Action Insight

Dollar weakens in early US session after mixed economic data. Headline durable goods orders dropped -1.2% in October, much lower than expectation of 0.3% rise. Ex-transport orders rose 0.4%, in line with consensus. Initial jobless claims dropped -13k to 239k in the week ended November 18, slightly better than expectation of 241k. Four week moving average rose 1.25k to 239.75. Continuing claims rose 36k to 1.9m in the week ended November 11. The greenback is so far trading as the weakest major currency today as markets await FOMC minutes. Nonetheless, there is little chance for the minutes to give Dollar a lift. They will most likely just reaffirm the chance for a December Fed hike.

Markets are generally back in risk seeking mode. Major US indices ended in record highs as DOW gained 0.69% to 23590.83, S&P 500 up 0.65% to 2599.03 and NASDAQ rose 1.06% to 6862.48. Asian markets follow with Nikkei gaining 200 pts in initial trading. Trading in currency markets is relatively subdued in Asian session. For the week, Sterling remains the strongest one follow by commodity currencies. Euro remains the weakest one on political uncertainties in Germany, but loss is, again, limited. Dollar is trading mixed as markets await FOMC minutes. Expectation on the minutes is rather low as they shouldn't reveal anything that alter the chance of a December Fed hike.

Euro remains pressured today and suffers some renewed selling. But overall sentiments in Eurozone are not too bad as German DAX rebounds today and is trading up 0.87% at the time of writing. CAC 40 is also trading up 0.69%. US futures also point to higher open. Political deadlock Germany will remain a focus but it will likely take some more time to resolve. Meanwhile, Dollar trading is subdued with Thanksgiving holiday this week and Senate could only vote on the tax plan next week. The greenback is trading as the second weakest one today, next to Euro. On the other hand, commodity currencies are trading broadly higher, paring recent losses.

Although the selloff the euro as a result of a breakdown of Germany's coalition talks appeared short-lived, political instability in the country and the EU would remain in play for some time. We see four possibilities are present in the aftermath of FDP's walkout from the 4-week exploratory talks: 1 New election, 2. Grand coalition (a CDU/CSU+SPD Government), 3. Restart of the Jamaica talks (CDU/CSU + FDP+ Greens) or 4. Formation of a minority government by CDU/CSU with either the Greens or FDP. It appears that none of the above options is easier to be achieved as each has its own limitations and constraints. This report would analyze each of the four scenarios. Yet, assessing the likelihood of the scenarios at this stage appears premature as the developments remain fluid.

The RBA minutes for the November minutes delivered a dovish tone as policymakers expressed concerns over the wage growth outlook. This is consistent with the central bank's worry over household spending as indicated in the meeting statement (released earlier this month). We believe this has added further pressure to Aussie's recent weakness, sending AUDUSD to the lowest level in 5 months. The central bank kept its powder, leaving the cash rate unchanged at 1.5%, in November. We expect the monetary policy would stay unchanged at least until 1H18 and could extend to 2H18.

Euro remains the weakest major currency for the week so far on political uncertainty in Germany. In addition, dovish comments from ECB President Mario Draghi is also weighing down the common currency. But after all, loss is limited, in particular against Dollar. EUR/USD is holding well above 1.1677 minor support and maintains near term bullish outlook. EUR/JPY breached 131.38 key near term support yesterday but quickly recovered. That's also helped by weakness in Yen, which pulled back on risk appetite and rebound in treasury yields. Dollar stays mixed as the rally attempt lacks follow through momentum. Australian Dollar weakens in Asian session as RBA minutes suggest interest rate to stay low for longer.

Euro tumbled earlier today in knee-jerk reaction to news that German Chancellor failed to form coalition government. But the common currency quickly recovered as markets perceive that the economy won't be hurt by the current political uncertainty. DAX dipped to as low as 1926.13 but is now back above 13000 handle at the time of writing, up 0.25%. Elsewhere, trading is very quiet today. Sterling is lifted by news that UK is ready to give an improved offer on the divorce bill to EU. Dollar trades mildly firmer today except versus Sterling and Kiwi. Swiss Franc is indeed trading as the weakest one, indicating followed by Canadian Dollar and then Yen. So far, markets are not in risk aversion mode.

Euro dives broadly after Germany Chancellor Angel Merkel declared failure in forming a coalition government. After over time exploratory talks, Merkel's Christian Democratic-led bloc couldn't reach an agreement with pro-business Free Democratic Party and center-left Greens. Merkel will now meet with President Frank-Walter Steinmeier next. The meeting with Steinmeier suggests that Merkel will not opt for forming a minority government with the Greens. And the reincarnation of the grand coalition with SPD is unlikely too. Instead, Merkel may ask Steinmeier to order another election. In the meantime, she will stay as the "caretaker" chancellor. And for the time being, Germany will hold of any work with France on Euro reforms until the domestic political picture comes clear.

Yen surged broadly last week and ended as the strongest one as partly driven by flattening yield curve, and partly by global risk aversion. Selloff in oil was one of the major factors driving equities down. Euro and Swiss Franc followed Yen with the common currency supported solidly by strong German GDP. On the other hand, commodity currencies ended as the weakest ones. In particular, data from Australia suggested that RBA would stay on hold for longer than originally expected. Meanwhile, inflation data from Canada argued that BoC won't rush into another rate hike. News from US were mixed. On the positive side, a big step was made with passage of the tax bill in House. On the negative side, the real challenges lie in Senate where Republicans only have a slim majority. And, efforts to reconcile the bills of both chambers are huge. Also, there are concerns of political instability as Special Counsel Robert Mueller's Russian probe is getting closer to US President Donald Trump. But so far, US financial markets have displayed much more resilience than others.

The House of Representatives passed its version of tax reform bill with a 227-205 vote. The outcome had been widely anticipated as Republicans control 240 out of 435 seats there. Despite the passage of the bill, there were 13 Republicans voted against it due to the dissatisfaction with the proposal to eliminate the deduction for state and local income taxes, although the deduction for property tax up to US$ 10 000 is preserved. Dissenters were mainly from high-tax states with 5 GOPs from New York, 4 from New Jersey, 3 from California and 1 from North Carolina voting against the bill. The House is presumably the easier hurdle for the tax reform bill due to the larger Republican majority.

Commodity currencies are set to end the week as the weakest ones. While WTI crude oil seems to have defended 55 handle and recovered, Canadian Dollar stays soft after mixed inflation data. Dollar follows closely and continues to display softness against Euro and Yen. Dollar could be supported by progress in tax plan after both House and Senate Finance Committee approved their own versions. Though, strength in the greenback is limited as there are still huge work to reconcile the tax plan between House and Senate. Also, there is some pressure from news that Special Counsel Robert Mueller issued subpoean to President Donald Trump for Russia related documents.

The US markets responded positively to the passage of the tax bill in House and in Senate Finance Committee. DOW jumped 187.08 pts, or 0.8% to close at 23458.36. Technically, it defended 23251.1 key near term support and maintained bullishness. Focus is back on historical high at 23602.1. NASDAQ has indeed made new record at 6806.67 before closing at 6793.29, up 1.3%. 10 year yield also showed some resilience and ended up 0.026 at 2.361, keeping itself well above 2.304 key support. In the currency markets, Dollar remains generally soft, though, except versus Aussie and Kiwi. Euro and Yen would probably end the week as the strongest ones.

Direction in the forex markets is rather unclear today. Euro pares back some gains after this week's strong rally. Sterling makes use of EUR/GBP's rejection of 0.9032 resistance and strengthens broadly. The pound is additionally supported by better than expected retail sales data. But momentum in Sterling is unconvincing. Similarly, Dollar also tries to rebound today but lacks conviction. House's expected passage of its own version of the tax bill might give the greenback a temporary lift. But the determining factor of the success of the tax bill will lie in how united the Senate Republicans are. And that's remain a big question.

The talk of the day is undoubtedly the flattening of US yield curve with the spread between the 10-year and 2-year yields fell to 64 bps, the lowest level since November 2007 on Thursday. Meanwhile, the spread between 30-year and 5-year yields also dropped below 75 bps, the lowest in about 2 week. Flattening yield curve has raised concerns as this is probably also a reason of diminished risk appetite this week, apart from disappointing global macro dat. Textbook knowledge suggests a normal yield curve is upward-sloping as yields for longer-dated investments are higher than shorter-dated ones. An inverted yield curve (short-dated yields exceed those of long-dated) is usually a signal of upcoming economic recession. A flat yield curve is the transitory period from a normal to an inverted curve. However, this interpretation does not necessarily hold true. For instance, US' economic growth managed to avoid recession, despite a series of global economic crisis from 1995-2000, years after the sharp yield curve flattening from 1994 to 1995 (Second Chart).

US equities generally lower overnight as the global market rout continued, but sentiments stabilized in Asian session. DOW lost -138.19 pts, or -0.59% to end at 23271.28. It breached 23251.11 near term support during the day, which could seen as a sign of near term reversal. 10 year yield also followed lower, down -0.046 at 2.335 but it s held well above 2.273 structural support so far. Meanwhile, Dollar is trying to recovery after the deep selloff, in particular against Euro, earlier in the week. Overall, the sell off in oil is seen as a factor driving risk aversion. But WTI might now be stabilizing around 55 handle. Another risk averse factors emerges as US politicians are raising doubts on the legislation of the tax plan.

Yen surges broadly today on risk aversion as global equity markets suffer heavy selloff. At the time of writing, FTSE is trading down -0.5%, DAX down -1% while CAC is down -0.5%. DOW futures also point to triple digit loss. That followed -1.57% fall in Nikkei earlier. The correction in oil price is seen as a key facto that drives stocks down. WTI crude oil is trading at around 55, after dipping to 54.97, comparing to last week's high at 57.92. Euro remains generally firm and accelerates against Dollar, as supported by optimistic economic outlook. But the common currency is overwhelmed by Yen. Meanwhile, Aussie remains the weakest one today as weighed down by weak wage growth. Canadian Dollar follows as weighed down by oil. Dollar is trading as the third weakest, and it could try to recover on slightly higher than expected core CPI reading. But it's not showing any strong sign of rebound yet.

Australian dollar tumbles broadly today as wage growth data disappoints. That also add to case for RBA to divergence from global tightening and stand pat ahead. Yen surges broadly as GDP miss pressures Nikkei. But Yen is outperformed by Euro, which surges this week on strong German GDP data. Euro is firm in Asian session and is on course for further rally. More important economic data will be released today. Sterling will look into employment data for some support. Meanwhile, Dollar will look into CPI and retail sales to solidify the case for a December Fed hike.

Euro surges broadly today as supported by solid economic data that supports ECB's tapering plan next year. Growth in Germany was particularly impressive. Technically, EUR/USD's strong break of 1.1689 resistance now indicates near term reversal. And more upside would likely be seen back to 1.18 level. Euro's strength also helps lift its cousin Swiss Franc, which follows as the second strongest one. On the other hand, Sterling remains one of the weakest as CPI was unchanged at a five year high but didn't accelerate. Both Dollar and Yen are also struggling.

Notwithstanding disappointing headlines, China's economic activities and credit conditions in October were a result of the government's regulatory tightening and the “neutral and prudent” monetary policy with a tighter bias. China's 10 year yields jumped to a 3-year high, approaching 4%, while 5-year yields breached 4% the first time in over 3 years, on Tuesday. The surge in yields can be attributed to a confluence of factors, including a selloff of sovereign bonds after softer-than-expected macroeconomic data and a reflection of tightened liquidity in the financial system. However, we believe the most critical factor is the rallies in US yields, on expectations of a December rate hike, and UK yields, amidst BOE's rate hike earlier this month.

After suffering steep selloff yesterday on political uncertainties, Sterling stabilized and recovers mildly today. But focus will set to stay in the UK with CPI featured in the economic calendar. For the moment, GBP/USD and EUR/GBP are still holding in range. Thus, we're treating the selloff in the Pound as part of a corrective pattern first. Meanwhile, the calendar is getting busy today with Eurozone set to release GDP, industrial production as well as German ZEW economic sentiment. Some volatility could be seen in EUR/GBP. US will also release PPI later today which gives the market a glimpse of the inflation outlook, and as a prelude to Wednesday's CPI release. The greenback is generally staying in consolidation mode and needs fresh inspiration for a breakout.