Action Insight

At the RBA minutes for the March meeting, policymakers raised concerns over the increasing levels of household debts which would be exacerbated by rising unemployment and falling consumption. The members also noted there had been a "buildup of risks associated with the housing market". While the central bank has been paying close attention to the housing market, including prices, supply, rents, debts and supervisory markets, the reference of "a buildup of risks" was non-existent in the March meeting statement and the February minutes.

Australian dollar's hit a four month high overnight but lost momentum after strong housing data and RBA minutes. RBA highlighted in the meeting minutes the risks from the heat-up housing markets. It noted that "data continued to suggest that there had been a build-up of risks associated with the housing market." And, "growth in household debt had been faster than that in household income."

Sterling dips broadly today but loss is limited. UK Prime Minister Theresa May's spokesman James Slack said that Article 50 on Brexit will be triggered next Wednesday on March 29. And, UK representative to EU Tim Barrow has already informed European Council President Donald Tusk of the plan. Slack also noted that "after we trigger, the 27 will agree their guidelines for negotiations and the Commission's negotiating mandate." And, "President Tusk has said he expects an initial response within 48 hours. We want negotiations to start promptly." Meanwhile, it's reported that UK and Germany are planning to sign a new defence pact after the trigger. German defence ministry confirmed that they are working on joint projects. And, the ministry emphasized that "independent of the effects of Brexit, Great Britain remains a strong partner and ally in Nato and also bilaterally."

The financial markets have mixed, or probably just little reaction, to the outcome of the G20 meeting in Germany over the weekend. Markets in Australia, South Korea traded mildly lower. Meanwhile, stocks in Hong Kong jumped. Japan is on holiday today. In the currency markets, Sterling is paring back some of last week's gain while Dollar stays generally weak. On the other hand, commodity currencies are trading broadly higher as led by Kiwi and Aussie. In other markets, Gold breaches last week's high and is extending rebound to as high as 1235 so far. WTI crude oil dips back to 48.3 as last week's recovery failed below 50. While RBNZ will meet this week, the main focus will turn back to economic data in most countries.

There were some major surprises in the markets, much volatility and some interesting developments, last week. Dollar ended the week as the weakest major currency as markets were clearly disappointed by the outcome of the dovish FOMC rate hike. Technical developments in Dollar index and treasury yields suggest there more down would be seen in the greenback in near term. There were some good reasons for Euro to surge last week. Those factors include speculations of ECB rate hike by the end of the year, as well as the Euro-friendly results of Dutch elections. But the common currency did end up as the second weakest one. In particular, the sharp pull back of EUR/CHF from as high as 1.0823 to close at 1.0718 indicates that traders are still concerned with political uncertainties ahead. On the other hand, Australian dollar ended as the strongest major currency last in spite of weak employment data. Sterling followed as the second strongest major currency after hawkish BoE minutes. Also, FTSE 100 closed at new record high despite all the Brexit and Scexit news.

The forex markets are relatively quiet today as the week is heading to a close. There have been talks about Euro strength around. While the common currency did jump against Dollar, it's indeed the second weakest major currency for the week. There are speculations that ECB could lift interest rate before ending the quantitative easing program. There are also talks that results of the Dutch elections showed a defeat for populism and anti-Euro sentiments. However, the lifts from those factors to Euro were rather brief. Cross price actions could be a factor as the currency markets are always a tug war of relative strengthens. But in such situations, we'll always look at EUR/CHF for more guidance on the performance of Euro.

Dollar is set to end the week as the worst performing major currency as post FOMC weakness continues. Meanwhile, Euro follows as the second weakest one after the positive impact of ECB and then Dutch election fades. Meanwhile, Australia dollar is leading the way high on solid risk appetite. And that is followed by Sterling which was lifted by hawkish BoE minutes yesterday. The forex markets are mixed elsewhere.

