Gov Flug: Interest rates to stay low for a considerable period
            Moody's saw stable credit outlook for euro area sovereigns in 2017 and expected euro area to grow by 1.3% in 2017 and 2018, although growth rates to vary from country to country
            Taiwan PM Lin Chuan: Do not need expansionary fiscal policy
            OPEC Sec Gen Barkindo: No specific target for oil prices; sought a level that would sustain investment in industry. Confident of agreed upon cuts by all 24 producers will be enacted and expected inventories to decline by Q2. To decide in May if more production cuts are needed. Forecast oil demand growth between 1.2-1.3M bpd (**Note: Dec OPEC Monthly Report saw it at 1.15M bpd)
            Iraq Oil Min Al-Luaibi: Iraq to cut an additional 40K bpd next week; reiterated commitment to OPEC agreement
            Kuwait Oil Min Al-Marzouk: Have cut oil production by more than the 130K bpd committed to the Nov OPEC agreement with production currently at 2.7M bpd (**Note: cut of 133K bpd)
            USD has been on the defensive in general amid disappointment that President-elect Trump's news conference had Very little on policy and more to do with deflecting damaging press speculation related to his history with Russia. No additional details about his fiscal priorities and this disappointed USD bulls. The atmosphere saw a loss of confidence in the US reflation trade as a result
            USD/JPY tested blow the 114 level for 5-week lows
            EUR/USD higher by over 0.5% around the mid-1.06 area.
            Commodity currencies outperform, led by Canadian dollar
            Fixed Income:
            Bund futures trade at 163.89 up 41 ticks off highs having topped 164 for the first time since Jan 3rd with the move being attributed to fast money flows out of Europe, with Cash flows more quiet. Resistance moves to 164.52 followed by 164.94 2017 high. Support moves tp 163.39 then 162.92 followed by 162.47.
            Gilt futures trade at 125.09 up 56 ticks trading higher with Bunds. Upside continuation targets 125.51 followed by 125.83 year high. A reversal sees support at 124.31 followed by 123.86. Short Sterling futures trade flat to up 2bp with Jun17Jun18 flattening to 14/15bp.
            Thursday's liquidity report showed Wednesday's excess liquidity rose to €1.263T a rise of €7B from €1.256T prior. This was primarily due to AFs and MonPol portfolios falling to negative €793.2B. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility rose to €278M from €377M prior.
            Corporate issuance saw $21.5B come to market via 7 issers taking weekly issuance past analyst estimates to $34.8B. Issuance was headlined by a $13.6B 4 part offering from Broadcom and a $2.5B part offering from General Motors. EUR denominated issuance remains robust, with WPC, Telecom Italia and ItalGas some of the names coming to market this morning.
            Political/In the Papers:
            TheCityUK (financial lobby group) said to have given up on efforts to keep full access to EU post Brexit and pushing instead for a more limited trade deal
            Looking Ahead
            05:30 (UK) DMO to sell £2.25B in 2% 2025 Gilts
            05:45 (NO) Norway Central Bank (Norges) Dep Gov Nicolaisen in Panel Debate
            06:00 (IL) Israel Dec Trade Balance: No est v -$1.1B prior
            06:00 (BR) Brazil Nov IBGE Services Sector Volume Y/Y: -4.4%e v -7.6% prior
            06:00 (ZA) South Africa Nov Manufacturing Production M/M: No est v -1.9% prior; Y/Y: +0.3%e v -2.7% prior
            06:45 (US) Daily Libor Fixing
            07:00 (IN) India Dec CPI Y/Y: 3.5%e v 3.6% prior
            07:00 (IN) India Nov Industrial Production Y/Y: 1.5%e v -1.9% prior
            07:30 (EU) ECB Account of Monetary Policy Meeting (Dec Minutes)
            08:00 (RU) Russia Gold and Forex Reserve w/e Jan 6th: No est v $379.1B prior
            08:15 (UK) Baltic Dry Bulk Index
            08:30 (US) Dec Import Price Index M/M: +0.7%e v -0.3% prior; Y/Y: +1.8%e v -0.1% prior
            08:30 (US) Initial Jobless Claims: 255Ke v 235K prior; Continuing Claims: 2.084Me v 2.112M prior
            08:30 (CA) Canada Nov New Housing Price Index M/M: 0.3%e v 0.4% prior; Y/Y: 3.1%e v 3.0% prior
            08:30 (CA) Canada Dec Teranet/National Bank HPI M/M: No est v 0.2% prior; Y/Y: No est v 11.9% prior; House Price Index: No est v 198.82 prior
            08:30 (US) Weekly USDA Net Export Sales
            08:30 (US) Fed's Harker speaks in Malvern, Pennsylvania
            08:30 (US) Fed's Evans and Lockhart participate in panel in Naples, Florida
            09:00 (BR) Brazil to sell 2023 LFT
            09:00 (BR) Brazil to sell 2018, 2019 and 2020 Bills
            10:30 (US) Weekly EIA Natural Gas Inventories
            12:00 (US) USDA World Agricultural Supply and Demand Estimates (WASDE) Crop Report
            12:30 (US) Fed's Lockhart speaks to Naples, Florida Chamber of Commerce
            13:00 (US) Treasury to sell 30-Year Bonds Reopening
            13:15 (US) Fed's Bullard speaks in New York on U.S. Outlook
            14:00 (US) Dec Monthly Budget Statement: -$25.0Be v -$136.7B prior


