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Andora Andrei

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Forex Major Currencies Outlook (Nov 24, 2016)

USD
The US dollar resumed its rallies across the board, buoyed by hawkish FOMC minutes and mostly strong data. Both headline and core durable goods orders figures beat expectations while the flash manufacturing PMI also posted an increase. Initial jobless claims and new home sales fell short of consensus. US banks are closed for the Thanksgiving holiday today.

EUR
The euro resumed its slide to the dollar but continued to take advantage of yen weakness. Flash PMI readings from Germany and France were mostly better than expected, except for the German flash manufacturing PMI. The German Ifo business climate index is due today and a rise from 110.5 to 110.6 is eyed.

GBP
The pound was still one of the stronger performers for the day as it chalked up gains after the Chancellor’s Autumn Forecast Statement. Hammond laid out plans for stronger spending and lower taxes in order to keep the economy afloat in transitioning out of the EU. There are no major reports due from the UK today.

CHF
The franc extended its slide to the dollar and the pound but ended higher against the euro. There were no reports out of the Swiss economy yesterday, although SNB official Maechler emphasized that the franc remains overvalued.

JPY
The yen was the biggest loser, owing to the quake in Japan and risk-taking. Japanese banks reopened today but the yen still failed to draw support, as the flash manufacturing PMI slid from 51.4 to 51.1 instead of improving to 51.7.

Commodity Currencies (AUD, NZD, CAD)

The comdolls resumed their slide to the dollar but managed to go for more gains against the yen. Crude oil inventories posted a surprise draw of 1.3 million barrels instead of rising by 0.3 million barrels while Iraq expressed willingness to cooperate in an OPEC output deal. New Zealand’s trade balance is due next.
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Andora Andrei

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FOMC Minutes confirm December hike

FOMC Minutes confirm December hike

After Yellen’s recent testimony, there were few doubts that the Fed is set to raise rates in December. Also, recent data was looking good. And now, the FOMC minutes also confirm the upcoming rise of interest rates. Here are three opinions:

Market Reaction – CIBC

The Fed’s most recent statement was light on changes, but the markets heard the message loud and clear. The minutes of the meeting only confirm that the Fed is ready to tighten policy in December, with most members seeing a rate hike as being appropriate ‘relatively soon’. Moreover, some officials saw a December rate hike as important to Fed credibility and even saw the economy as already having reached maximum employment. That said, there are reasons to believe that the pace of tightening will be gradual. Several officials judged there is still appreciable slack in the labour market, in direct contrast to those who believe that further gains will push the economy through full employment. Moreover, some Fed officials remain wary of tightening too early, with monetary policy so close to the lower bound.

All told, not much new was revealed in the minutes, and it shouldn’t garner much market reaction. The Fed is still on track to hike December, with further evidence needed to consolidate the current divergence in opinions.

Nov FOMC Minutes: All ‘Teed-Up’ For A December Hike – BNPP
The November FOMC meeting minutes gave the overall impression that December is baked in, failing a substantial shock. And this was before the election and the subsequent positive assessment by markets. December seems as certain as any rate move in recent years.
A substantial majority viewed the risks as roughly balanced, though a few still saw significant downside risks. When the Fed says ‘balanced’ it means they have just hiked, so roughly balanced signals very close to hiking.
The participants “generally agreed” the case for a rate hike had “continued to strengthen.” Most agreed it could well become appropriate to raise the rate “relatively soon” (which we translate as “December”).
Some said that to preserve credibility, the hike needed to come at the “next meeting”. A “few” advocated an increase in December (though only two dissented). * “Many” thought risks to economic and financial stability could increase over time if the labor market overheated appreciably, though some argued undershooting the full-employment rate of unemployment could have favorable supply-side effects. The latter point is one the Chair has made, but it sounds like not everyone buys that and more in fact worry about the possible adverse implications of undershooting full employment than see it as a plus..

The Committee reiterated a slow pace of future hikes, saying that monetary policy would remain “dependent on the outlook as informed by incoming data” and that participants expected that “economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate.”




Nov FOMC Minutes: Fed Set To Move In December – Danske

The FOMC minutes from the November meeting were quite a non-event, mainly because much has happened since the meeting.
We think the higher wage growth and lower unemployment rate in the jobs report for October were sufficient ‘further evidence’ for the Fed to feel comfortable raising rates in December (regardless of the election result). The combination of the market rally on the back of the Trump victory and strong US economic indicators for Q4 has only made the case for a December hike even stronger. Markets have priced in a Fed hike in December with certainty.
The Fed is only expected to partly offset the fiscal boost from Trump, as the FOMC turns more dovish next year due to shifting voting rights and many dovish FOMC members (including Fed Chair Yellen) have said it may be a good idea to let the economy run a bit hot.

Markets expect four hikes from now until year-end 2018 against only two hikes before the US election. While the ‘median’ dots in the September projections indicated two hikes in 2017 and three in 2018, we expect two Fed hikes each year.
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Pip Up

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The latest US data on US durable goods was very impressive. It was a big leap for the month of October as the previous reading for the month of September was really disappointing. All these pointing to the possibility of interest rates hike by December.
 

Andora Andrei

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Moerning recap. 25 Nov. 2016

Moerning recap. 25 Nov. 2016

USD/JPY climbed above 113.90 overnight on rising 10-year US bond yields. Japanese inflation data came slightly higher than it was expected and ahead of the figure of the last month, but it is still very low to push BOJ to taper its accommodative monetary policy.

EUR/USD slipped down yesterday in the countdown to Italy’s constitutional referendum scheduled for December 4. The euro rose to 1.0575 in the course of Asian session as 10-year US Treasuries had finally slowed down their pace. Later today we will receive goods trade balance data for the US (the consensus forecast indicates an extended divergence between American exports and imports), and flash services PMI.

AUD/USD gained some point having risen to 0.7435 mainly of the rising prices of copper and iron ore. Kiwi moved upwards to 0.7025 in the cross with USD availing of the drop in the US Treasuries.

USD/CAD slid down below 1.3480 due to the weakening of the greenback. Oil prices were mostly steady as investors are waiting for the next week's meeting of the OPEC for clarity on proposed output cut.

GBP/USD didn’t make big moves on the session. The pair is slowly rising towards the next resistance line located at 1.2465. The trigger of today’s session is the British second estimate GDP. The reading should be bullish for the pound. Many strategists call on the market participants to give the pound a break. It has already weakened significantly since the UK voted to leave the EU on June 23. There is little reason to buy/sell the cable aggressively before any news on the UK/EU relationship surface.
 

Andora Andrei

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Brexit May Take Decade So Give the Pound a Rest, Investors Say

Brexit May Take Decade So Give the Pound a Rest, Investors Say

two of Scotland’s biggest fund management firms have a message for the currency market: it’s time to give the pound a break.

Sterling’s 16 percent slide since the U.K. voted to leave the European Union on June 23 reflects a changed economic reality, according to Standard Life Investments and Kames Capital. That means there’s little reason to aggressively sell -- or buy -- the currency until the details of the U.K.’s new relationship with the EU and the economic implications have unfolded.

