Action Insight

Dollar recovers broadly today, except versus Japanese yen. But momentum in the greenback doesn't warrant a sustainable rebound yet. For the moment, Euro is still in the driving seat in the forex markets. Political news out of Germany over the weekend looked positive as Chancellor Angela Merkel secured support form her allies on grand coalition. This will remain a major topic of attention for the week ahead. Besides, US Senate is set to floor their version of tax bill and could trigger some volatilities on the markets. The economic calendar is light today but will build up intensity towards the end of the week. In particular, inflation data from Eurozone, US and Japan are the highlights.

Euro surged broadly last week as economic data suggested a "boom" in Germany ahead. Also, political situation in Germany has improved. Ending as the strongest currency, Euro also took Sterling and Swiss Franc high. On the other hand, Dollar ended as the weakest one as traders held their bet during thin holiday trading. The US tax plan is entering into a "make or break" week. Despite sharp rally in oil price, Canadian Dollar ended as the second weakest one as data suggested that BoC would remain on hold. Aussie and Yen were both weak too. We perceive the rout in China stock markets as a factor in pressuring both.

Euro strengthens again today as boost by strong confidence data. German Ifo business climate hit a record high. Additionally, there is positive political news out of Germany as the Social Democrats announced to enter into talk with Chancellor Angela Merkel. Dollar pared back some losses against all but Euro and Sterling. But the greenback will still likely end the week as the weakest one. Meanwhile, Japanese Yen lost much ground as risk appetites returned to global markets. Yen and Canadian Dollar could end as the weakest ones together with Dollar.

Markets are engaging in quiet holiday trading today while Dollar is paring some losses. But for the week, the greenback is still set to end as the worst performing one. Trading will likely stay subdued today as traders are already having their eyes on next week. In particular, the Senate will return from Thanksgiving recess and would floor the tax bill. Markets will then have a clearer idea on what the final version of Senate tax bill then. And assessment could then be done on the final reconciled version between House and Senate.

Euro strengthens broadly today as supported by solid PMI data that indicates strong Q4 growth. Nonetheless, the common currency remains in negative territory against all major currency except Dollar and Loonie, Canadian Dollar suffers some selling after much softer than expected retail sales data. Overall, trading is relatively quiet today as US is on holiday. Subdued trading could carry on for the rest of the week.

Dollar tumbles overnight as November FOMC minutes should some members are concerned with weaker inflation. December hike is still the base case but there might be growing doubts on whether there will be three more hikes next year. Euro closely follow Dollar as the second weakest on political uncertainties in Germany. Meanwhile, commodity currencies are supported by this week's rebound in commodity prices. ECB monetary policy accounts, Eurozone PMIs are the main focus in European session today. Canada will release retail sales while US will be on holiday.

The greenback slumped as the FOMC minutes for the November meeting revealed that 'several' members were concerned that weak inflation would be persistent, rather than temporary. They highlighted the worries about a 'a diminished responsiveness of inflation to resource utilization'. Another important message suggested in the minutes is that a December rate hike is almost a done deal with 'many' members judging that it is 'warranted in the near term' if the macroeconomic data remain steady. Such opinion has outweighed the thought of 'a few 'members' that a rate hike should be delayed. We view the USD selloff might have been over-reacted. Note that the (core) PCE, the Fed’s preferred inflation barometer, has improved, while the October CPI, released after the November meeting, also picked up. We believe the majority of the FOMC still retain the view that weak inflation is transitory.

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.