Action Insight

The FOMC members had quite extensive discussions on the balance sheet policies, the minutes revealed. US Treasury yields declined as the market interpreted Fed's phasing out of the reinvestment policy might be a de facto tightening measure, reducing the urgency to hike interest rates. We expect the Fed might begin balance reduction in as soon as December 2017. The minutes also unveiled that the rationale behind the March rate hike was the solid economic growth developments. The members acknowledged that the labor market strengthened further in January and February and that real GDP was continuing to expand in the first quarter. The moderation in growth from the fourth quarter was mainly driven by 'transitory factors'.

Dollar strengthens mildly in early US session after stronger than expected job data. But there is no follow through buying seen yet. ADP report showed 263k growth in private sector jobs, versus consensus of 189k. Prior month's figure was revised down fro 298k to 245k, but was still solid. Markets will look into the FOMC minutes of March meeting to be released later today, as well as non-farm payroll report on Friday. The two-day meeting between US President Donald Trump and China President Xi Jinping will also be closely watched. But after all, directions of Dollar and treasury yields will remain dependent Fed expectations. And it's well known that Fed's base case is three hikes in total this year. Change in the base case will require solid input from Trump's implementation of his economic policies. And we're yet to see anything solid. Any movements in the greenback would likely be temporary before Trump delivers.

EURCHF recovered after declining over the past three weeks. Political uncertainty and diminished expectations of ECB's QE tapering has pressured the single currency and raised demand for safe-haven assets. Despite the selloff to as low as 1.0629 in February, EURCHF had then rebounded to a 3-month high of 1.0825 in mid-March, before settling at 1.068 at end-1Q17. This came in line with over forecast of 1.07 for the first quarter. Movement of USDCHF was, however, more volatile than we had anticipated. The currency pair indeed broke below 1, plunging to a 4.5-month low of 0.9812 on March 27 before returning to parity on March 31. We attribute the sharper-than-expected weakness in US dollar over the past quarter to the inability of Trump's administration. Indeed, the market has turned less optimistic over the president's pro-growth policy, after the withdrawal of the healthcare bill. However, the price movements in the first quarter do not alter our view that SNB has turned more tolerable to franc's appreciation, although FX intervention would continue should euro's selloff accelerate.

The forex markets are pretty steady in Asian session today. Commodity currencies remain generally soft on mild risk aversion. Traders are cautious ahead of the meeting between US President Donald Trump and China President Xi Jinping. Yet, they are calm in spite of the news that North Korea fired another ballistic missile. Euro is also staying in range after French presidential election TV debate. Yen pares back some gains after treasury yields stabilized but more upside is still favored. In other markets, both gold and WTI crude oil extended recent rally but momentum is not too strong so far.

Japanese Yen remains the strongest major currency for the week on risk aversion. On the one hand, sentiments were weighed down by terrorist attack in Russia. On the other hand, markets are getting cautious ahead of the summit between US president Donald Trump and China President Xi Jinping. Dollar follows Yen as the second strongest one but it's losing some momentum against Euro. Commodity currencies are generally lower today with Aussie leading the way down on the perceived dovish RBA statement. In other markets, Gold seems to benefit from risk aversion and jumped to 1263.7 but lost momentum quickly. WTI crude oil is struggling around 55 day EMA around 50.67.

RBA left the cash rate unchanged at 1.5% in April, continuing to struggle between soaring property prices and subdued inflation. Policymakers appeared more optimistic over the global economic outlook than the domestic one. The central bank remained concerned over the rising property prices and warned of the situation that household borrowing growth was outpacing growth in income. We expect RBA to leave its monetary stance unchanged throughout the year.

Australian dollar weakens after the Reserve bank of Australia held cash rate unchanged at 1.50% as widely expected and maintained a neutral stance. RBA reiterated in the statement that "taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time." The statement itself is largely unchanged from the prior one.

The most imminent political event in the Eurozone is the French presidential election, with the first round taking place on April 23 and the second and final round on May 7. Polls have suggested that centre-left candidate Emmanuel Macron and populist far-right candidate Marine Le Pen would get the most votes in the first round, but then Macron would win the second and final round, and become the next French president.

Movements in the forex markets are very limited today. Sterling dips mildly after PMI manufacturing missed expectation. Euro stays soft in general even though comments from policy makers should be Euro supportive. Aussie weakened earlier in the day on retail sales disappointment but no follow through selling is seen so far. Yen stays in tight range after uninspiring release of Tankan survey. Dollar on the other hand, trades mixed as markets await ISM indices and employment data later in the week, as well as FOMC minutes. In other markets, Gold continues to struggle in tight range around 1250. WTI crude oil is staying firm above 50 handle but can't extend gains so far.

The forex markets opened the week relatively quietly with the exception of Australian Dollar. Aussie dives broadly after weak retail sales data and stays weak ahead of RBA rate decision. Meanwhile, Yen follows as the second weakest as Tankan survey showed less than expected improvements in sentiments. On the other hand, Euro is paring some of last week's loss. Focus will turn to French elections in April. Dollar is trading mixed ahead of a string of important economic data. That starts with ISM manufacturing today, ISM services on Wednesday and non-farm payroll on Friday. Fed will also release March FOMC meeting minutes this week.

