USD Strenghtens Ahead Of CPI Data, Japan Still In Easing Mode

News and Events:

Unlikely CPI provides USD boost

Global equities and the US dollar rallied yesterday amid Janet Yellen’s appearance before the Senate Banking Panel. The S&P 500 rose 0.40% to 2,337 points while the dollar index jumped 0.65% to 101.30. The Fed Chair’s remarks were in the same vein as the last FOMC statement as she reiterated that the time for another rate hike is coming; however she but did not provide any hints regarding the timing. The market, once again, has interpreted its comments as being hawkish, while in our opinion she is simply slowly starting to prepare the market for the next hike. According to the Fed funds futures, the probability of a rate hike at the March meeting has climbed above 50%. Nevertheless, we believe that the uncertainty generated by the Trump administration, together with overestimated inflation expectations will force the Fed to proceed slowly and cautiously.

The January inflation report that is due for release later today will therefore be key in assessing whether a March move is underway. The headline measure is expected to have increased 2.4%y/y in the first month of the year (2.1% in December), thanks to rising energy prices. On the other hand, the core measure that excludes the most volatile components is expected to have eased to 2.1%y/y from 2.2% previous reading. We do not expect a strong read for this month due to the lack of solid momentum in personal consumption and recent investment. Therefore, the risk is mostly on the downside in USD today as the risk of disappointment is quite substantial. Moreover, retail sales are expected to have suffered from the January lull.

Kuroda hints at further easing

The days of ultra-loose monetary policy are not over for Japan. At the Japanese Parliament BoJ Governor Kuroda stated that the target rates for bonds could be lowered as the economy is not really showing signs of improvement. In reality it rather seems that the Japanese economy has been operating at full capacity for many years but that the economy is proving way too difficult to stimulate.

The inflation target of 2% does not look attainable. Japanese policymakers have a close eye on the Fed and are certainly secretly hoping that US officials raise rates several times this year to provide some needed downside pressure on the yen. It is worth noticing that current demand for the dollar against the yen remains stable.

Kuroda’s comments remind us of the fact that there is actually not much that the BoJ can do. The institution is running out of ammo and the past decade’s monetary policy has only served to cause debt to skyrocket.

We believe that entering into the risk-on period with a true global recovery would offload some of the pressure from the country. However, the world has rarely been so unstable. We are not ruling out the possibility that the yen will serve this year as a safe haven. Between the rock and the hard place that is Trump and European political uncertainties, the Japanese currency has definitely room for further strengthening.

Today’s Key Issues (time in GMT):

• Jan PPI MoM, last 0,60% DKK / 08:00
• Jan PPI YoY, last 3,20% DKK / 08:00
• Jan Central Gov’t Budget Balance, last -27.14b TRY / 08:00
• Jan CPI YoY, exp 6,70%, last 6,80% ZAR / 08:00
• Jan CPI Core MoM, exp 0,50%, last 0,50% ZAR / 08:00
• Jan CPI Core YoY, exp 5,80%, last 5,90% ZAR / 08:00
• Jan CPI MoM, exp 0,70%, last 0,40% ZAR / 08:00
• 4Q GDP Indicator SA QoQ, last 0,20% DKK / 08:00
• Jan F CPI YoY, exp 3,00%, last 3,00% EUR / 08:00
• Jan F CPI MoM, exp -0,50%, last -0,50% EUR / 08:00
• Jan F CPI EU Harmonised MoM, exp -0,90%, last -0,90% EUR / 08:00
• Jan F CPI EU Harmonised YoY, exp 3,00%, last 3,00% EUR / 08:00
• Jan CPI Core MoM, last 0,10% EUR / 08:00
• Jan CPI Core YoY, exp 1,10%, last 1,00% EUR / 08:00
• Bank of Russia Governor Nabiullina in Federation Council RUB / 08:00
• Feb 15 Riksbank Interest Rate, exp -0,50%, last -0,50% SEK / 08:30
• 4Q Industry Capacity, last 88,90% SEK / 08:30
• Jan Claimant Count Rate, exp 2,30%, last 2,30% GBP / 09:30
• Jan Jobless Claims Change, exp 0.5k, last -10.1k GBP / 09:30
• Dec Average Weekly Earnings 3M/YoY, exp 2,80%, last 2,80% GBP / 09:30
• Dec Weekly Earnings ex Bonus 3M/YoY, exp 2,70%, last 2,70% GBP / 09:30
• Dec ILO Unemployment Rate 3Mths, exp 4,80%, last 4,80% GBP / 09:30
• Dec Employment Change 3M/3M, exp 22k, last -9k GBP / 09:30
• Dec General Government Debt, last 2229.4b EUR / 09:30
• Feb FGV Inflation IGP-10 MoM, exp 0,24%, last 0,88% BRL / 10:00
• Dec Trade Balance SA, exp 22.0b, last 22.7b EUR / 10:00
• Dec Trade Balance NSA, exp 26.0b, last 25.9b EUR / 10:00
• Dec IBGE Services Sector Volume YoY, exp -4,40%, last -4,60% BRL / 11:00
• Dec Retail Sales Constant YoY, exp 2,20%, last 3,80% ZAR / 11:00
• Dec Retail Sales MoM, exp 0,40%, last 3,50% ZAR / 11:00
• Feb 10 MBA Mortgage Applications, last 2,30% USD / 12:00
• Feb 13 CPI WoW, last 0,10% RUB / 13:00
• Feb 13 CPI Weekly YTD, last 0,70% RUB / 13:00
• Dec Manufacturing Sales MoM, exp 0,30%, last 1,50% CAD / 13:30
• Feb Empire Manufacturing, exp 7, last 6,5 USD / 13:30
• Jan CPI MoM, exp 0,30%, last 0,30% USD / 13:30
• Jan CPI Ex Food and Energy MoM, exp 0,20%, last 0,20% USD / 13:30
• Jan CPI YoY, exp 2,40%, last 2,10% USD / 13:30
• Jan CPI Ex Food and Energy YoY, exp 2,10%, last 2,20% USD / 13:30
• Jan CPI Core Index SA, last 249,93, rev 250,013 USD / 13:30
• Jan CPI Index NSA, exp 242,479, last 241,432 USD / 13:30
• Jan Real Avg Weekly Earnings YoY, last 0,20%, rev 0,40% USD / 13:30
• Jan Real Avg Hourly Earning YoY, last 0,80% USD / 13:30
• Jan Retail Sales Advance MoM, exp 0,10%, last 0,60% USD / 13:30
• Jan Retail Sales Ex Auto MoM, exp 0,40%, last 0,20% USD / 13:30
• Jan Retail Sales Ex Auto and Gas, exp 0,30%, last 0,00% USD / 13:30
• Jan Retail Sales Control Group, exp 0,30%, last 0,20% USD / 13:30
• Jan Existing Home Sales MoM, last 2,20% CAD / 14:00
• Jan Industrial Production MoM, exp 0,00%, last 0,80% USD / 14:15
• