Action Insight

Dollar stays soft in early US session but selling momentum is limited so far. Indeed, the greenback has pared back some losses against Yen, which is the relatively stronger one. Released from US, trade deficit widened to USD -65.3b in November, larger than expectation of USD -61.5b. Exports rose 1.0% to USD 121.7b while imports rose 1.2% to USD 187.0b. Initial jobless claims dropped 10k to 265k in the week ended December 24, below expectation of 277k. Continuing claims rose 63k to 2.1m in the week ended December 17.

US equities closed lower overnight as DJIA suffered the second triple digit loss since presidential election. DJIA closed down -111.36 pts, or -0.56%, at 19833.68. S&P 500 lost -18.96 pts, or -0.84%, to close at 2249.92. NASDAQ also dropped -48.88 pts, or -0.89%, to close at 5438.56. While a day of decline in thin holiday trading is not enough to warrant reversal in trend, the synchronous move with other markets suggest that the markets overall is turning into a consolidation phase. To be more specific, 10 year yield closed down -0.057 to 2.506. 30 year yield also lost -0.055 to close at 3.084. Dollar index is back at 102.90 after edging higher to 103.63. Gold breaches 1150 again, comparing to recent low at 1124.3. We'd probably see more consolidative trading ahead, at least before US non-farm payroll to be released on January 6.

Trading in financial markets are generally subdued in holiday mood. DJIA closed up 11.23 pts, or 0.06%, overnight at 19945.04, still struggling to take out 20000 handle. S&P 500 also closed up 5.09 pts, or 0.22%, at 2268.88, but stays in recent range. Asian markets are mixed with little movements. US yields closed higher with 10 year yield up 0.02 to 2.563 but like others, stayed in tight range. Notable strength is seen in gold this week, hitting as high as 1151.7, comparing to recent low at 1124.3. There is prospect of a stronger rebound in gold in near term. WTI crude oil also strengthened mildly this week and breached 54 handle. But recent price actions suggest that it's staying in consolidation since hitting 54.51 and more sideway trading is in favor.

The Japanese Yen edges mildly lower in very quiet holiday trading today. A bunch of weak economic data is weighing slightly on the currency. Japan national CPI core dropped -0.4% yoy in November, unchanged from October's reading and missed expedition of -0.3% yoy. That's also the ninth straight month of decline in prices. Tokyo CPI core dropped -0.6% yoy, worsened from October's reading of -0.4% yoy and missed expectation of -0.4% yoy. Nonetheless, it's hopeful that the sharp depreciation in Yen since November would eventually provide some inflationary effect on prices that help lift the burden from BoJ for additional stimulus. Also from Japan, unemployment rate rose to 3.1% in November, above expectation of 3.0%. Household spending dropped -1.5% yoy in November, much worse than expectation of 0.2% yoy rise. Housing starts rose 6.7% yoy in November, much lower than expectation of 9.6% yoy.

The financial markets are generally steady ahead of holiday weekend. Dollar index is back below 103 handle but is staying in tight range between 102.50/103.50. Gold follows and stays in range between 1125/1140 for the moment. Meanwhile, crude oil is engaging in consolidative in a relatively wider range between 50/54. Trading in stock markets are also subdued with FTSE and DAX trading nearly flat in European morning. In the currency markets, bigger movement is found in Sterling today which trading broadly lower except versus Aussie and Lonnie. In particular, GBP/USD's break of 1.2301 support should confirm completion of recent corrective rise from 1.1946. And deeper fall would likely be seen back to 1.1946 in near term.

Dollar stays in tight consolidation against European majors but strengthens against commodity currencies in holiday trading. In particular, Canadian dollar is weighed down by the dip in oil price. Released in US, initial jobless claims rose to 274k in the week ended December 17, above expectation of 255k. Durable goods orders dropped -4.6% mom in November, slightly better than expectation of -4.9%. Ex-transport orders rose 0.5% mom, above expectation of 0.2% mom. Q3 GDP was finalized at 3.5% annualized, GDP price index at 1.4%. From Canada, retail sales rose 1.1% mom in October while ex-auto sales rose 1.4% mom. Both were above expectation. But headline CPI slowed to 1.2% yoy and BoC core CPI slowed to 1.5% yoy, missing expectations.