            • US Dollar Sinks as Investors Sour on Trump Trade

              Talking Points:

              US Dollar drops after Trump press conference disappoints
              Yen gains as stocks decline, Loonie gains amid crude oil rally
              Fed-speak may do little to derail “Trump trade” unwinding

              The US Dollar succumbed to broad-based selling pressure in the aftermath of a press conference with Donald Trump. The President-elect was short on policy details as he took reporters’ questions for the first time in six months. This clearly disappointed investors that have been eagerly waiting for details on his economic policy proposals.

              The greenback rallied to a 14-year high in the two months after the election amid speculation that Mr Trump’s favor for tax cuts, deregulation and big-ticket fiscal stimulus will boost inflation and push the Fed into a more aggressive interest rate hike cycle. Skepticism has emerged since the calendar turned to 2017 as details remained scarce and this presser seemed to stoke traders’ desire to scale back exposure.

              The Japanese Yen outperformed as capital flows away from the so-called “Trump trade” undermined risk appetite, which bolstered demand for the perennially anti-risk currency. The Canadian Dollar was also a standout as USD weakness translated into a de-facto boost for crude oil prices, a frequent pace-setter for the Loonie considering its home country’s prowess at exporting energy.

              Looking ahead, a lackluster offering of US economic data means there are few obstacles standing in the way of continuity for established momentum. A bit of Fed-speak is on the docket, with comments from incoming FOMC voters Patrick Harker and Charles Evans – Presidents of the Philadelphia and Chicago central bank branches – on the docket. Even a hawkish tone may fall on deaf ears however.



              • Yen Higher as US Dollar Falters After Trump Theatrics

                Yen Higher as US Dollar Falters After Trump Theatrics

                USD/JPY is considerably lower in the Thursday session. Currently, the pair is trading at 114.30. On the release front, Japan's current surplus narrowed to JPY 1.80 trillion, but this easily beat the estimate of 1.48 trillion. In the US, today's highlight is unemployment claims, with the indicator expected to rise to 266 thousand. We'll also hear from two FOMC members - Charles Evans and Patrick Harker. Friday promises to be busy, with the US releasing retail sales and consumer confidence reports.
                There was plenty of anticipation ahead of Donald Trump's press conference on Thursday, but the event quickly turned into a spectacle rather than a platform outlying the president-elect's plans as president. The markets were hoping to hear some specifics about Trump's economic policy, but the president-elect didn't comply. Instead, Trump focused on attacking the media for releasing damaging material on him, and also presented his plan to avoid business conflicts while in office. The markets were clearly disappointed with the theatrics and the US dollar was broadly lower after the press conference.
                During the recent presidential campaign, Trump had plenty to say about the ills of the US economy on the campaign trail, but was short on solutions. He has gone on record promising tax cuts and significant fiscal spending to repair the country's infrastructure. This has led to expectations of reflation in the US, after years of low inflation levels. What does this mean for the currency markets? Lower taxes and higher spending (assuming both can be done simultaneously), would boost the US economy and raise inflation levels. This would likely lead to further rate hikes, which is bullish for the US dollar. The greenback has impressed since the US election, posting gains against most of its major rivals.
                It was a dismal fourth quarter for the Japanese yen, as USD/JPY plunged 11.4 percent. However, the yen has moved higher in the New Year. Earlier on Thursday, USD/JPY dropped below the 114 line, its lowest level since December 8. Japanese consumers remain pessimistic about the economy, but there was a silver lining from the latest Consumer Confidence indicator, which rose to 43.1 points in December. This figure beat expectations and marked the indicator's highest level since September 2013. Will the economy improve in 2017? There are some positive signs as we enter 2017. A weaker Japanese yen has boosted exports, and the Bank of Japan has given the economy a cautious thumbs-up, raising its growth projections. If improving consumer confidence translates into stronger consumer spending, economic growth could improve.


