Action Insight

The forex markets opened the week rather steadily. Euro recovers mildly as there was no escalation in Catalonia tension. sacked regional president Carles Puigdemont remained calm and called for peaceful "democratic opposition" the Madrid's takeover. Dollar pares back some more of recent gains as markets await an eventful week. It's repeatedly reported that US President Donald Trump favors Fed Governor Jerome Powell for the job of Fed Chair after Janet Yellen's term expires early next year. And Powell is seen as sone one who will speed up the pace of tightening. But it's far from being certain as some unnamed persons close to Trump were quote saying he changes his minds everyday.

Dollar closed broadly higher last week, and closed as the strongest as boosted by a couple of factors. Firstly, House approved Senate's version of budget blueprint, and cleared an important procedural step for getting the tax cuts done by the end of the year. Secondly, markets responded positively to news that Fed chair Janet Yellen is out of the race for a renewal. Instead, Fed Governor Jerome Powell and Stanford University economist John Taylor are now the front runners. Powell is reported to be slightly more favored by US President Donald Trump and is seen as a less hawkish candidate. But after all, there is still a possibility of Powell/Taylor combination for chair/vice of Fed. And either one seems to be more welcomed by the markets than Yellen. Thirdly, Q3 GDP came in at an impressive 3% annualized growth, despite the impacts of hurricanes.

Dollar's rally extends in early US session after stronger than expected data. GDP grew a solid 3.0% annualized in Q3, beating expectation of 2.6%. More importantly, taking into consideration of the impacts of the hurricanes, growth was just 0.1% below prior quarter's 3.1% annualized. That's very impressive. Meanwhile, GDP price index rose 2.2%, much higher than prior quarter's 1.0% and expectation of 1.8%. barring any disastrous developments ahead, a December rate hike now seems more likely than ever. And indeed, based on yesterday's pricing, fed fund futures were already indicating 95.2% chance of another 25bps hike in federal funds rate to 1.25-1.50%.

Dollar surged overnight and remains firm in Asian session today. ECB's dovish tapering is seen as a key factor driving the greenback higher. But more importantly, another step was taken forward as House passed Senate's versions of the budget bill. That procedural path is now cleared to move on to US President Donald Trump's tax cuts. Staying in the currency markets, commodity currencies remain the weakest ones for the week. Aussie's selloff accelerated after CPI miss earlier this week and weighed further down by PPI miss today. Canadian Dollar remains weak as post cautious BoC statement selloff continues. Euro, while weak, is trading mixed only.

ECB announced the plan to reduce asset purchase next year. In line with the majority of market participants had anticipated, the central bank would trim the size of buying by half, to 3B euro per month, in the first nine months of 2018, "or beyond, if necessary". It added that stimulus measures would be implemented "in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim". The single currency dropped after the announcement, on profit-taking. The policy rates stayed unchanged, with the main refinancing rate, the marginal lending rate and the deposit rate at 0%, 0.25% and -0.40% respectively.

Euro drops sharply after ECB announced the tapering plan as the markets expected. But traders seem to be unhappy with the cautious tone in the statement. Meanwhile, Dollar remains generally firm, as supported by solid job data. Also, markets are getting more convinced that either Powell or Taylor will be taken as the next Fed chair. Elsewhere, Canadian and Australian Dollar are both trying to recovery yesterday's losses. But not much strength is seen against Dollar yet.

Euro recovers overnight against Dollar and remains generally firm this week. It's just overpowered by Sterling which was shot up by strong Q3 GDP data. ECB policy decision and press conference will be the main highlight for today. The central bank is widely expected to announce recalibration of its EUR 60B a month asset purchase program, after it expires by the end of this year. The general consensus is that ECB will half the program to EUR 30B per month, but give it a 9-month extension till end of September 2018.

Showing genuine concerns over the downside risks to inflation, BOC indicated it would be more 'cautious' over future rate hike decisions. In the concluding statement, policymakers stressed that 'while less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate'. The tone in this October appears more dovish than previous ones, likely resulting from recent developments of disappointing progress in NAFTA negotiations, household debt levels and appreciation of Canadian dollar. USDCAD jumped about +1% after the announcement.

Sterling is the star performer today as stronger than expected GDP data boosts the chance of November BoE rate hike. Euro and Dollar are not too far behind though. The common currency is supported as German Ifo business climate hit record high. That clears another hurdle for ECB to announce tapering of asset purchase tomorrow. Meanwhile, Dollar also remains firm on tax plan hope and expectation of December Fed hike. Data from US are also Dollar supportive. Headline durable goods orders rose 2.2% in September versus expectation of 1.0%. Ex-transport orders rose 0.7% versus expectation of 0.5%. Meanwhile, Aussie remains the weakest one as selloff accelerates after CPI data. Canadian Dollar is also soft ahead of BoC rate decision.

The 19th National Congress of the Chinese Communist Party culminated with the announcement of the new Politburo Standing Committee (PSC) - the group of officials leading the country in the coming five year. Five out of seven members of the previous PSC were replaced, with only President Xi Jinping and Premier Li Keqiang staying in power. The five new members are Li Zhanshu, Wang Yang, Wang Huning, Zhao Leji and Han Zheng.

US equities surged to new record highs again while treasury yields jumped as tax plan and Fed chair position continued to be the theme that drove the markets. The developments also took Dollar generally higher. DOW closed up 167.80 pts or 0.72% at 23441.76, hitting all time high. S&P 500 and NASDAQ gained 0.16% and 0.18% too but lagged DOW in the record runs. 10 year yield jumped 0.030 to close at 2.406, above 2.396 key resistance, which is see as a bullish signal. TNX could now be heading to retest 2.621 high made back in December.