New Zealand dollar stays soft today in spite of better than expected data. GDP grew 1.1% qoq in Q3, up from prior quarter's 0.7% qoq, and beat expectation of 0.8% qoq. Statistics New Zealand noted that the data points to "broad-based growth" with 13 of 16 industries up. Main weakness came from agriculture. Household spending "continued its strong growth" and jumped 1.6%. Exports volumes "remain high" even though growth fell over the quarter. Manufacturing activity also rose "on the back of food beverage, and tobacco manufacturing; and transport equipment, machinery and equipment manufacturing." Also from New Zealand, current account deficit widened to NZD -4.89b in Q3.

Yen trades mildly higher in otherwise quiet markets today. The Japanese Cabinet Office upgraded assessment of the economy for the first time in 21 months. The office said in its December report that "the Japanese economy is on a moderate recovery, while delayed improvement in part can be seen." That compared to prior description that the economy was in a moderate recovery "while weakness can be seen recently." In particular, exports and private consumptions outlook are more upbeat, showing "movements of picking up". Nonetheless, improvement in business investment "appears to be pausing", same as prior assessment. Also, the government cautioned that "attention should be given to the uncertainty in overseas economies and the effects of fluctuations in the financial and capital markets."

US equities surged yesterday on Santa rally, yet DJIA failed to take out 20k handle and closed at 19974.62, up 91.56 pts, or 0.46%. It was, nonetheless, a record high. Meanwhile, S&P 500 also gained 8.23pts, or 0.36%, to close at 2270.76. Treasury yields also closed higher with 10 year yield gained 0.026 to 2.568 but stayed in recently established range. Dollar stays firm and is trading higher against most major currencies for the week, except versus Yen as USD/JPY is stuck in consolidation. In other markets, Gold trading sin tight range between 1125/1145 as sideway consolidation extends. WTI crude oil is trading higher at 53.6 but is held below recent resistance at 54.51..

The recent selloff in Japanese yen and widening in US-Japan yield differentials have been driven by the FOMC rate hike and expectations of further tightening in US monetary policy. Indeed, BOJ’s action has minimal impact on the phenomena of late. BOJ on Tuesday left its interest rate targets unchanged with the short-term and -10 bps and the 10-year JGB yield at around 0%. The asset purchase program also stays at approximately 80 trillion yen of JGBs annually. The central bank also upgraded its current economic assessment and outlook.

Dollar jumps today on safe haven flows on report of "probable terrorist attack" in Germany. In addition, markets were also nervous on the Russia/Turkey issue after Russian ambassador to Turkey was fatally shot. Meanwhile, the greenback is supported by Fed chair Janet Yellen's upbeat comments on the employment conditions. The dollar index surges to as high as 103.65 so far, breaking near term resistance at 103.56 to resume recent up trend. The index is on course to medium term projection target at 105.19. In the currency markets, Sterling is so far the weakest one for the week, followed closely by commodity currencies and Euro. Yen, despite today's weakness, is supported mildly by risk aversion with the Swiss Franc.

RBA in its minutes for the December meeting cautioned the high levels of household debt due to low interest rates. It also warned of the 'considerable uncertainty' in the labor market. The central bank maintained a neutral bias at the meeting while leaving its cash rate unchanged at historic low of 1.5%. Note the meeting was held a day before the release of 3Q15 GDP growth which shrank -0.5%.

Yen weakens mildly today even though BoJ offered a brighter view on the economy after keeping monetary policies unchanged. Interest rate was held at -0.1% and the asset purchase program was also kept unchanged under the yield curve control framework. The vote on YCC was by 7-2 vote with policymakers Sato and Kiuchi opposing. The central bank noted in the statement that "Japan's economy continues to recover moderately as a trend", with consumption "moving on a firm note".Though, CPI is expected to be "slightly negative or about 0 percent for the time being. BoJ also noted that risks to the outlook including development in "emerging and commodity exporting economies", particularly China; developments in US; and Brexit. Separately, the Japanese government projected the real GDP to grow 1.5% in the year starting next April, revised up from prior projection of 1.2%. Nominal GDP growth is projected to be 2.5%, up from prior projection of 2.2%. CPI is forecast to be at 1.1%, down from prior estimate of 1.4%. Meanwhile, the initial budget for next fiscal year is JPY 97.5T, a mild 0.8% from the current year.