                • Lack of Details Unwind the Trumpflation Trade

                  Lack of Details Unwind the Trumpflation Trade

                  Thursday January 12: Five things the markets are talking about
                  U.S dollar bulls should be preparing for many more Trump disappointments. Yesterday's was the first, but certainly not the last.
                  In his first press briefing as U.S. president-elect, Trump presided over a wide-ranging session that touched on many topics, but with little substance.
                  The briefing did not break new ground as it contained no details on tax cuts and infrastructure spending, which have been the two factors that's instigated a five-week global bond market selloff and an equity and dollar rally after his surprise presidential win in November.
                  The 'bulls' will now look to the Fed today for support. A host of Fed Reserve presidents including Philadelphia, Chicago, Atlanta, Dallas and St. Louis will be speaking on a range of issues, while their boss, Chair Janet Yellen, appears at a webcast town hall meeting with educators this evening.
                  Philadelphia Fed Harker speaks at 8:30 a.m. EST, Atlanta Fed Lockhart at 11:30 a.m., St. Louis Fed Bullard at 1:15 p.m. and Fed Chair Yellen at 7:00 p.m.
                  1. Investors' book equity profits
                  Overnight, Asian bourses reversed their early gains to end broadly lower, as investors preferred to book profits amid the prevailing global political uncertainties.
                  The Shanghai Composite Index ended down -0.6%, while Hong Kong's Hang Seng Index declined -0.5% and Aussie ASX 200 fell -0.1%.
                  With the President-elect naming Japan as a net benefiter from a trade imbalance with the U.S contributed to a -1.2% slump in the Nikkei Stock Average. A stronger yen (¥114.33) is also punishing Japanese exporters.
                  In European, equity indices are trading lower as market participants digest Trumps first press conference. The lack of details has financial trading generally lower on the Eurostoxx and FTSE 100. However, energy, commodity and mining stocks are trading notably higher on the FTSE.
                  U.S futures are set to open in the red.
                  Indices: Stoxx50 -0.4% at 3,294, FTSE -0.3% at 7,269, DAX -0.6% at 11,579, CAC-40 -0.4% at 4,867, IBEX-35 -0.2% at 9,390, FTSE MIB -0.5% at 19,395, SMI -0.8% at 8,357, S&P 500 Futures -0.3%
                  2. Oil rises on OPEC output cuts
                  Oil prices have rallied overnight, supported by reports that OPEC was starting to cut output and expectations of strong demand growth in China.
                  Note: Rising U.S. crude inventories continue to reinforce concerns over plentiful global supplies. Yesterday's EIA report implies ongoing 'oversupply' as crude stocks unexpectedly rose by +4.1m barrels to +483.11m last week.
                  Brent crude futures are up +25c at +$55.35 a barrel, while U.S. crude (WTI) is up +5c at +$52.30.
                  OPEC agreed in November to cut oil production to try to reduce a global supply glut that has depressed prices for more than two years. Several OPEC members appear to be implementing the deal, for now at least.
                  Iraq had reduced its oil exports by -170k bpd and was cutting them by a further -40k bpd this week. Kuwait had already cut its oil output by more than it promised, while the Saudis has earmarked some supply reductions for next month to China, India and Malaysia and is focusing most of its cuts on Europe and the U.S.
                  Gold prices (+1% at $1,203.54) continue to edge higher, trading atop of its two-month high print from yesterday's session, as the dollar remains on the back foot after Trumps lack of clarity on future fiscal policies.
                  3. U.S curve flattens after strong 10-year auction
                  With Trump providing no new details in his first press outing as the new Commander-in-Chief set the stage for a competitive U.S 10 year note auction yesterday.
                  There was a strong demand for the 10-year $20B Treasury note with yields decreasing slightly as investors reassessed the speed of future interest rate hikes and inflation: average yield came in at +2.342% from the prior +2.485%, the bid-to-cover was 2.58, a shade higher than the past eight reopening average of 2.57.
                  U.S 10's are trading at +2.32% ahead of the U.S open, their lowest level since Nov. 30. Elsewhere, Aussie 10's have lost -6bps overnight to +2.67%, while those in New Zealand dropped -8bps to +3.10%.
                  4. Dollar pummeled on lack of details
                  For this year in particular, investors can expect political disappointment to be expressed very strongly through currency price moves. Yesterday's first press conference by the new POETUS is a good example.
                  The mighty dollar has seen a sharp decline right across the board; the absence of clarity on fiscal policy has supported a notable correction in the "Trumpflation trade."
                  Against Asian currencies, the greenback is off -0.5% vs. the Chinese yuan (CNH), -0.3% lower against the Thai baht (THB) and -0.7% lower against the Korean won (KWN).
                  Against the majors, the EUR/USD is up +0.4% at €1.0626, having earlier reached a one-month peak of €1.0665. USD/JPY has fallen -0.7% to ¥114.30, having hit a one-month low around ¥113.77, while the pound received a small reprieve to trade at £1.2266.
                  However, expect USD bulls to be looking for support from strong inflationary pressures and a 'hawkish' Fed to push U.S. yields and the dollar higher once again.
                  5. Eurozone industrial data stronger than expected
                  This morning's Eurozone industrial production (IP) came in much stronger than expected for November. It was up +1.5% on the month and +3.2% on the year, against consensus estimates of +0.5% and +1.8%, respectively.
                  October also saw a positive revision; it now readjusted to +0.1% m/m rise, rather than a fall of the same magnitude.
                  Digging deeper, France led the pickup, mostly supported by Spain. Non-durable consumer goods drove the surge, which would suggest that household spending was picking up.
                  The headline print is further proof that the Eurozone experienced a pickup in economic growth during H2 of 2016. Analysts are revising up their Q2 and Q3 tallies to +0.5% as against the previous +0.3%.