“This is a long, slow train lasting a decade,” Andrew Milligan, head of global strategy at Standard Life, which manages about 270 billion pounds ($335 billion), said in an interview at Bloomberg’s Edinburgh office this week. “Markets have priced in the fact that the U.K. economy is going to go through a big structural adjustment -- sterling shows us that.”

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After plunging to the lowest against the dollar since 1985, the year of an international agreement to devalue the American currency, the pound has recovered some equilibrium and traded between $1.21 and $1.27 over the past month. Initial losses were capped as the depreciation boosted exports and the Bank of England’s monetary stimulus supported the economy more than policy makers had predicted.

The pound was the “whipping boy” of foreign exchange markets in the aftermath of the referendum, said Stephen Jones, chief investment officer at Kames. Also based in the Scottish capital, the firm oversees about 51 billion pounds for clients.

“I’m slightly more optimistic on it now,” Jones said in an interview alongside Milligan. “We are not short sterling, but it’s not an endorsement of buying it. Whilst we can take comfort from the beginnings of reference to policy, the detail is non-existent.”
The government hasn’t yet triggered the two-year legal process to leave the EU. While the Supreme Court will decide whether it needs a parliamentary vote, Prime Minister Theresa May reiterated her plan to do it by the end of March. Only then will Britain start unraveling more than four decades of agreements with continental Europe spanning everything from trade and labor laws to weights and measures.

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In the meantime, the country’s financial health is deteriorating and the pound remains the worst-performing major currency in the world this year along with the Mexican peso, which was hit by Donald Trump’s U.S. election victory. In the first major statement on the economy since the Brexit vote, U.K. Chancellor of the Exchequer Philip Hammond this week slashed the forecast for growth in 2017 and laid out plans for more government borrowing.

For now, there’s less scope for a bigger selloff irrespective of concerns about the state of the economy past next year and 2018, Jones said. The median of analysts’ predictions compiled by Bloomberg is for the currency to trade at $1.23 by Dec. 31 and $1.25 next year, little changed from Thursday’s $1.2457 close.

“The U.K. economy generally does well when you lower the cost of borrowing for the consumer and have depreciated your currency pretty aggressively relative to neighbors,” said Jones.

Standard Life’s Milligan advises investors to be “neutral and flexible” on U.K. assets because extricating the U.K. from the EU won’t be quick and easy.

“We can have a lot of preliminary talks,” he said. “But very little will actually be agreed of any note until the beginning of 2018.”
 

Andora Andrei

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British companies keep investing in third-quarter despite Brexit

British companies keep investing in third-quarter despite Brexit

UK companies managed to increase their investment by more than expected during the three months as Britain’s economy surged solidly following June's vote to abandon the European Union.

Business investment expanded at a quarterly rate of about 0.9% during the three months to September, as the Office for National Statistics informed, thus ruining expectations for a 0.6% ascend in a Reuters survey of economists.

The ONS officially confirmed that the UK’s economy surged 0.5% during the third quarter, assisted by a rebound in exports and also robust household spending.

While it resembles a much better performance than many experts had expected in the immediate aftermath of Brexit, a much bigger test is awaited next year.

Ascending inflation provoked by the sterling’s post-Brexit vote plunge seems to have squeezed household spending, while there have been worries that business investment looks set to slow.

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Andora Andrei

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Weekly Trading Forecast: December Expectations Face Themes Like Brexit, Data Like NFP

Weekly Trading Forecast: December Expectations Face Themes Like Brexit, Data Like NFP

December is historically one of the more quiet trading periods of the year. However, an antsy market heading towards protectionism makes a docket loaded with events like US NFPs, an OPEC meeting and BoE stability report a trading minefield.

Dollar Looking to Close Out Best Two-Month Rally in Two Years. - Rate forecasts are fully pricing a December 14 hike, with Feds funds calling a 100% chance of a move.

- The speculative burden is now on February and beyond – the Fed’s expectations glide path.
- The US trade agenda under new president will compete with Fed rate forecasting and strength in counterpart weakness.

Though the ICE Dollar Index (DXY) closed out this past week at its highest level in over 13 years, there was a notable downshift in bullish momentum. Following the strongest two-week rally since the currency topped out in early 2015, the benchmark currency barely eked out a bullish close through a period restrained by holiday liquidity. The currency’s primary effective driver – Fed rate forecasts – has enjoyed a remarkable run but is quickly burning off its fuel. Can the expectation of 2017 rate hikes pick up the responsibility for further Dollar gains? Will the threat of US trade barriers take over the responsibility of lifting the speculative value of the Dollar at the detriment of its largest trade partners? The bullish course is not particularly easy to chart ahead.

This past week, the Dollar managed its third straight positive close; but the gains were far less material than what was achieved in the two weeks immediately following the US Presidential election. This was not simply a flush of optimism following the outcome of the closely watched vote, but it nevertheless supplied the kind of fuel that the Dollar has been able gain considerable traction on. The problem is that these outlets of strength may be tapped without direct – rather than incidental – support. The most prominent bullish engine at risk of spent conviction is the rapid buildup of interest rate speculation.

As of this past week, the market is affording a 100 percent probability that the Federal Reserve hikes at its next meeting on December 14th. We haven’t seen this degree of certainty since the last hawkish policy cycle. In an environment where most are maintaining zero or negative rate policies alongside ever-expanding quantitative easing programs, this unusual tack is a strong fundamental booster. Yet, you can’t push expectations beyond 100 percent. Well, in fact, you can push yield forecasts above that traditional cap in certitude because speculation can go out to a move beyond 25 basis points. That is extremely unlikely however as the group has vowed a gradual pace so as to curb fears as they attempt to normalize policy. Where further bullish premium may be found is through tightening at further meetings.

According to the same futures contracts, the market is pricing out a meager 10 percent chance that the Fed would hike in December and act again at the first gather in 2017 (February 1st). Accelerating the Fed’s timetable would be exceptionally difficult to motivate. That said, it is still possible. The data listings on tap for the coming week are the high-profile that could accomplish just that if they provided an unexpectedly robust outcome…though they could also torpedo current forecasts with surprisingly weak outcomes.

Top billing for event risk this coming week is the November NFPs and broader labor statistics. The net job change is the speculative rank’s first concern. If the number can tap a deeper risk response, it may carry a lasting Dollar move. More likely, the print will be capable of a jolt at best with lasting motivations reserved for the underlying statistics closer to the Fed’s mandate. The jobless rate is already far along. It is the wage growth clip that the FOMC has mentioned in minutes and amongst individual members for lacking the credibility to support a follow up to December 2015’s liftoff. Before the employment statistics cross the wires, the Conference Board’s consumer sentiment survey and the PCE deflator will offer insight into a more unstable backdrop for the group and currency.

