Dollar Following Yields Higher Temporarily, Sterling Pullback in Progress

Dollar recovered overnight with the help of surging treasury yields. 10 year yield hit as high as 2.725 before paring gains to close at 2.696, up 0.034. That’s also the highest level since April 2014. Nonetheless, the lift to the greenback would likely be temporary as Dollar and yields would likely go back to the "decoupled" relationship fairly quickly. British pound is trading as the weakest for the week. Renewed Brexit uncertainty is seen as a factor weighing on Sterling. But it’s actually more about returning to reality after last week’s utopic rally. For today, New Zealand Dollar is trading mildly higher after trade balance data.

Technically, weekly MACD suggests that 10 year yield is picking up momentum. TNX is on course for 61.8% projection of 1.336 to 2.621 from 2.034 at 2.827. The key resistance level, nonetheless, lies in 2013 high at 3.036.

Australia: Perplexing gap between business conditions and confidence narrowed

Australia NAB business conditions rose to 13 in December, up from 12 but missed expectation of 15. Nonetheless, that’ still way above long run average of 5. Business confidence rose to 11, up from 7 but also missed expectation of 12. That’s the highest reading since July. The strong bounce in confidence reading "helped to narrow the perplexing gap between business conditions and confidence evident over the past couple of years, and is an encouraging signal for investment," noted NAB group chief economist Alan Oster.

However, retail remained pressured at negative conditions at -2. Oster noted that "final retail prices also weakened sharply in December into negative territory, and are running at a slower rate than labour costs and purchases costs, pointing to margin compression." And the fall in prices is seen as a downside risk to Q4 CPI report due tomorrow.

New Zealand imports and exports hit records in 2017

New Zealand trade balance came in at strong surplus at NZD 640m in December, versus expectation of NZD -125m deficit. Exports surged 26% yoy to NZD 5.55b in the month while imports rose 11% to NZD 4.91b. Over the year, total exports hit NZD 53.7b in 2017, up 11% on 2016 and hit a new record. Imports also rose to NZD 56.5b, up 9.4% on 2016, and hit a record too. Exports to China jumped a strong 27% in 2017, hitting close to NZD 12b. Exports to Australia, however, grew a mere 6.5% to NZD 8.8b.

Abe’s advisor Hamada: BoJ Governor should follow Abenomics

In Japan, an economic adviser to Prime Minister Shinzo Abe said the BoJ should stick with so called "Abenomics" no matter who the next Governor is. Koichi Hamada, an emeritus professor of economics at Yale University said that the next BoJ Governor should have "boldness and experience". He emphasized that "Abenomics is managed excellently by the BOJ policy. If you are winning in a sport, you don’t change the strategy." For the moment, there is no decision on whether Haruhiko Kuroda would be given another term. Hamada commented that "there are many excellent people working at the BOJ and their morale will be reduced if someone outside of the central bank becomes governor so often, though I don’t know if a BOJ official will become next governor this time."

Released from Japan, retails ales rose 3.6% yoy in December, household spending dropped -0.1% yoy. Unemployment rate rose to 2.8%.

Looking ahead

Eurozone GDP is a key focus in European session while confidence indicators will also be featured. Germany CPI is another data to watch. Swiss will release trade balance, KOF. UK will release mortgage approvals and M4. Later in the day, focus will be on US consumer confidence.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.4015; (P) 1.4086; (R1) 1.4148; More…..

GBP/USD dips to as low as 1.4024 so far as retreat from 1.4345 extends. Intraday bias remains neutral as corrective trading would extend. But downside should be contained by 1.3915 support to bring rally resumption. On the upside, break of 1.4345 will resume medium term up trend to 100% projection of 1.2108 to 1.3651 from 1.3038 at 1.4581 next. However, break of 1.3915 will argue that, at least, deeper pull back in underway to 1.3651 resistance turned support.

In the bigger picture, sustained break of 1.3835 key resistance level indicates that rebound from 1.1946 is at least correcting the long term down from from 2007 high at 2.1161. Further rise should now be seen back to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466. Medium term outlook will stay bullish as long as 1.3038 support holds, in case of pull back.

Economic Indicators Update