                  • Dollar Sell Off Abates

                    Dollar Sell Off Abates

                    The markets have continued to play off Wednesday’s press conference by US President-elect Donald Trump, as dealers appetite for US Dollars ebbed when US Treasury yields traded with a softer bias.
                    Commodity markets were again the stars of the day, as crude oil prices recuperated; WTI topped the charts above $53 per barrels, while gold continues to shine from safe-haven flows. Uncertainty over fiscal policies to be implemented by the incoming US administration, along with the fact Trump neglected to address them continued to weigh on market sentiment
                    Adding to a level of unwanted confusion, Fed Members took to the airways and as usual with this sitting Fed Board, offered little in the way of consensus. Uber-hawk, Patrick Harker, told his gathering that he projected three rate hikes in 2017. While at to opposite end of teeter totter, St Louis Fed’s James Bullard said that he would stick with his forecast of just one rate hike in 2017.
                    Dr Yellen, on the other hand, did not comment on Monetary Policy during this morning’s speech. While it is always a challenge is deciphering what is being implied, I suspect it means there is little to add to her current view and there is nothing majorly dollar negative.
                    In her follow-up Q&A, Yellen suggested that the US economy was doing well and she foresaw no major issues on the horizon. Tentative dollar bid back in the market.
                    Australian Dollar
                    The Australian Dollar has been the clear beneficiary of the yield-driven USD weakness along with underlying support from Iron Ore prices. What is interesting about the new yield induced USD dollar sell-off, and perhaps a better indicator of overall investor sentiment, is that risk assets have held up relatively well. Sure we have seen some Trump-related capitulation on US equities, but dip buyers emerged en masse, suggesting the investor’s outlook remains rosy.
                    The AUD breached the .7500 level, the first time since the recent Fed hike, but the Bulls are treading cautiously at these elevated levels as the risk reward above .7500 is shifting for the short positions. Current price action is suggesting this, as the Aussie is trading near the .7480 level in early trade.
                    Commodity prices, especially the industrial bulk subsection, have remained extremely well bid. It is a bit surprising, given the scepticism in the market over Trump’s fiscal spend. After all, it was Trump’s pledge to spend $500 billion on US infrastructure that stoked the commodity price furnace. However, recent supply-side reform, to ensure lower quality steel will be eliminated, that which is produced by electrical furnaces, is weighing on short-term supply.
                    Japanese Yen
                    Yesterday’s USD dollar sell-off was uncompromising at times as dealers did little more than hit bids, as the amount of USD coming to market was a clear indication that dealers had miscalculated the breadth of long USD positions and were grossly overextended on pent-up expectations going into the Trump Press Conference.
                    The slide in US rates has been the primary sentiment driver that saw USDJPY meltdown to a low of 113.75 in early London trade. Yesterday’s support levels of 115 -115.25 are now offering key resistance.
                    While the Tump Trade ship has sprung a few leaks, my view is that the reflationary trade remains intact and that recent events are more related to overextend positioning, rather than a US dollar sentiment reversal. The sharp dollar sell off was likely exacerbated by stop loss and some Japanese exporter panic selling.
                    While USD dip buying latter emerged in the NY session, it was driven by a combination of nimble long dollar re-engagements and fast money short cover profit taking. USD gains will likely be capped today ahead of US retail sales in what is shaping up to be a much higher risk event than expected as Investors are fretting about the possibility of back to back weaker data points on the core. Expectations are for a print of .5 vs. last month’s sour .2 reading.