While the economic docket lays direct track for us to follow for possible volatility flare-ups, Dollar traders should also be intimately aware of the influence that rising protectionist agenda has for the currency and global investment landscape. The Brexit vote, US Presidential election, competitive monetary policy regimes are all product of countries attempting to benefit at their global counterparts’ detriment. There are initial gains to be had for those pursuing barriers to and withdrawal from global trade; but they are short lived. In the first phase, few countries stand to benefit more than the world’s largest consumer nation. However, the net loss for the global economy in diminished trade, investment and growth will come back to hit that largest player. The question is: what phase are in for these big picture fundamental themes? I believe we aren’t as early as many seem to be treating the Dollar. –JK
 

Andora Andrei

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Euro Risks Increasing for Euro Ahead of Italian Constitutional Referendum

Euro Risks Increasing for Euro Ahead of Italian Constitutional Referendum

- French Republican primary results see Francois Fillon – the more mainstream candidate more likely to beat the National Front’s Marine Le Pen – win on Sunday, providing a boost for the Euro.

- Italian constitutional referendum next Sunday (December 4) looks increasingly likely to fail; the existential threat of a Euro-Zone break-up may soon be thrust back into the spotlight.

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EUR/USD looks increasingly likely to break consolidation streak to downside, setting up a move towards 0.9500 in 2017.

All things considered – it being a holiday week, resulting in markedly lower liquidity levels than normal across all markets, including forex – the Euro had a rocky week. While it was barely changed on balance, EUR/USD traded between roughly 1.0520 and 1.0660, an appetizer of the volatility that may be forthcoming. Over the coming days, a mix of economic data and political risk should be particularly prominent in driving EUR/USD.

The calendar provides an outlet for traders looking for more definable risk. On the Euro side, inflation data from Germany and the Euro-Zone for November are due out. With energy prices providing a nice tailwind (vis-à-vis a base effect), there might a slight bump higher in the year-over-year figures in the cards for both Germany and the broader Euro-Zone. A speech by European Central Bank President Mario Draghi in European Parliament on Monday should draw interest, as well as his speech in Madrid on Wednesday, as markets prepare for the ECB’s rate decision on December 8.

On the US Dollar’s side of the economic calendar, the November US Nonfarm Payrolls report will be in obvious focus on Friday. It’s important to understand that slower rates of headline NFP growth are expected with the unemployment rate below 5%, so the FOMC won’t be hesitant about raising rates at their December 14 meeting even if the headline NFP report came in around +150K. Over the past year, various Fed officials (including Fed Chair Janet Yellen) have estimated the breakeven pace of jobs growth is around +100-110K; the Atlanta Fed’s Job Calculator projects +120K per month are needed to keep the unemployment rate at or below 4.9% through October 2017.

Political risk is on a different level than the economic risk over the coming weeks for EUR/USD. For one, the economic risk is quantifiable; the political risk is more nebulous. To be clear: we are not operating in the bounds of a ‘normal distribution’ anymore; there will only be ‘bimodal outcomes’ going forward. The political risk can still be boiled down into a binary scenario: events will unfold in a manner that will help strengthen the bonds of the Euro-Zone; or they will unfold in a manner that will strain them more than ever. There will be no more kicking the can down the road, lest policymakers desire to sow the seeds of greater upheaval in 2017 and beyond.

In what should be seen as a positive development for the Euro to start the week, Francois Fillon appears poised to lock up the Republican Party’s nomination for President. For those participants hoping to see the European Union and the Euro-Zone stay together, Fillon represents the best choice to defeat nationalist populist Marine Le Pen, France’s version of Nigel Farage or Donald Trump. Le Pen has campaigned on taking France out of the EU; she represents more than an existential threat for the Euro. French elections are in April and May.
 

Andora Andrei

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British Pound May Weaken on Profit-Taking, Year-End Flows

British Pound May Weaken on Profit-Taking, Year-End Flows

Fundamental Forecast for the British Pound: Neutral

British Pound gains for sixth week as monetary policy outlook improves
Thin UK data docket, status-quo BOE FSR may leave prices rudderless
Profit-taking, year-end flows may drive Pound lower in the week ahead

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The British Pound recovery continued as prices posted the sixth consecutive weekly gain versus an average of the UK unit’s major currency counterparts. An increasingly benign BOE policy outlook appears to be the catalyst driving recent gains. Prices have advanced alongside OIS- and futures-based measures of expectations for next year’s policy path as well as benchmark 10-year Gilt yields.

Last week, a revised set of third-quarter GDP figures underscored the economy’s relative resilience since the Brexit referendum. An expansionary Autumn Budget Statement also appeared to shift some of the burden of supporting the economy from monetary and toward fiscal policy. Traders appeared to interpret this as reducing scope for further BOE accommodation.

Looking ahead, November’s manufacturing and construction PMIs as well as October’s Mortgage Approvals report headline an otherwise lackluster data docket. UK economic news has cautiously deteriorated relative to consensus forecasts since the beginning of October but more of the same seems unlikely to beckon easing by itself as inflation firms and the government readies its own stimulus.

Meanwhile, the BOE Financial Stability Report seems unlikely to offer anything particularly novel. Credit conditions have appeared to be broadly stable since mid-August since recovering from a slump in the referendum’s immediate aftermath. This means that the central bank is probably comfortable in wait-and-see mode for the time being, saving its ammunition for the possibility that something truly worrisome transpires.

On balance, this leaves Sterling somewhat rudderless. The currency has enjoyed the longest winning streak since mid-2015, which may inspire jittery investors to consider profit-taking amid a lull in top-tier news flow. Year-end portfolio readjustment that tends to play out across financial markets in the month leading up to winter holidays and the turn of the calendar year may reinforce this dynamic.
 

Andora Andrei

Active member
Yen Dropping at its Fastest Pace in Two Decades But What Motivation are Bears Tapping

Yen Dropping at its Fastest Pace in Two Decades But What Motivation are Bears Tapping

Fundamental Forecast for Japanese Yen: Neutral

- USD/JPY has posted its fastest three-week climb since July 1995.

- Risk trends, a rise in carry appeal, and divergent monetary policy all take part responsibility.

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All of the major Yen crosses rose this past trading week…aggressively. Much of the strength to these crosses – weakness for the Japanese currency – can be summed in the USD/JPY’s performance. The world’s second most liquid currency pair rallied strongly this past week to round out a three-week climb that has no equal in the past 21 years. Dollar strength strong-arming the Yen and its counterparts does have some merit, but such tail wind is limited. Risk appetite is similarly dubious as only US equities seem to enjoy the drunk optimism that would be extracted from the USD/JPY’s rate of climb. The true source of this move may be something as detrimental as capital flight. Few trades founded on pain perform well for long.

The first thing to clear up in assessing the Yen crosses bearings moving forward is misallocated views of influence. This current climb is not the work of Japanese authorities. The Bank of Japan has backed off of its ever-growing stimulus vow as the effectiveness of competitive monetary policy globally cools. The Japanese government’s efforts in the meantime have barely even registered. As central banks collectively set the limits of their accommodation, the BoJ has found itself among the most prominent recipients of outright doubt from speculators.

