Action Insight

Risk aversion was the dominate theme last week on reverse Trump trade. DJIA suffered the biggest decline this year and lost -317.9 pts or 1.51% to close at 20596.72. S&P 500 dropped -34.27 pts or 1.44% to close at 2343.98. Treasury yield followed with 10 year yield losing -0.101 to close at 2.400. Dollar index dive through 100 handle to close at 99.62, down from prior week's close at 100.31. In the currency markets, Yen was the biggest winner last week on risk aversion and falling yields. Swiss Franc closely followed as the second strongest major currency. Dollar weakened against European majors and Yen but ended up against Aussie and Canadian Dollar. The two were the weakest major currencies last week. In other markets, Gold extended recent rise from 1194.5 and closed at 1248.5, but kept below resistance at 1264.9. WTI crude oil continued to stay in sideway consolidation between 47/50.

Euro trades broadly higher today as lifted by solid PMI data. Meanwhile, the greenback also follows even though markets are facing uncertainty on health care vote in House. US president Donald Trump has issued his ultimatum to House Republicans that if the American Health Care Act is not passed today, he will move on to other priorities and leave Obamacare alone.

The financial markets are holding their breaths as US House delayed the vote of President Donald Trump's health care plan. DJIA recovered to 20757.89 overnight but closed down -0.02% at 20656.68. S&P 500 also recovered to 2358.92 but closed down -0.11% at 234596. 10 year yield recovered by closing up 0.022 at 2.418 but stayed below 55 day EMA at 2.434.

The Japanese yen extends this week's broad based rally even though markets stabilized elsewhere. US President Donald Trump will be facing his first legislative test today. House will vote on Trump's American Health Care Act for replacing so called Obamacare. As Chair of the House Freedom Caucus, Mark Meadows, suggested, there are still insufficient votes to pass the bill but the chance appears to have improved. Meanwhile, there are also reports that there could be more than 25 Republicans opposing the bill.

China's financial system continues to display fragility and liquidity squeeze. China's 7-day repo rate jumped to 5.5% (close), the highest level since late 2014, on Tuesday, followed by PBOC's injection of RMB 80-90B to the market on Wednesday as some small banks failed to repay debts in the interbank market. Less than a week ago, PBOC raised a range of short-term and medium-term interest rates to reduce financial risks, thought to be a response to Fed funds rate hike. Interbank rates should remain volatile over the coming week, ahead of PBOC's quarterly macro-prudential assessment in late March. Although recent data suggested that the problem of capital outflow eased in February, ongoing interest rate normalization in the US would prolong China's capital outflow problem, sustaining the challenges facing China in the implementation of its monetary policy.

As widely anticipated, RBNZ left the OCR unchanged at 1.75% and maintained the neutral bias in the monetary policy stance. Domestic economic developments remained upbeat with rising inflation and positive growth outlook. Policymakers attributed weaker-than-expected 4Q17 GDP to temporary factors. The central bank acknowledged the recent depreciation in trade-weighted exchange rate. Yet, it reiterated that a weaker kiwi would be needed for more balanced growth. RBNZ warned that geopolitical uncertainty remained the biggest challenge in the global economic development. We expect RBNZ would stand on the sideline throughout the year.

New Zealand dollar is steadily in range after RBNZ stands pat as widely expected. The central bank left the Official Cash Rate unchanged at record low of 1.75% and maintained a neutral stance. Governor Graeme Wheeler reiterated in the statement that "monetary policy will remain accommodative for a considerable period." And, "numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."

Risk aversion dominates the financial markets today. European indices are trading broadly lower with FTSE leading the way by losing more than -0.7%. CAC and DAX are both down -0.5% respectively. DJIA had the worst day for this year yesterday and is set to extend the sharp fall as suggested by futures. Nikkei lost -2.13% earlier today as additionally pressured by report of North Korea's failed missile test. Stocks are sold off sharply on concerns that US president Donald Trump doesn't have the ability to fulfil his election promises and push through his policies.

US equities suffered the steepest decline for the year overnight. Doubts over US president Donald Trump's ability to push through his policies are seen as the major factor driving stocks down. In particular, some economists pointed out that there is simply not enough money in the government to allow for a tax cut, nor the fiscal stimulus programs. DJIA dropped -237.85 pts, or -1.14% to close at 20668.01. S&P 500 lost -29.45 pts or -1.25% to close at 2344.02. Financials led the way, dropping more than -2.5%. Treasury yield also suffered with 10 year yield extending the near term fall from 2.615 to close at 2.436, down -0.037. Dollar index broke 100 handle to as low as 99.66. In the currency market, risk aversion boosted Yen to be the strongest major currency for the week. Commodity currencies are the weakest with Aussie leading the way down. Sterling and Euro are relatively resilient.

Sterling strengthens against all other major currencies as its boosted by strong inflation data. Headline CPI accelerated to 2.3% yoy in February, up from 1.8% yoy and beat expectation of 2.1% yoy. Core CPI also accelerated to 2.0% yoy, up from 1.6% yoy and beat expectation of 1.7% yoy. Headline CPI is now back inside BoE's target zone. iIt's also the highest reading since September 2013. While BoE has been clear that it will allow inflation to overshoot for sometime, there are continuous speculation of the timing of a rate hike.

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".