Euro was sold off broadly last week as the markets got a wake up call regarding expectation on ECB policy path. The common currency topped the top mover chart with EUR/GBP losing -1.96% and EUR/CAD lost -1.81%. Weakness in Euro also dragged down the Swiss Franc as GBP/CHF rose 1.77% while CAD/CHF rose 1.58%. On the other hand, Sterling ended as the strongest major currency last week, after some volatility on UK's trigger of Brexit finally. Yen followed as the second strongest major currency as the recovery in US stocks and yields were disappointing. Meanwhile, Canadian dollar ended as the third major currency as WTI crude oil rebounded and closed above 50 psychological level.

Trading is relatively subdued in the forex markets today as the quarter is heading for close. Euro turned into sideway trading but is set to end the week as the weakest major currency. In spite of more Brexit news, Sterling is just mixed for the week, up against Dollar, Europeans and Yen. Canadian dollar continues to be supported by firmness in oil price as WTI crude oil is holding on to 50 handle after brief retreat. Aussie follows as risk appetite returned to the markets. In other markets, European indices are mixed while US futures point to a flat open. Gold lost steam as Dollar rebounds and is heading back to 1240.

Risk appetite returned overnight with financial sector leading stocks higher. The surge in WTI crude oil through 50 handle also boosted overall sentiments. DJIA closed up 0.33% at 20728.94 and would be testing 20757.89 near term resistance today. NASDAQ has indeed closed at new record high at 5914.34, up 0.28%. But the sentiments didn't carry on in Asian session as Nikkei closed down -0.81% at 18909.26, below 19000 handle again. Dollar index is back above 100 handle and broke near term resistance at 100.48, indicating the possibility of reversal. In the currency markets, Aussie and Canadian Dollar are leading the way up for the week on risk appetite, followed by Dollar. Meanwhile, European majors are generally weak with Euro setting to close as the weakest one.

Dollar trades mixed today in spite of news about US President Donald Trump's infrastructure spending. US Transportation Secretary Elaine Chao said the Trump would unveil a USD 1T infrastructure plan over ten years, later this year. But no detail was provided. Chao said that the plan would cover "more than transportation infrastructure, it will include energy, water and potentially broadband and veterans hospitals as well." However, the news is shrugged off by investors as they remain skeptical on Trump's ability push through his economic policies.

Dollar attempted for recovery overnight but momentum has been very weak. Boston Fed President Eric Rosengren's hawkish comments provided brief lift to the greenback. But weakness in stocks and yield limited Dollar's gain. European majors are trading broadly lower for the week. Sterling was sold off as UK finally submitted formal request for Brexit yesterday. Euro was weighed down as traders pared expectations of stimulus exit from ECB any time soon. Commodity currencies are trading higher for the week but is bounded in established range. In other markets, DJIA closed down -0.2% at 20659.32 after failing to take out 20757.89 near term resistance. 10 year yield's recovery failed below 55 day EMA and closed at 2.386, down -0.023. Gold engages in sideway consolidation around 1250. WTI crude oil rebounded strongly and is heading back towards 50 handle.

Talks of ECB's tapering have been looming of late, thanks to Eurozone's improving economic developments, especially in Germany, adverse effects of negative deposit rates on financial institutions, bigger-than-expected targeted longer-term refinancing operations (TLTROSs) take-up last week, as well as the asset buying program's ongoing deviation from its capital key. Bundesbank president Jens Weidmann has been vocal about less expansionary policy and a review to the forward guidance, while other members of the Governor Council reiterated the need to maintain accommodative measures to boost inflation.

Euro drops sharply today, taking over Sterling as the weakest major currency for the week. The selloff in the common currency is triggered by reports that the markets have over-interpreted ECB's message in the March meeting. Back than, there was a slight change in the language in the guidance. Markets took that as a sign that ECB is moving closer to stimulus exit. However, Reuters quoted unnamed source saying that policy makers merely wanted to communicate reduced tail risk.

DJIA rebounded strongly overnight by closing up 150.52 pts or 0.73% at 20701.50. S&P also rebounded by gaining 16.98 pts or 0.73% to close at 2358.57. Some attributed the rebound to strong economic data. Conference Board consumer confidence jumped to 125.6 in March, hitting the highest level since December 2000. But from our point of view, the rebound in stocks were mainly technical driven. Strong support was seen in both DJIA and S&P 500 from 55 day EMA. Meanwhile, the rebound in stocks was also accompanied by yields and Dollar index. The development suggests that reversal Trump trade has at least passed the first climax even though there is no sign of it being completed yet. The focus is turned to Sterling selling as Brexit day finally arrives.

The financial markets stabilized today with major European indices trading mixed. DAX jumps 0.5% at the time of writing while FTSE and CAC stays in tight range around break even. US futures also point to flat open. In the currency markets, commodity currencies are soft but generally confined in yesterday's range. Yen is firmer against all others but there is no follow through buying to push it throw Monday's highs yet.

Trump administration's failure to repeal and replace Obamacare has hurt market sentiment, triggering concerns over the feasibility of the president's pro-growth policy agenda. In the FX market, US dollar fell across the board amidst concerns that reflation trades since Trump's victory is over. The DXY index dived to a 4-month low of 98.86 on Monday before recovery. USDJPY also plunged to 110.09, lowest since November 18, 2016, before stabilizing. As we mentioned in the January report, it would not be surprising to see USDJPY correct to 110-112 in 1Q17. Therefore, the current price movement has not yet derailed our forecast although Trump's implementation ability has surprised to the downside. While it cannot be ruled out that the currency pair might break below 110 briefly, we retain the forecast that USDJPY should recover to 115 and then to 117 later this year.