While the Japanese stimulus program may have lost control of the reins, its long-term course has solidified the assumptions that its currency is an ideal funding currency to carry trade. The yield collecting strategy rises and falls with the same sentiment tide that pushes global equities or shifts the preference from advanced to emerging market assets and back again. US equities seem to signal a remarkable climb in speculative appetite – perhaps enough to make even the record low returns on these crosses palatable. The problem is that risk drive in everything other than US shares lacks for drive.

In the absence of these traditional, speculative motivations; perhaps the true motivation is something as banal as necessary diversification. Brexit rang the bell of rising protectionism, but the US election made the risk all too real for Japan. President-elect Donald Trump ran on a platform of protectionism that would see the world’s largest consumer economy erect trade barriers on countries whose livelihood is more prominent source through exports. Japan is one of those economies. With the TTP and other important trade deals with the US and other major partners at risk, growth and international investment appeal in Japan drop quickly.
 

Andora Andrei

Active member
Stocks in Asia are mixed with strong yen weighing on Tokyo

Stocks in Asia are mixed with strong yen weighing on Tokyo

On Monday, Japanese shares traded weaker, thus breaking seven straight trading sessions of profits as the Japanese yen headed south steeply against the major American currency and crude prices went down.
Japan's Nikkei 225 edged down 0.61% on yen strength, which is considered to be negative for Japanese export-oriented shares, with the Japanese yen spiking more than 1% to 111.87 against the evergreen buck.
Australian S&P/ASX 200 lost 0.29% on weaknesses in its energy stocks, though the Shanghai composite went up 0.38%. Additionally, the Hong Kong's Hang Seng added 0.32%.
The previous week, American shares were higher after the close on Friday, as revenues in the Utilities, Telecoms as well as Consumer Goods sectors brought stocks higher.
The Dow Jones industrial average concluded +0.36% in a holiday-shortened trading session. As for the S&P 500, the given benchmark finished +0.39%, while the Nasdaq composite closed up 0.34%

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Andora Andrei

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Brexit Watch: What the Government and the BOE Are Planning

Brexit Watch: What the Government and the BOE Are Planning

U.K. Chancellor Hammond unveiled the government’s plans to provide fiscal support to prep the economy for the Brexit, but my spies tell me that the BOE has a secret mission of its own. Here’s what you need to know about the Autumn Forecast Statement and Mark Carney’s hush-hush meetings.
Autumn Forecast Statement

Office for Budget Responsibility upgraded 2016 growth forecast to 2.1%
2017 growth forecast downgraded to 1.4%
OBR projects U.K. economy to grow 1.7% in 2018 and 2.1% in 2019
U.K. debt to rise to 87.3% of GDP this year and 90.2% in 2017-2018
In an effort to bolster confidence in the U.K. economy, Chancellor of the Exchequer Philip Hammond started off by boasting that the IMF predicted that the U.K. is poised to be the fastest-growing major advanced economy this year. He even highlighted that unemployment is at a record low and that this year’s growth is set to outpace their estimates made back in March.

However, Hammond admitted that growth is slated to slow in the next couple of years due to lower investment and weaker consumer demand, likely spurred by rising domestic price levels on sterling depreciation and Brexit-inspired uncertainty. To combat this, the government is introducing these fiscal stimulus efforts to keep the economy afloat:

Corporate tax cut to 17% by 2020 to benefit 1 million businesses
£400 million in investments to innovative small businesses
Increasing the rural rate relief to 100% in April 2017 for businesses to save £2900 a year
Freezing fuel duty in 2017 for drivers to save £130 a year on average
Raising the Personal Allowance to £12,500 and the Higher Rate Threshold to £50,000 by 2020-21
Increasing the National Living Wage and National Minimum Wage by April 2017
Reducing the Universal Credit Taper from 65% to 63%
National Productivity Investment Fund to provide £23 billion in infrastructure spending
New Housing Infrastructure Fund of £2.3 billion
£390 million investment in future transport technology
£1 billion investment in full-fibre broadband and 5G mobile network trials by 2020-21
£2 billion increase per year in research and development funding by 2020-21
£800 million for the Scottish Government, over £400 million for the Welsh Government and over £250 million for the Northern Ireland Executive for additional spending
£10 million in support for culture and heritage projects across the U.K.

Phew! Quite a list, eh?

Pound bulls seem to be impressed by the government’s plans to loosen its purse strings, something that Prime Minister Theresa May already hinted at in an earlier speech. Naysayers, however, were quick to point out that a bunch of these are just lofty goals rather than an immediate injection of funds so the U.K. might still find itself in a too-little-too-late situation later on.
Carney’s “Brexit Buffer”

Of course BOE head honcho Mark Carney isn’t looking forward to this predicament one bit, as he is reportedly on a top-secret mission to convince Prime Minister May to push the Brexit date much later.

Apparently, the BOE Guv’nah has hosted dinners for senior investment bankers and finance directors of major British banks over the past couple of weeks in what is being interpreted as an attempt to come up with a transitional agreement dubbed as the “Brexit Buffer.” Some sources even mentioned that Carney is trying to make similar appeals with EU officials.

You see, Carney has repeatedly stated that businesses need time to adapt to leaving the single market and that two years isn’t enough to make the necessary adjustments. “Carney knows there needs to be a two to three-year extension to allow Britain to adjust from the old rules under Europe to the new order,” shared a banker who attended one of Carney’s secret meetings. “His key word is continuity.”

By the looks of it, the Confederation of the British Industry and the British Bankers Association are on Carney’s side, as their leaders have recently turned their speeches into a plea for Prime Minister May to delay invoking Article 50 or to retain access to the single market. While the ball seems to be in 10 Downing Street at this point, keep in mind that the BOE is set to release the results of the bank stress tests this week, along with its assessment of major risks to the financial system, so Carney could use that platform to lobby his anti-Brexit sentiment. Stay on your toes!
 

Andora Andrei

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EUR/USD: Look Out Below As Cyclical Low In Sight – BTMU

EUR/USD: Look Out Below As Cyclical Low In Sight – BTMU

EUR/USD managed to stage a recovery and created a double-bottom. However, there may be room for more falls:

Renewed downward momentum for the euro against the US dollar remains firmly in place in the near-term.
EUR/USD is now moving to within touching distance of testing key technical support at 1.0458 which was the cyclical low from March 2015. A break below would open the door for a potential test of parity.

The euro is likely to remain offered in the week ahead driven by positioning in the run up to the Italian constitutional referendum on the 4th December. Comments from President Draghi will also be watched closely ahead of the ECB’s policy meeting next month. The US dollar rally has come a long way in a short period of time increasing the risk of a pullback although any dips are likely to be bought.

The main US economic data released in the week ahead will be US GDP report for Q3 which is expected to reveal a modest upward revision to growth, and the latest ADP survey for November. We do not expect the reports to alter the market’s view that a December Fed hike is a done deal. US dollar performance will continue to be driven more by expectations for faster tightening in the coming years under President Trump.
 