Dollar and Euro are both trading firm today. The greenback is supported by hope of passing Republican's tax plan by the end of the year. US President Donald Trump will visit Senate Republicans for lunch today for talks on tax cut. Meanwhile, Solid PMI data fro Eurozone supports that case for ECB to announce tapering later this week. New Zealand Dollar trades broadly lower as markets react negatively to the labor led coalition's policies. Yen and Aussie follows closely and as the second and third weakest.

Once again securing a super majority (two-third of seats) in the snap election on October 22, Japan's LDP/ Komeito coalition would continue to lead the lower house, possibly until 2021. The landslide victory indicates that PM Shinzo Abe would likely be re-elected for a third presidential term in the LDP next year, allowing him to push forward his political and economic policies with a stronger mandate. There are several reasons for the rally in Nikkei and USDJPY after the election outcome. Just like the previous elections we have seen before, the stock market and currency of a country usually weaken amidst of political uncertainty. Re-election of the ruling party has removed of uncertainty at least in the near-term. This bodes well for the stock market and currency. Unlike other currencies which tend to rise on lessened uncertainty, Japanese yen fell on diminished demand for safe-haven asset. Another reason for the rise in Japanese stock market and yen was expectations of lengthy monetary easing by BOJ. Meanwhile, widening US-Japan yield spread would also continue to support USDJPY in the medium term.

Dollar trades generally lower in quiet markets today. Economic data released this week so far are generally shrugged off by traders. The more important events are BoC and ECB meeting, as well as UK and US GDP. Waiting for the key events, traders seem to be spending their time on speculating who will US President Donald Trump nominate for the post of Fed chair. Current Fed chair Janet Yellen is still in the race and would provide status quo stability. But it's clear that Yellen is never a favorite of Trump. Fed Governor Jerome Powell is seen as the favorite by bookies, as he has knowledge of Fed and monetary policy. Stanford University economists John Taylor is so far the dark horse. Former Fed governor Kevin Warsh and White House economic advisor Gary Cohn are out of the race already

Euro is trading broadly lower today as markets are awaiting the highly anticipated ECB meeting later in the week. The common currency is even weaker than the Japanese Yen, which gapped down after Japanese election. Prime Minister Shinzo Abe's coalition retained absolute majority in the parliament, paving him the way to push for strong fiscal and monetary stimulus. Meanwhile, Dollar is generally firmer today with support from hope on tax cut/reform in the US. New Zealand Dollar and Sterling are also among the strongest ones.

Nikkei surges today while Yen tumbles on landslide victory of Prime Minister Shinzo Abe's Liberal Democratic Party (LDP) at the snap election on Sunday. At the time of writing, Nikkei is gaining over 1% and more than 220 pts. On the other hand, Yen is trading broadly lower. Removing political uncertainty is a key factor in lifting Japanese stocks. Meanwhile, continuation of ultra-loose monetary policies under Abenomics is a factor pressuring Yen. The forex markets are a bit mixed in initial trading, with Sterling leading the way up. Euro and Swiss Franc are slightly lower, following Yen.

Dollar surged broadly last week as Republican's tax plan overcame another hurdle. The news also sent DOW and S&P 500 to new records, with upside acceleration. Accompanying that, treasury yields closed sharply higher, reversing prior week's loss. Technical development in Dollar was not totally convincing yet. NZD/USD led the way lower as markets were unhappy with the new labour-led coalition in New Zealand. USD/CAD followed after disappointing economic data. Solid risk appetite also pushed USD/JPY and USD/CHF near term resistance to resume recent rally. But EUR/USD was kept in range only, showing much resilience in spite of political turmoil in Catalonia. GBP/USD was also held in range with support from some positive news regarding Brexit. AUD/USD also stays in recently established range.

Canadian Dollar weakens notably in early US session after a batch of disappointing data. Headline CPI rose 0.2% mom, 1.6% yoy in September, up from August's 0.1% mom 1.4% yoy. But that's below expectation of 0.4% mom, 1.7% yoy. CPI core-common was unchanged at 1.5% yoy. CPI core - trim edged higher to 1.5% yoy. CPI core median also edged higher to 1.8% yoy. Meanwhile, headline retail sales dropped -0.3% mom in August, way below expectation of 0.4% growth. Ex-auto sales was even worse and dropped -0.7% mom, versus consensus of 0.3% mom. BoC will be meeting next week and there is practically no change for a rate hike from current 1.00%. USD/CAD is staying in range of 1.2432/2598 at the time of writing. Near term outlook remains bearish as rebound from 1.2061 should resume through 1.2598 sooner or later.

Dollar regains much ground overnight as boosted by revived hopes on tax reform in the US. A critical hurdle was cleared after the Senate approved a budget blueprint for fiscal 2018. That was narrowly passed by 51-49 after marathon debate. Nonetheless, the passing of the blueprint includes instruction that would help Republicans avoid a Democrat filibuster. Senate Majority Leader Mitch McConnell said that "passing this budget is critical to getting tax reform done, so we can strengthen our economy after years of stagnation under the previous administration." Senator Bob Corker, who's in feud with President Donald Trump, voted the for the budget. Meanwhile, Senator John McCain also voted yes.

Japanese Yen and Swiss Franc strike a strong come back today as markets are haunted by political developments. Spanish Prime Minister Mariano Rajoy announces to invoke the so called Article 155 of Constitution to suspend autonomy of Catalonia. That came after Catalan leader Carles Puigdemont refuses to withdraw the declaration of independence. Euro initially dipped against all major currencies after the news. But then, the common currency recovered strongly against all but Yen and Swiss Franc only. German DAX is trading down down more than -0.9% at the time of writing. US futures also point to a lower open.