Eyes on BOC decision, Australian jobs report and US CPI

AUD/USD: Eyes on Australian jobs report and US CPI

Macroeconomic overview

• The Australian dollar held near two-month highs on Wednesday as traders unwound their long positions in the greenback after U.S. president-elect Donald Trump expressed concerns at the currency's strength.

• Wednesday's survey of the Melbourne Institute and Westpac Bank found consumer sentiment in Australia edged up just 0.1% in January, failing to recover much from December's 3.4% drop. That left the index at 97.4, a meagre 0.2% higher than in January last year.

• The measure of family finances compared to a year ago dropped a sharp 7.6%, but that for family finances over the next 12 months rose 0.3%. Expectations for the economic outlook over the next 12 months bounced 2.5%, but the assessment of economic conditions for the next five years fell 1.4%. One bright spot for retailers was the measure of whether this was a good time to buy major household items which rebounded by 4.9% in January.

• Investors will keep a close eye on jobs data for December due on Thursday to take the pulse of the Australian economy, which contracted in the third quarter of last year.

• We believe the Australian jobs report should be the highlight of the week for commodity currencies. The AUD has been benefiting from the rise in commodity prices and judging by the uptrend in global manufacturing this is unlikely to change in the foreseeable future.

• If the labor market report manages to surprise to the upside this will likely provide an additional boon to the currency. Recently, aggregate job gains have been robust but the most important development has been a notable improvement in the composition of employment with full-time additions being the primary driver. If this trend is corroborated by the figures next week, labor market gains will be regarded as more sustainable.

• Investors will be also focused on U.S. events. Fed Chair Janet Yellen's speech later on Wednesday could offer clues about the direction of policy. San Francisco Federal Reserve Bank President John Williams said on Tuesday he saw a "good case" for three rate hikes this year even without fiscal stimulus, but if the economy accelerated, the Fed would need to raise rates faster. Fed Governor Lael Brainard on Tuesday joined the growing chorus of policymakers at the Fed warning that sustained wider budget deficits could fuel inflation.

• Investors also awaited the U.S. consumer price index, expected to show inflation at 0.3% last month, compared with 0.2% in November.

 

Technical analysis

• Bull sentiment is upped as the pair powers above the converged 100 and 200-day sma as well as the daily cloud top. RSIs still give bulls momentum with no divergence. A strong support level is 0.7464 (50% fibo of November-December fall).

• Yield spread between Australian and U.S. 10-year bonds

 

USD/CAD: BoC is widely expected to keep rates on hold today

Macroeconomic overview

• The Canadian dollar strengthened to a nearly three-month high against its U.S. counterpart on Tuesday, one day before a Bank of Canada interest rate decision and updated outlook.

• We expect the Bank of Canada to keep its policy rate on hold at 0.5% today. The much more critical element to the day's news will be the bank's quarterly Monetary Policy Report, which will provide considerable new detail about the bank's expectations on rates, inflation and the country's overall economic prospects – including specific new forecasts for economic growth and inflation for 2017.

• Recent domestic data has shown a surge in jobs in December and the first trade surplus in more than two years in November, while a Bank of Canada survey last week pointed to improving business conditions.

• Lending to small businesses in Canada picked up in November on gains in the manufacturing and retail sectors, a report showed, suggesting companies felt more confident with the U.S. election out of the way.

• There is one school of thought that the Bank of Canada's forecasts will err on the cautious side in light of the new uncertainties to Canada's outlook, especially on the trade front, posed by the election last November of Donald Trump as U.S. president. Donald Trump comes to the office with an aggressively protectionist trade agenda, and has been increasing his threats on the trade front in the weeks leading up to his January 20 inauguration. On the other hand, Trump's policies may also represent an upside risk to the Canadian outlook, as his spending plans could accelerate U.S. growth and demand.

• Given how important trade and U.S. growth are to Canada's outlook, the Monetary Policy Report will certainly have to address the Trump presidency in some way. But we expect the Bank of Canada to play it close to the vest, more or less holding the line on its forecasts and keeping any Trump-related assumptions out of the equation until there is some semblance of clarity about Trump's policies.

 

Technical analysis

• The USD/CAD has broken below a rising trendline recently, which is a strong bearish signal. It also had tried to break below a support level at 50% fibo of May-December rise, but was stopped there twice. We think this is a case of third time lucky. If the USD/CAD closes below 1.0328, the next stop for the bears will be September low at 1.2822.

• Yield spread between U.S. and Canadian 10-year bonds

 

EUR/GBP: Theresa May outlines Brexit path ahead

Macroeconomic overview

• The GBP dropped back on Wednesday after huge gain on Tuesday as Prime Minister Theresa May outlined Britain's hopes for its exit from the European Union.

• Yesterday in her biggest speech since becoming Prime Minister, she warned she would walk away from Brexit talks, leaving the EU without any future trade agreement, if European countries tried to impose a "bad deal".

• May confirmed that she planned to take Britain out of the EU's single market, but cheered currency markets by including promises to let parliament have a say on its Brexit deal and give firms time to transition to the new setup. The message have been well-received because it seeks solutions rather than a confrontational approach. But there remains huge uncertainty over where the talks will lead.

• Reflecting the largely resilient picture in Britain's labour market since the shock decision to leave the European Union last year, the unemployment rate held at an 11-year low of 4.8% in the three months to November, in line with market expectations. The employment rate held at all-time record high of 74.5% and wage growth picked up pace. But the number of people in work slipped by 9k.

• The Bank of England said in November it expected the jobless rate to stand at 5.4% by the end of this year although last week one of its policymakers, Michael Saunders, said recent signs of resilience in the economy meant the increase in joblessness in 2017 could be slower than the BoE's projections.

• The Office for National Statistics also said the number of vacancies in the three-month period to the end of December slipped to 748k, the lowest number since the three months to July of last year. Despite the signs of some nervousness amongst employers about the Brexit outlook, growth in wages picked up, possibly reflecting shortages of skilled workers reported in several sectors. The ONS said workers' total earnings in the September-November period rose by an annual 2.8%, the fastest pace since September 2015. Excluding bonuses, earnings rose by 2.7% yoy, the strongest increase since August 2015 and ahead of expectations for a 2.6% rise.

• However wages are not expected to keep pace with inflation in 2017, calling into question whether consumers will be able to continue driving Britain's economy with their spending. Inflation rose to 1.6% in December, its highest level since mid-2014, and we expect it will climb sharply towards 3% during this year, reflecting the fall in the value of the pound since the Brexit vote.

 

Technical analysis

• The EUR/GBP broke below 7-day exponential moving average and below the support level at 0.8648 (low on January 11). Yesterday’s drop is not continued today. The outlook is unclear from the technical analysis point of view. We cannot exclude further downward move towards 0.8553 (23.6% fibo of October-December drop) or rising December-January trendline

• Yield spread between German and British 10-year bonds