Andora Andrei

Active member
GBP: 3 Factors Behind This Squeeze; 1.15 Remains The Trough

GBP: 3 Factors Behind This Squeeze; 1.15 Remains The Trough

GBP/USD seems to have found some stability. However,the team at Bank of America Merrill Lynch lists three reasons for seeing a dip to lower ground:

The consolidation in GBP that we had anticipated into year-end has materialized and has been given a boost following the election of Donald Trump. Since hitting a new multiyear low in mid-October, the GBP trade-weighted index (TWI) has rallied by nearly 5% and has been the best-performing currency over the past month. In the absence of any incremental new information on the Brexit process, we had highlighted that extreme short positioning and maximum bearishness presented asymmetric upside risks for GBP and that has materialized.

We identify three main catalysts for this squeeze but continue to believe that GBP/USD will mark a new low in Q1 2017: data has remained robust; the UK government losing the Judicial Review on the right of Parliament to vote on Article 50 (A50); and a more balanced assessment from the Bank of England at the November Quarterly Inflation Report and the UK rates market pricing in a high probability of a rate hike by mid-2018. Sterling developments will continue to be dominated by the politics into the end of the year, notably the Government’s appeal on the Judicial Review verdict which is due to be heard by the Supreme Court at the start of December. A verdict is unlikely before the end of the year, but the government has insisted that it intends pressing ahead with the triggering of A50 before Q1 2017. We tend to agree.

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Forecasts: $1.15 still remains the trough.

In line with our broader forecasts changes, our GBP/USD forecast profile has been lowered into 2017. We still look for GBP/USD to mark a cycle low of $1.15 in Q1 but to recover into the end of that year.

The EUR/GBP forecast profile has been lowered in recognition of the rising political risks in Europe over the coming year.

Risks: Have we seen the low in GBP? We believe that the risks to GBP are asymmetrically skewed to the upside. The market remains short and sentiment is overwhelmingly bearish. This leaves the pound susceptible to a recovery for a variety of reasons: continued strength in UK data; the Bank of England resisting the need for further easing and a more conciliatory backdrop to Brexit negotiations.
 

Andora Andrei

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Yen Posts Brief Gains After Japan Sales Data Beats Expectations

Yen Posts Brief Gains After Japan Sales Data Beats Expectations

The Yen caught a modest bid after some perky Japanese retail sales data
The numbers came in well ahead of economists’ gloomy estimates
But, this doesn’t look like a market that wants to be selling USD/JPY

The Japanese Yen rose a little against the US Dollar, but soon surrendered gains early in Tuesday’s Asian session after official Japanese retail sales figures handily topped market expectations.

Sales rose 2.5% month-on-month in October, much ahead of the 1.1% rise economists had been looking for. Receipts fell 0.1% year-on-year but that was much better than the expected 1.6% slide.

The data was not all good news however. The monthly retail sales surge may simply represent an ongoing bounce back from August’s nadir, which was blamed on poor weather. Household spending also fell by 0.4%, for an eighth straight month of falls. Much of Japan’s domestic economic policy is aimed at boosting consumption and through that, hopefully, stagnant prices, so any hints that that might be bearing fruit tends to support the Yen.

USD/JPY slipped to its Asia session low of 111.60 after the numbers. It had been 111.835 just before their release. However, the US Dollar soon regained its previous levels.

Overall, the perky US Dollar took a little breather early in Asia on Tuesday. However, it remains on track for its strongest overall two-month gain since early last year. But the Dollar Index, which tracks the greenback’s progress against a basket of widely traded peers, slipped back a little from near 14-year peaks.

The final piece of key data released in a busy morning for Japan was the unemployment rate. That stayed at 3% in October. This was as expected by the markets.

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Andora Andrei

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Asian Session Forex Recap 29 Nov. 2016

Asian Session Forex Recap 29 Nov. 2016

AU HIA new home sales drops to two-year lows in October vs. 2.7% uptick in September
BOC’s Poloz sees higher uncertainty for Canada’s economy after Trump’s win

Forex price action was a mixed bag of nuts, as market players continue to brace for this week’s top-tier events.
Major Events:

Slight risk aversion – Between OPEC’s highly-anticipated meeting, the U.S. GDP and NFP reports, and Italy’s referendum this weekend, there’s no shortage of possible catalysts that might affect the major currencies.

This, along with a lack of economic releases during the Asian session, is probably why traders continue to take profits from their dollar and equities bets. Nikkei was hit by the yen strength, while other Asian bourses simply tracked Wall Street’s weak close.

Nikkei is down by 0.26%, Australia’s A SX 200 is down by 0.13%, Hang Seng is down by 0.23%, while the Shanghai index managed to gain 0.08% as of writing.

Oil prices also continue to slip ahead of the OPEC meeting. Brent crude oil is down by 0.96% to $48.74 while U.S. crude oil is also down by 0.83% to $46.70.

Speech by BOC’s Poloz – Bank of Canada (BOC) Governor Stephen Poloz inspired volatility among Loonie pairs earlier today when he hinted that “heightened uncertainty” persists even after Trump has won the elections.

Poloz was generally confident in his interviews, saying that the economy is on track to keep its 2% quarterly growth average. Not only that, but he also believes that, unless there’s strong catalysts like the oil price shock, inflation can go “back at target” by around mid-2018.

But what caught the investors’ attention were his remarks over the impact of Trump winning the elections. Though he and his team are still waiting for “concrete” policies, he has also acknowledged that there will be “heightened uncertainty” until they hear more from Trump.
Major Market Movers:

CAD – The Canadian dollar received a one-two punch from lower oil prices and Poloz’ slightly bearish remarks.

USD/CAD is up by 14 pips (+0.10%) to 1.3433, EUR/CAD popped up by 14 pips (+0.10%) to 1.42321, and NZD/CAD shot up by 18 pips (+0.19%) to .9503.
Watch Out For:

8:00 am GMT: German import prices (0.6% expected, 0.1% previous)
TBA: German preliminary CPI (0.1% expected, 0.2% previous)
8:45 am GMT: French consumer spending (0.2% expected, -0.2% previous)
9:00 am GMT: Spanish flash CPI (0.5% expected, 0.7% previous)
10:30 am GMT: U.K. net individual lending (4.8B GBP expected, 4.7B GBP previous)
10:30 am GMT: U.K. mortgage approvals (66K expected, 63K previous)
 

Andora Andrei

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Dollar Succumbs to Profit Taking Ahead of Event Risks

Dollar Succumbs to Profit Taking Ahead of Event Risks

Five things the markets are talking about
Expectations that a OPEC production deal would unravel, a possible defeat in Sunday’s referendum in Italy and elections in Austria, coupled with the U.S presidential transition challenge of polls in battleground states by Clinton is dominating early trading.

Consolidation in bonds and equities has been relatively muted compared with the forex market – the U.S dollar has started this week, succumbing to profit taking after recent strong gains in the wake of Trump’s election victory and on expectations of Fed rate increases.
The drop in oil prices is hitting U.S. inflation expectations, which is pulling down U.S. Treasury yields and finally knocking back this lengthy dollar rally.
A raft of U.S. economic data is due this week – ISM manufacturing data and non-farm payroll (NFP) – is also strengthening the case for selling dollars as stimulus-driven Trump presidency appears to have run its course for now?
Don’t be surprised to see many adopt a “wait and see” approach, at least until there is some greater market clarity.