Euro stays soft against Dollar in spite of better than expected confidence data. German IFO business climate rose to 111.0 in December, up from 110.4, above expectation of 110.7. Current assessment gauge rose to 116.6, up from 115.6, above expectation of 115.9. Expectations gauge rose to 105.6, up from 105.5, above expectation of 105.5. Ifo president Clemens Fuest noted that "the German economy is in a festive mood."And, "assessments of the current business situation improved, reaching their highest level since February 2012. The business outlook for the first half of 2017 is also slightly more optimistic. The German economy is making a strong finish to the year."

Dollar surged broadly last week as Fed delivered the expected rate hike and painted a more hawkish rate outlook for 2017. Dollar index resumed the long term up trend and reached a 14 year high at 103.56 before closing at 102.95. In particular, EUR/USD took out 1.0461 key support level and reached the lowest level since 2002. Nonetheless, Yen and commodity currencies were hardest hit. Rally in Dollar was accompanied by extended rally in treasury yields as 10 year yield breached 2.6 handle before closing at 2.597. Gold suffered deeper selling on dollar trend to close at 1136.8 while WTI crude oil pared back much of the post OPEC gains to close at 51.90. However, stocks turned mixed despite Fed raising GDP projection for next year. DJIA struggled to power through 20000 handle and closed the week slightly higher at 19843.31. The markets may turn into consolidation mode as holidays approach. But strength in Dollar will likely carry on to early next year.

Of the three major European central banks held monetary meeting on Thursday, all left their policy rates unchanged. Moreover, all pointed to higher uncertainty in the global economic outlook. BOE kept its Bank rate unchanged at a record low of 0.25%. The sizes of government and corporate bond purchases also stayed unchanged at435B pound and up to 10b pound, respectively, in December. Policymakers warned that the recent strength in sterling might cool inflation in the medium-term. SNB held deposit rate steady at -0.75%, while Norges bank left kept its deposit rate steady at 0.5%.

The Fed increased the policy rate by +25 bps for the first time in a year. While this had been widely anticipated, the 'dot plot' indicated that the members expect three hikes in 2017, up from two previously. The accompanying statement was in a hawkish tone, upgrading the assessments to the economic outlook. The members reinforced that 'near-term risks to the economic outlook appear roughly balanced. Fed Chair Janet Yellen made no hint on how the new fiscal policy would affect the monetary stance. Yet, she stressed there is non-negligible uncertainty regarding the new policy.

Recent releases in China's November macroeconomic indicators suggest that growth continue to stabilize. Yet, weakness in renminbi means that capital outflow should remain a headache. China's growth in industrial production (IP) improved to +6.2% y/y in November, from +6.1% a month ago. This came in better than consensus of +6.1%. Retail sales expanded +10.8% y/y in November, compared with expectations of +10.2% and +10% in October. Indeed, this is the fastest pace of consumer spending growth so far this year. A key contributor to the upside surprise was auto sales, thanks to government tax incentives. Meanwhile, 'single's day earlier in November also helped boost sales of electronics and telecom products. Urban fixed assets investment gained +8.3% in the first 11 months of the year, unchanged from the year through October. This came in line with expectations.

ECB surprised the market by announcing tapering plan for its bond purchases program. The Governing Council decided to extend the program until December 2017. However, the pace would slow down to 60B euro per month from April 2017, compared with the current 80B euro. The market generally anticipated ECB to extend the program for 6 months without changing the pace of purchases. The market was disappointed. German yields spiked to a one-year high. The single currency soared to a one-month high of 1.0872 immediately after the announcement. However, gains were erased with EURUSD dropping more than -1%, as ECB left the door open to extend QE further beyond December 2017 and/or pick up the pace of bond buying again if the economic conditions deteriorate. Despite disappointing in first sight, the ECB has indeed delivered more than the market had anticipated: 9 months*60B euro = 540B euro vs consensus of 6 months*80B euro = 480b euro. Has the ECB has again disappointed the market by doing more?

BOC, as widely anticipated, left the policy rate unchanged at 0.5% in December. The central bank maintained a dovish tone as in recent meetings. While acknowledging that global market conditions have 'strengthened', 'undiminished' uncertainty has continued to undermine 'business confidence and dampening investment in Canada's major trading partners'. Of particular note is that BOC explicitly indicated its different from the Fed, attempting to dampen hopes that BOC would follow the Fed in raising interest rates. It also attributed the recent increase in Canadian treasury yields to US factors, instead of domestic fundamentals. We expect BOC to leave the policy rate unchanged, as well as maintaining a dovish tone, throughout 2017.