                    However, I fully expect the market to reload USD long positions ahead Trump’s inauguration and State of the Union where once again traders will brace for confirmation on the Fiscal spend
                    The Chinese Yuan
                    The underlying tone continues to be driving on the weaker USD sentiment. However, offshore funding costs appear to be moving higher which is the major topic of conversation this morning on the CNH desk which could be extending the current Yuan momentum.
                    If investors were getting antsy about the increase in the mainland’s capital controls regulations, there’s unconfirmed chatter relating to cross-border CNY payments that suggest the ratio of inflow and outflow will be monitored under the 1:1 ratio (it was previously 1: 1.6). This suggests that corporates can only move 1 Yuan out of onshore when there is 1 Yuan flow into the onshore market. The clampdown on capital outflows continues.
                    EM Asia
                    The South Korean Won continues to perform well as bullish equity sentiment is lending support to the currency as USD long liquidation was the name of the game the past 24 hours. EM currencies, in general, have performed well since the Trump presser but I suspect this is merely a position event as opposed to an overall shift in sentiment. None the less South Korea issues $ 1 bB of forex stabilisation bonds at a record low spread to Government Debt. International investors are snapping up Captial Market broadcast suggesting foreign investor appetite for all things related to Korea economy
                    As widely expected, the BOK has kept interest rates on hold. South Korea’s exports-driven economy, seen as a bellwether for global trade, was hit hard by a slowdown in China last year. But with signs Chinas economy is improving and global inflation is rising, there was less incentive for the BOK to cut interest rates


                    • EUR/USD Jan 13, 2017

                      Backed off the 1.0685 high and setback see a long upper wick weighing. Below the 1.0600 level will see deeper setback to the 1.0565 support then the 1.0500 level. Higher low sought to further pressure the upside later for retest of the 1.0653/85 highs then the 1.0700 level. [PL]



                      • USD/CHF Jan 13, 2017

                        Failed to sustain break of the 1.0100 level and bounce from the 1.0056 low see a long lower wick supportive of bounce. However, upside seen limited with resistance now at 1.0150 then the 1.0200/219 area. Lower high sought to further pressure the downside later to target 1.0021 support then parity level.



                        • USD/JPY Jan 13,2017

                          No follow-through on the break below the 114.00 level yesterday and bounce from 113.76 low see the recent lows at 115.07/20 area and 116.05 now reverting to resistance. While the latter caps, risk is seen for further weakness, below 113.76 low will see further slide to the 113.13/112.88 area. [PL]



                          • EUR/CHF Jan 13, 2017

                            Choppy in range above the 1.0700 level which keep the 1.0680 base out of reach for now. Upside see resistance at 1.0762 and clearance here will trigger a double bottom at the 1.0680 low and get stronger recovery underway towards the 1.0800 level. [PL]



                            • GBP/USD Jan 13, 2017

                              View unchanged from this morning with corrective upmove staged to 1.2317 high last session but sell-off towards closing in the appearance of a long upper shadow indicates loss of upside momentum and settling trade into consolidation and bears will have to take out lower support at 1.2039 to regain



                              • EUR/GBP Jan 13, 2017

                                Bounce from the .8648 to regain the .8700 level return focus to the .8764 high. Clearance will see strength to target the .8800 level. Beyond this see strong resistance coming into play at the .8857/81, previous lows. Support now at .8648 then the .8572, early Dec high. [PL]