1. Fall in U.S yields aids EM stocks

The prospects of reduced upward pressure on inflation from oil prices, is putting pressure on U.S rates and bringing some relief to Asian indexes. To date, they have been underperforming on worries about capital flight to higher-yielding U.S assets.
MSCI’s broadest index of Asia-Pacific shares ex-Japan rallied +0.6%, led by gains in Hong Kong and Taiwan.
Elsewhere, Japan’s Nikkei 225 closed down -0.1% on the back of a stronger yen (¥112.00), while Australia’s S&P/ASX 200 was off -0.8%.
In Europe, both the Stoxx 600 and FTSE 100 are off more that -1%, pressured mostly by commodity and energy stocks.
S&P futures are set to open down -0.4% after the benchmark set a new all-time high Friday.

Indices: Stoxx50 -1.0% at 3,018, FTSE -0.9% at 6,781, DAX -1.0% at 10,589, CAC-40 -0.9% at 4,507, IBEX-35 -0.5% at 8,627, FTSE MIB -2.0% at 16,190, SMI -0.5% at 7,844, S&P 500 Futures -0.4%.

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2. Oil prices under pressure

OPEC is making a last-ditch effort to secure agreement for production cuts even as Saudi Arabia is now suggesting reduction of output is not needed.
The Saudi energy minister said yesterday that he believed the oil market would balance itself in 2017 even if producers did not intervene, and that keeping output at current levels could therefore be justified.
Ministers are flying to Russia for talks ahead of the meeting in Vienna this Wednesday.
Brent futures last traded at +$47.13 per barrel, down slightly on the day, after having fallen by as much as -2.0% in early Asian trade, following on from its -3.6% fall on Friday. West Texas Intermediate crude (WTI) has slipped -1.1% to +$45.57 a barrel, extending its declines after Friday’s -4% drop.
If a deal cannot be agreed upon on Wednesday, some analysts expect a sharp correction lower, potentially going as low as +$35 per barrel on big inventories and supply overhang issues.
Spot gold prices have found some traction on a weaker dollar, gaining +0.9% to +$1,194.49 an ounce following last week’s -2% decline, its third consecutive weekly retreat.
Industrial metals continue to find support from bullish speculative sentiment out of China; zinc has rallied another +3.5%, heading for its highest monthly close in nine years.

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3. U.S Yields fall and flatten curve
The drop in crude prices is hitting U.S. inflation expectations and pulling down Treasury yields.
U.S 10-year prices have rallied overnight for the first time in three sessions, pushing yields down -3bps to +2.33% and off its 16-month high print of +2.417% touched last Thursday.
Elsewhere, yields on Aussie 10-year notes lost -7bps to +2.69%, while yields on similar maturity in Japan, New Zealand and Hong Kong fell at least -2bps.
German 10-year Bund yield fell to +0.2%, its lowest level since the U.S. election results on Nov. 9 sparked a bond market selloff, while two-year German yields hit a new record low at -0.76%.

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4. EM currencies enjoy a good day

A handful of emerging-market currencies have enjoyed a strong session overnight to start the week, spurred on by a weaker dollar index (DXY down -0.6%).
EM pairs have had a torrid few weeks since Trump’s surprise election win. The “reflation” trade and potential protectionist policies have seen a flight of capital from certain regions.
The South African rand (ZAR) is up +2% outright, while the Turkish lira (TRY) is up +1.1% and the Mexican peso (MXN) has gained +0.7%.
MXN remains down -8.2% this month, while the rand and the lira are still down -2.5% and -9.1% respectively.

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5. Swiss National Bank (SNB) likely intervening

Analysts note that another sizable increase in sight deposits at the Swiss National Bank (SNB) would suggest that the central bank continues to intervene in the forex market to weaken the CHF.
Sight deposits have rose nearly CHF +3B last week to CHF +527.6B and about CHF +8B in the past fortnight.
EUR/CHF trades atop of €1.0748, little changed from Friday’s close.
This morning, ECB President Draghi is due to testify about the European Central Bank’s perspective on economic and monetary developments and the consequences of the Brexit before the European Parliament’s Economic Committee, in Brussels at 9am EST.

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Andora Andrei

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Aussie drops, Kiwi ascends in cautious trade

Aussie drops, Kiwi ascends in cautious trade

On Tuesday, the Australian dollar dropped against the greenback, while the New Zealand dollar managed to grow, as traders waited for the publication of American economic growth data later in the day amid overall optimism over the strength of the US economy.

The currency pair AUD/USD lost 0.08%, trading at 0.7475.

Investors were eyeing the issue of preliminary third-quarter economic growth news from America for further clues on the strength of the American economy.

The US dollar has remained broadly backed in recent weeks amid hopes that increased fiscal spending as well as tax cuts under the Trump administration will power economic growth, to say nothing of inflation.

The greenback has also been driven by the view that a rate lift by the Fed in December is a near certainty.

The currency pair NZD/USD earned 0.17%, showing 0.7085.

Market participants were also looking ahead to Wednesday’s OPEC gathering, amid ascending uncertainty over the probability for a production cut deal.

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Andora Andrei

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3 Things You Should Know Before Oil Ministers Meet This Week

3 Things You Should Know Before Oil Ministers Meet This Week

Unless you’ve been too busy buying the Greenback like there’s no tomorrow, you should know that the Organization of the Petroleum Exporting Countries (OPEC) as well as other non-member oil producers are set to have a huddle tomorrow.
What’s the meeting all about?

Remember that two years ago, OPEC tried to limit global oil output by flooding the markets with even more supply, a strategy that should have pushed competitors with higher production costs out. Instead, higher-priced producers got more efficient while the lack of policing from OPEC encouraged other members to ramp up their production even more.

Fast forward to OPEC’s November 30 meeting in Vienna, Austria where the goal is getting OPEC members and non-members alike to agree on some sort of deal to help reduce the global oil glut that has shaved prices in half over the last two years. Some of the popular options include cutting production and/or implementing output ceilings that would reduce output of up to a million barrels a day.
Will negotiations start from scratch?

Not exactly. Recall that oil players already had a huddle in late September with the meeting ending with a deal to… draft an outline of the real deal. Since then, OPEC member oil ministers have been hustling hard to hammer out the details of a deal that’s expected to get signed this week.

Unfortunately, it seems like the major oil players are no closer to finding common ground than they were a few months ago.

Saudi Arabia, the world’s largest oil producer (tied with Russia) and OPEC’s de facto leader, is proposing to use third-party production figures published by OPEC as basis for any production cut deal. It also wants Iran and Iraq to take a larger share of output cuts, something that both countries have opposed.

It also doesn’t help that Iran wants to hit its pre-sanction levels before agreeing to any cut; Iraq is questioning OPEC’s production data, and other conflict-laden territories such as Libya and Nigeria are pushing to get exemptions.