To our, and the market's, surprise, BOE's Kristin Forbes voted in favor of a 25 bps rate hike in March. While this had not altered the decision of keeping the Bank rate unchanged at 0.25%, the overall message sent to the public has now become more hawkish. The members voted unanimously to leave the government bond purchases at 435B pound and corporate bond purchases at up to 10B pound. Adding to the rising speculations of tightening is the minutes, which suggested that some of those who voted for unchanged policy believed 'it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted'. GBPUSD jumped to a 2-week high of 1.2376 after the announcement, before settling at 1.2358, up +0.55%.

As widely anticipated, SNB left the sight deposit rate unchanged at -0.75%. The target range for the three-month Libor stayed at between -1.25% and -0.25%. Reiterating the excessive strength in Swiss franc, the central bank pledged that it would "remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration. Policymakers acknowledged ongoing improvements in the global economy but noted that it is "is still subject to considerable risks", among which the key is political uncertainty with "respect to the future course of economic policy in the US, upcoming elections in Europe, and the complex exit negotiations between the UK and the EU".

Sterling jumps sharply after BoE left monetary policies unchanged as widely expected. That is, benchmark interest rate was kept at 0.25%, asset purchase target was kept at GBP 435b. Most importantly, the decision for interest rate was not unanimous. Kristin Forbes voted for a 25bps hike. That's seen by the markets as sign of a split in the MPC with some policymakers getting more intolerant to the surge in inflation. As noted in the minutes, "some members noted that it would take relatively little further upside news on the prospects of activity or inflation for them to consider that a more immediate reduction in policy support might be warranted." On the other hand, the majority stayed cautious on inflation outlook as wage growth has been "notably softer than expected, despite a further fall in the unemployment rate". Also, "estimates of retail sales had weakened notably" and that other indicators were "mixed".

The responses to FOMC's announcement overnight were very clear. Stocks rebounded with DJIA gained 112.273 pts or 0.54% to close at 20950.10. S&P 500 rose 19.81 pts or 0.84% to close at 2385.26. NASDAQ jumped to as high as 5911.20, just missed record high at 5911.79 before closing at 5900.05, up 43.23 pts or 0.74%. Long term treasury yields, on the other hand, tumbled sharply. 10 year yield was rejected from 2.621 resistance and closed at 2.508, down -0.087 for the day. 30 year yield lost -0.066 to close at 3.106. Dollar index dips to as low as 100.43 and broke 100.66 near term support level, suggesting more downside ahead.

FOMC raised the fed funds target range, by +25 bps, to 0.75%-1.00% with 9-1 vote. Minneapolis Fed President Neel Kashkari dissented as he favored leaving the monetary policy unchanged. The Summary of Projections (SEP) shows virtually the same macroeconomic outlook. Moreover, the median dot plot maintained three rate hikes this year and in 2018. Chair Janet Yellen noted that that the projections have not included potential fiscal stimulus promised by President Donald Trump. She also noted that the Committee discussed on balance sheet policy but no conclusion was reached. The market was disappointed, reflected in the decline in US dollar and Treasury yields, as they had anticipated more hawkish statement and some upward adjustments in economic forecasts.

Dollar drops sharply after Fed hikes federal fund rates by 25bps to 0.75-1.00% as widely expected. The disappointment comes from effectively no upward revision in the projected rate path. The median projection of federal fund rates was held at 1.4% by the end of 2017, same as December projection. Median projection for rate by the end of 2.18 was held at 2.1%, also same as December projection. Median projection for rate by the end of 2019 was revised by a mere 0.1% to 3.0%.

Dollar weakens mildly again as markets are awaiting FOMC rate decision, economic projections and press conference. Headline CPI rose 0.1% mom, 2.7% yoy in February, up from 2.5% yoy and beat expectation of 2.6% yoy. Core CPI rose 0.2% mom mom, 2.2% yoy, down from 2.3% yoy but met expectation of 2.2% yoy. Retail sales rose 0.1% in February, above expectation of -0.1%. Ex-auto sales rose 0.2% , above expectation of -0.1%. Empire state manufacturing index dropped to 16.4 in March, down from 18.7 but beat expectation of 15.0. The data are mixed to positive but markets paid little attention to them.

