US data to remain a supporting role ahead of January 20th
(Arnaud Masset, market analyst)
It has been a busy week for financial markets and especially the FX market as the US dollar, which rallied strongly after the US elections, accelerated its debasement as Trump’s first press conference disappointed. The dollar index rose almost 1% ahead of the conference but quickly reversed gains, sliding as much as 2% since then, down to 100.72 before stabilising at around 101.30. The market does not expect much from Trump’s investiture next week as it will most likely be in the same vein. Against this backdrop, we expect the market will pay increasing attention to US fundamentals and to the Federal Reserve. Obviously this will not happen overnight as investors still expect a lot from the Trump presidency; however, they have also started to realised that they were somewhat overoptimistic.
December US retail data is due this afternoon. After disappointing substantially in November (0.1%m/m versus 0.3%% median forecast), the headline measure is expected to rise 0.7%m/m in December amid a substantial boost from motor vehicle sales and rising oil prices. The gauge excluding automobiles and service stations are expected to rise 0.4%m/m in December versus 0.2% in November. The market will be increasingly sensitive to a reverse in the retail sales positive trend as it would dampen the growth outlook (as a reminder consumer expenditure contributes to almost two-thirds of the US total GDP figure). We remain bearish USD and expect high quality commodity and EM currencies to continue rallying. However, in the short-term, the Trump story will remain the main driver in the FX market, meaning that event risk is definitely something to monitor, especially the President-elect's Twitter feed.
Limited info on China's export fall
(Peter Rosenstreich, head of market strategy)
China trade data fell slightly in December, primarily on high base effect. Trade balance USD exports contracted -6.1% against -3.3% expected and from 0.1% in November. USD imports rose 3.1% above expectations from 3.0% but slowed significantly than 6.7% in November. Commodity imports were a mixed picture as December volumes fell but value increased. There is not much we can take from this data point, however we do continue to see an improvement in China trade data as the global economic backdrop marginally strengthens.
Of course, the political uncertainty emulating from President-elect Trump's volatile trade policy continues to haunt investors. Trump's appointment trifecta of severe China trade critics in Navarro, Ross and Lighthzer indicates that adversarial trade policy between US-China is coming. As we indicated in our research, “Outlook 2017”, this collision is one of our clearest themes for the year. And the end-result will be a resilient regional trade block led by China. Elsewhere, rumors indicate that the PBoC has directed the bank to provide monthly reports on the balance of inflow and outflows. Proof that outflows are being neutralised by inflow. If true, this would be further evidence that China is tightening CNY movement through capital controls to halt RMB depreciation. Resulting liquidity issues should pressure CNH markets into giving the yuan some form of short-term relief from selling pressure.
ECB minutes reveal its political concerns for 2017
(Yann Quelenn, market analyst)
Following the release of the much-awaited Fed minutes, yesterday the ECB released its account of its December Monetary Policy Meeting. These minutes clearly indicate that economic and political uncertainty are now important central bank drivers. The result of the Brexit and Italian referendums are clearly straining EU unity. However, these uncertainties, as long as they are controlled, are helping to the ECB by lowering the single currency's value. Indeed, a strong euro would not be beneficial for economic growth in the Eurozone, which is currently stalling below 2%.
We recall that the central bank has extended its asset-purchase program by nine months, adding around €540 billion to the economy. In our view, the reduction of the amount of the asset-purchase program is mostly due to address the scarcity of the bonds. We strongly disagree that this should be viewed as an act of dovishness regarding the total amount of bonds to be purchased. The minutes also indicate some concerns regarding inflation, which is not picking up even though higher energy prices should be adding upside pressures on consumer prices. All in all, no major surprises from the ECB. Eurozone reflation will be the yardstick of the ECB’s monetary policy this year.