Not all hope is lost though. Earlier today Russia has announced that Putin and Iran’s Rouhani have talked over the phone and agreed to “continue to coordinate their efforts on the world energy markets, including the dialogue on energy between Russia and OPEC.” Russia also recognized that “the importance of steps taken by OPEC to limit the production of commodities was emphasised as an essential element for stabilising world oil markets.” This comes after Saudi has cancelled a meeting with non-OPEC producers on Monday.
What are the possible scenarios?

The best case scenario would involve a production cut or output freeze deal with concrete plans, hard numbers, and specific timelines. Such an outcome would likely push oil prices sharply higher over the next couple of days.

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Market players aren’t crossing their fingers, however. While members are expected to sign an accord to reduce output, it’s more likely that the deal will not include specifics. As in the last meeting in Algiers, participating countries could promise details at a later date. If this is the case, then we’ll likely see global oil prices rally and then eventually lose steam.

The worst case scenario would be if members don’t reach any deal at all. The prospect of extending the oil glut and period of lower oil prices would fuel (pun intended) uncertainty and inspire risk aversion across the board.

How about you? What do you think will happen at the end of this week’s OPEC formal meetings?
 

Andora Andrei

Active member
US GDP revised to 3.2% – above expectations – USD rises

US GDP revised to 3.2% – above expectations – USD rises

Better than expected data from the US: the economy grew by 3.2% annualized in Q3 according to the updated data. Consumption has been upgraded to 2.8%, but the investment was downgraded.

The US dollar is slightly stronger, more against the yen than against others.

US GDP was expected to be revised up from 2.9% annualized to 3% in Q3 2016. There is still one more release coming up in late December. The US economy rebounded after 3 poor quarters.

The dollar was looking good ahead of the publication.
 

Andora Andrei

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In OPEC Poker Game, Iran and Iraq Call Saudi Arabia’s Bluff

In OPEC Poker Game, Iran and Iraq Call Saudi Arabia’s Bluff

Riyadh hints it could walk away from Vienna oil talks
Iran, Iraq judge Saudi Arabia could have to cut unilaterally


For decades, Saudi Arabia has had its way at OPEC. All of a sudden the position has turned: Riyadh finds its power waning against a resurgent Iran and Iraq.

As Organization of Petroleum Exporting Countries ministers gather for a meeting on Wednesday, Saudi Arabia is trying to reassert its authority by hinting it’s prepared to walk away from the negotiations. Genuine warning or bluff, Tehran and Baghdad may be willing to take the risk. Both have seen Saudi Arabia gain market share and neither is as dependent on oil prices as Riyadh.

"Iran and Iraq have assumed that Saudi Arabia will cut unilaterally because it wanted higher prices and thought they could put the Saudis into a corner," said Amrita Sen, chief oil analyst at Energy Aspects Ltd. "Riyadh has effectively said it isn’t in a corner and will not do a deal unless everyone else contributes."

The consequences could be enormous. If oil prices rise, energy giants such as Exxon Mobil Corp. may soon be flush enough to revive abandoned projects and the finances of cash-strapped nations such as Mexico and Russia will get a boost. If not, oil’s recent rally is likely to come undone.

"If OPEC does not come up with a credible agreement to cut production on Wednesday oil prices will end the year below $40 a barrel and be chasing down $30 a barrel early next year," said David Hufton, chief executive officer of brokers PVM Group Ltd. in London.

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Saudi Arabia is sticking to its same offer: cut production, but only if Iran freezes at current levels and Iraq also reduces output. Iran and Iraq are also holding to their own positions. The first wants to be able to recover to its pre-sanctions level of 4 million barrels per day and the second to freeze, rather than cut.

Nobody seemed ready to fold on Monday. A committee charged with determining where the burden of production cuts should fall met for 10 hours, but made little progress as the Saudis demanded Iran was barred from raising output any further.
Last Barrel

Both sides fought to the very last barrel: the Saudis told Tehran it needs to cap output at 3.707 million barrels a day; Tehran offered in exchange a cap at 3.975 million barrels a day. The difference, a mere 0.3 percent of global oil supply, could still scupper the deal.

Iran’s frustration was evident. In an article published on Monday by the official news service, Shana, Oil Minister Bijan Zanganeh said reviving the country’s oil output was "the national will and demand of the Iranian people." Like Libya and Nigeria, Saudi Arabia should accept Iran as a special case that’s excluded from production constraints, he said.

For the latest on negotiations in Vienna before Wednesday’s meeting, click here.

Together, Iran and Iraq pump more than 8 million barrels a day, up from about 6 million barrels a day from late 2014 when OPEC adopted its current pump-at-will oil policy. Saudi Arabia remains the largest producer at more than 10.5 million barrels a day.

"The reality is that only Saudi Arabia and perhaps the U.A.E. and Kuwait are prepared to make any cuts, and those will be modest and short-lived," said Bob McNally, founder of consultant Rapidan Group in Washington. “At best, Iran and Iraq will sign for production freezes.”

Perhaps with that in mind, Khalid Al-Falih, the Saudi oil minister, tried over the weekend to change the OPEC narrative. Oil prices will stabilize next year, "and this will happen without an intervention from OPEC,” he said in Dhahran, eastern Saudi Arabia, on Sunday, according to the Saudi newspaper Asharq al-Awsat.

For Saudi Arabia, it’s an unusual position: in the past, it’s approached OPEC negotiations differently. Traditionally, Saudi Arabia let another country put forward a proposal and waited to see whether others -- particularly Iran and Venezuela -- were ready to support it, showing its hand last.

This time, however, the kingdom showed its hand early in the process, signaling in the run up to the meeting in Algiers in late September that it was willing to switch from two years of produce-at-will and consider output cuts.

For both sides, the talks go beyond oil.

Deputy Crown Prince Mohammed bin Salman is trying to re-tool the Saudi economy through its modernist "Vision 2030" program and low oil prices are forcing unpopular austerity measures. In Tehran, President Hassan Rouhani faces elections in May against conservatives who believe his rapprochement with the West isn’t yielding enough economic benefits.

"The stakes are extremely high, and everyone seems to be upping the ante," said Yasser Elguindi, a veteran OPEC watcher at consultants Medley Global Advisors LLC. "The thing with poker though is you can win even if you have a weak hand. But right now it’s hard to know who is bluffing and who is holding aces."
 

Andora Andrei

Active member
GBP/USD Shrugs Off Gloomy Bank of England Financial Stability Report

GBP/USD Shrugs Off Gloomy Bank of England Financial Stability Report

One of the major UK banks, RBS, failed the BoE’s ‘stress tests.’

GBP/USD strengthened moderately in early European trading Wednesday, before easing back later, largely unaffected by a downbeat Bank of England Financial Stability Report. By midday in Europe, it was still close to the 1.2500 level and within the narrow trading range that has been in place for much of November.

In its report, the central bank said the outlook for financial stability in the UK remains challenging in the wake of the Brexit vote. “The UK economy has entered a period of adjustment following the EU referendum. The likelihood that some UK-specific risks to financial stability could materialize remains elevated,” it added.