Markets are holding their breath as the highly anticipated FOMC meeting awaited. DJIA's recovery lost steam and closed down -44.11 pts, or -0.21%, at 20837.37 after breaching 20800 briefly. S&P 500 also lost -8.02 pts, or -0.34%, to close at 2365.45. Both indices are holding above last week's low at 20777.16 and 2354.54 so far. 10 year yield stayed in tight range below recent resistance at 2.621 and closed down -0.013 at 2.595. Gold continued to engage in range trading around 1200. WTI crude oil dived sharply to as low as 47.09 but recovered to 48.50 for the moment.

Dollar rebounds broadly today and maintain gains after stronger than expected inflation data. Headline PPI rose 0.3% mom and 2.2% yoy in February, comparing to prior month's 0.6% mom and 1.6% yoy, above consensus of 0.1% mom and 2.0% yoy. Core CPI rose 0.3% mom, 1.5% yoy, up from 0.4% mom and 1.2% yoy, versus consensus of 0.2% mom, 1.5% yoy. In particular, GBP/USD drops through 1.2133 support as Sterling is sold off broadly on news on Brexit and revival of Scexit. Meanwhile, Yen is trading as the strongest major currency with buying interest seen ahead of BoJ meeting.

FOMC is highly likely to raise its policy rate, by +25 bps, to a range to 0.75-1% in March. With a March rate hike a done-deal, the market focus turns to the future monetary policy stance. We expect two more hikes, one in June and one in September, this year. Given the recent improvements in employment and inflation, the market has begun talking about four rate hikes in 2018. For now, we stick to three, as suggested in December's dot plot. The market is currently pricing in three 25-bps hikes this year and two for 2018. The Fed's updated Summary of Projections (SEP) would be released with fan charts added for the first time.

The financial markets are generally staying in tight range in Asian session today as traders await the heavy-weight events later in the week. US equities ended mixed overnight with DJIA closed down -22.5 pts, or -0.1% at 20881.48. S&P 500, on the other hand, gained 0.87 pts, or 0.04%, to close at 2373.47. Treasury yields also rose with 30 year yield gained 0.023 to close at 3.192. Meanwhile, 10 year yield gained 0.026 to close at 2.608. But both are limited below recent resistance at 3.197 and 2.621 respectively. Gold is trying to regain 1200 handle for the moment. WTI crude oil turned sideway after breaching 48 handle briefly. Dollar index is trying to draw support from 55 day EMA and is trading at 101.40 at the time of writing. Forex pairs are all trading inside Monday's range.

Sterling surges broadly today on news that UK Prime Minister Theresa May could trigger Article 50 for Brexit this week. The House of Commons is set to debate the Brexit bill today and there is hope for passing the bill unamended. The House of Lords has already approved two amendments to the bill last week, in particular to grant the Parliament a "meaningful vote" on the final agreement. Passing the of bills in Commons today would set the stage for May to start' her plan for a so-called "hard Brexit". And the announcement could happen as soon as tomorrow. GBP/USD is trading above 1.22 at the time of writing, comparing to last week's low at 1.2133. EUR/GBP is back at 0.872, comparing to last week's high at 0.8786. While Sterling recovers today, it's still holding below near term resistance against Dollar and Euro. Thus, it's maintaining bearish outlook.

Dollar weakens broadly today as markets await a busy week ahead with four central bank meetings. Fed is widely expected to hike interest rate by 25bps this week. However, such expectation should be fully priced in, traders are looking through the FOMC meeting and turning cautious. In particular, Fed's updated Summary of Projections (SEP) and the monetary policy outlook for the rest of the year would be crucial to Dollar's trend in near term. Technically, the dollar index could dip further towards 100.66 key near term support before FOMC announcement on Wednesday.