Weekly Outlook: 2016, January 17 - 24

ECB, BoC, China, Risk Off, USD Decouple

Attachment 17842

• "Further tightening of global financial conditions seems therefore inevitable, leaving risk-correlated and commodity currencies vulnerable while supporting safe haven currencies like JPY and EUR."
• "The GBP decoupling trade has imploded under the weight of Brexit fears and concerns about the USD decoupling trade are starting to mount."
• "We remain cautious on risk-correlated currencies and think that CAD could be particularly vulnerable ahead of the BoC meeting next week."
• "The market theory about the crumbling central banks’ put will be put to the test by the ECB. Falling inflation expectations and depressed commodity prices should make for a dovish outcome with Draghi likely to reiterate that the ECB can further ease aggressively if required. We are bearish on EUR but are mindful of risk from further risk aversion."

What we’re watching:

USD – Evidence of accelerating core inflation could help the USD but mainly against risk-correlated and commodity currencies.
EUR – ECB President Draghi may consider a more dovish rhetoric as part of next week’s press conference. This should keep the EUR a sell.
GBP – Next week’s labour and retail sales data should confirm constructive domestic conditions to the benefit of rate expectations, and the currency.
CAD – Even if the BoC were to refrain from easing monetary policy further as soon as next week, they should consider a dovish rhetoric. This should prove sufficient in keeping the CAD a sell on rallies.
NZD – Any better than expected inflation data is likely to prove an opportunity to sell the NZD anew.

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Forex Weekly Outlook January 18-22

The fall in Chinese stock markets and the yuan devaluation intertwined with the crash in oil prices and currencies certainly felt it. AUD, CAD and GBP reached new multi-year lows against the dollar while the latter fell against the safe haven euro and yen. US data was not convincing and the chances of another rate hike coming in March have fallen. Yen and euro crosses have made big moves.

1. UK Inflation data: Tuesday, 9:30. The UK’s inflation rate turned positive for the first time in four months, rising 0.1% in November. The main increase occurred in transport costs, alcohol and tobacco prices while clothing prices declined. Analysts expected CPI to remain flat after declining 0.1% in October. Falling oil prices continued to reduce manufacturer’s costs, keeping prices intact while core inflation, excluding food and energy increased to 1.2%. Another 0.1% rise is expected this time.
2. Chinese GDP: Tuesday, 2:00. The world’s second largest economy has been the center of attention with the recent weak data, fall in stocks and devaluation of the yuan that expose weakness and an inability to transition from manufacturing and investment to services and consumption. After serving as the engine of growth for the world, especially after the financial crisis, China could be a reason for another crash. GDP is expected to show an annualized growth rate of 6.9% in Q4, exactly like in Q3. And while many doubt the official data, the publication still has an impact. A positive number can boost risk, supporting AUD and also other commodity currencies and the pound, while hurting the euro and yen. All this could be limited. And in case of a weak figure, it’s the other way around. China also publishes industrial output at the same time, and this is expected to stand at 6% y/y after 6.2% beforehand. Fixed Asset Investment carries expectations of 10.2% y/y.
3. German ZEW Economic Sentiment: Tuesday, 10:00. Economic Sentiment according to the ZEW report edged up 5.7 points in December reaching 16.1 points. The reading was higher than the estimate of 15.2 points. The current condition index posted 55 rising 0.6% points from the 0.8% fall in November. Although economic sentiment improved in December, it’s still lower than the long-term average of 24.8 points. However, a recent uptick in export orders may provide a breather to the German economy. Economic Sentiment is expected to decline to 8.2 in January.
4. NZ Inflation data: Tuesday, 21:45 New Zealand’s inflation was slightly higher than forecasted in the third quarter, rising 0.3% following a 0.4% increase in the June quarter. The main rise occurred in housing prices increasing 1.2%. Analysts expected the third quarter CPI to reach 0.2%. Inflation is predicted to decline by 0.2% in the fourth quarter of 2015.
5. UK Employment data: Wednesday, 9:30. The number of people claiming unemployment allowance increased more than expected in November, rising 3,900, while the previous month’s claimant count change was revised down to only 200 people. However, despite the rise, the UK jobless rate declined to 5.2% in the three months to October, down from 5.3%. Wage growth continues to weaken with regular pay slowing to a rise of 2% in the three months to October, down from a revised 2.4% a month before. Total pay, including bonus payments, decelerated to 2.4% from 3%. The number of jobless claims is expected to rise by 4,100 this time.
6. US Building Permits: Wednesday, 13:30. Building permits surged 11% in November, reaching 1.29 million-unit rate, the highest level since June. The number of permits is a good indicator for housing starts, indicating the housing market is on a growth trend. Permits for the construction of single-family homes increased 1.1%, the highest level since December 2007. Multi-family building permits soared 26.9%. US building permits is expected to reach 1.2 million in December.
7. US Inflation data: Wednesday, 13:30. The weakness in gasoline prices kept CPI flat in November while underlying inflation pressures increased with a 0.2% rise in core Consumer Prices. Core CPI increased for the third month in November. In the 12 months through November, the core CPI edged up 2.0%, the largest gain since May 2014, after rising 1.9% in October. The continuous rise in rents, airline fares, automobiles and medical care indicate rising inflationary pressures. The headline inflation is expected to remain flat again as core inflation is forecasted to rise 0.2% in December.
8. Canadian rate decision: Wednesday, 15:00. The Bank of Canada kept its key rate at 0.50% in line with market forecast amid the effects of low oil prices and other pressures. Total inflation remains near the bottom of its one- to three-per-cent target range, due to low energy prices. Furthermore, business investment continues to be weighed down by spending cuts at resource companies. The central bank remains concerned about consumer debt levels. BOC Governor Poloz stated that even as the Fed hikes, Canadian rates would stay steady. The Bank of Canada is expected to cut rates from 0.50% to 0.25% this time.
9. Eurozone Rate decision: Thursday, 12:45, press conference at 13:30. In the previous meeting of the ECB, expectations were sky high for more monetary stimulus, and the results fell a bit short. A cut of the deposit rate to -0.30% and an announcement of extending QE to March 2017 + reinvesting proceeds were not enough. EUR/USD shot higher and Draghi made his best effort at damage control. No change is expected this time, but we could get a hint about what the Bank could do in March, when new staff forecasts are published. Draghi and some of colleagues are open to do more, while the hawks, most notably his German colleagues, say they have done more than enough. A promise to do more, as inflation looks weak, could hit the euro, while a relaxed stance, given the improvement in the euro-zone, could lift the common currency.
10. US Philly Fed Manufacturing Index: Thursday, 13:30. Manufacturing activity in the Philadelphia area plunged to -5.9 in December, its third negative reading in four months. This unexpected decline followed a 1.9 points reading in the previous month. Analysts expected the index to show 2.1 points. The new orders section remained negative and fell 6 points, to -9.5. However, companies reported higher shipments, as the current shipments index increased 6 points to a reading of 3.7. Furthermore, the 6-month outlook plunged more than 20 points to 23.0. Overall, the report suggests weak global demand. Manufacturing activity in the Philadelphia area is expected to reach -3.1 in January.
11. US Unemployment claims: Thursday, 13:30. The number of new jobless claims increased unexpectedly last week, but remained below the 300,000 line. Initial claims for unemployment benefits rose 7,000 to a seasonally adjusted 284,000 worse than the 275,000 forecasted by analysts. However, the rise could be attributed to seasonal volatility rather than a change in labor market conditions. The four-week moving average of claims, rose 3,000 to 278,750 last week and the four-week moving average of continuing claims increased 5,250 to 2.22 million. Jobless claims is expected to reach 281,000 this week.

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