Since the UK referendum on membership of the EU, UK financial stability has been maintained through a challenging period of uncertainty around the domestic and global economic outlook, the Bank argued. Moreover, substantial moves in financial market prices have not been amplified by the UK financial system.

However, vulnerabilities stemming from the global environment and financial markets, which were already elevated, have increased further since July. “Financial stability depends on the resilience of the system to risks. The UK banking system is capitalized to sustain the provision of financial services, including the supply of credit, to severe stresses such as those that could face the United Kingdom and global economies,” said the Bank of England.

As for the fall in GBP following the Brexit vote, “recent market developments further highlight the importance of the resilience of markets, and of market-based finance, to sharp market moves. The resilience of market liquidity remains uneven,” the Bank warned.

Chart 1: GBP/USD 5-minute Chart (November 30, 2016 Intraday)

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As part of the Report, the Bank also released the results of its so-called “stress test” to measure the resilience of the UK’s seven major lenders to a global economic crash and one, Royal Bank of Scotland, failed. It has therefore been forced to devise a new capital plan in case of a financial crisis. The lender is still 73% owned by the government after its bailout in 2008.

Barclays was also asked to take action when it fell short of one hurdle, but the BoE deemed its existing capital plan was enough. Standard Chartered missed a key metric as well, although it was not asked to take any action. Lloyds Banking Group, HSBC, Santander and Nationwide Building Society all passed.

Looking ahead, Prime Minister Theresa May’s determination to begin the Brexit process by March next year could increase the concerns of the BoE, which asks for sufficient time for business to acclimatize to the post-EU period.

Therefore, a “hard Brexit” is a still a substantial risk, with the BoE warning that if adjustments take place in a short timeframe, there could be a greater risk of disruption to services provided to the European real economy, which could spill back to the UK economy through trade and financial linkages.”
 

Andora Andrei

Active member
CAD: ‘Rates Trump Oil’; Where To Target? – BofA Merrill

CAD: ‘Rates Trump Oil’; Where To Target? – BofA Merrill

USD/CAD is stuck between Donald and oil. Which factor will win? The team at Bank of America Merrill Lynch assesses the situation:

Themes: rates trump oil. We pushed up our USD-CAD forecast sizably, and now expect 1.43 at end-2017. The shift in view reflects several developments:

First, Donald Trump’s election increases the risk that NAFTA will be renegotiated or scrapped. The latter is unlikely, but given 23% of Canadian GDP is comprised of trade with the US, any developments along these lines will be CAD-negative. The economic risks are not adequately priced by the market, in our view.

Second, we now see the Bank of Canada cutting rates, potentially as soon as midyear or later, as growth remains lackluster and downside risks are growing.

Third, on the USD side, the GOP sweep opens up the door for dollar-positive fiscal stimulus, raising the prospect of a faster pace of Fed hikes. The market’s mispricing of BoC cuts relative to our forecast (3bps of cuts through mid-year 2017) and the extent of Fed hikes will leave the rate-sensitive Canadian dollar vulnerable during 2017.

Lastly, while our Energy team sees oil prices higher in 2017, uncertainty is high heading into the November 30th OPEC meeting. Risks are skewed towards lower prices if OPEC retreats from its previously agreed production cuts.

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Risks: more balanced risks There are a few key risks to our bearish CAD stance. First, while we now see a BoC cut in 2017, a significant fiscal-driven boost to US growth could have positive spillovers to Canada. Given Canada’s lower sensitivity to US growth now we don’t think this would be a game change, though it is a risk. Second, higher oil prices on back of more disciplined OPEC production cuts or positive spillovers from US fiscal spending would support CAD more than we currently anticipate. Lastly, if USD gains turn the Fed more dovish, the policy divergence theme could be less positively USD/CAD than currently anticipated.
 

Andora Andrei

Active member
Asian Session Forex Recap – Dec. 6, 2016

Asian Session Forex Recap – Dec. 6, 2016

Japan’s average cash earnings up by 0.1% vs. 0.2% uptick expected, 0.0% previous
U.K. BRC retail sales monitor improves by 0.6% vs. 1.7% previous
AU current account deficit narrows down from 15.9B AUD to 11.4B AUD in Q3 2016
RBA keeps rates at 1.50% as expected

Asian session market players kept calm and carried on today after getting jittery over Renzi’s resignation yesterday.
Major Events:

RBA keeps its rates at 1.50% – Earlier today, the Reserve Bank of Australia (RBA) has decided to keep its rates at 1.50%, a move that market players had expected. In its official release, the central bank noted that higher commodity prices are boosting national income and that, globally, “the outlook for inflation is more balanced than it has been for some time.”

On a domestic scale, the economy is expected to see some slowdown near the end of the year before picking up again. Labor market conditions remain “somewhat mixed” with “considerable variation in employment outcomes across the country.”

The housing market has also shown different outcomes, with some areas seeing rapid price increases and others declining prices. Last but not the least, inflation is also expected to remain low thanks to lack of upward pressure from wages.

Overall, the RBA believes that keeping its rates steady is “consistent with sustainable growth in the economy and achieving the inflation target over time.” RBA Governor Lowe and his team will conduct their next meeting on February 2017.

Australia’s current account – Before the RBA made its waves, Australia had a chance to sneak a peek of tomorrow’s GDP report. See, the current account deficit clocked in at 11.3B AUD in Q3 2016, much lower than Q2’s 15.9B figure and marks the lowest level in two years.

A closer look, however, tells us that it was higher prices for Australia’s commodity that mostly boosted the numbers. Iron ore export volumes actually fell by 2.0% and while liquefied natural gas (LND) also dipped by 1.0%. In seasonally adjusted chain volume terms, the surplus on goods and services dropped by 61% in Q3, which is expected to shave off as much as 0.2% from the GDP report. Yikes!

Risk appetite returns – Thanks to Uncle Sam printing better-than-expected data yesterday and Italy’s Renzi delaying his official resignation, Asian session market players had a chance to keep calm and carry on.

Nikkei is up by 0.47%, Hang Seng is up by 0.76%, the Shanghai Index is hanging in there with 0.03%, and Australia’s A SX 200 is up by 0.52%. Oil prices missed the bus, however, as Brent crude oil slips by 0.53% to $54.65 and U.S. crude oil prices dips by 0.70% to $51.43.
Major Market Movers:

AUD – The Australian dollar failed to find support from the RBA’s decision to hold its fire. Instead, Aussie traders focused on the impact of today’s releases on tomorrow’s GDP report.

AUD/USD is down by 15 pips (-0.20%) to .7462, AUD/JPY is down by 19 pips (-0.22%) to 84.88, EUR/AUD shot up by 13 pips (+0.09%) to 1.4415, and AUD/NZD ended the session 31 pips lower (-0.30%) to 1.0452.
Watch Out For:

8:00 am GMT: German factory orders (0.6% expected, -0.6% previous)
9:15 am GMT: Switzerlan’s CPI (-0.1% expected, 0.1% previous)
10:10 am GMT: Euro Zone retail PMI
10:30 am GMT: FPC meeting minutes
11:00 am GMT: No revision expected to the Euro Zone’s GDP
 
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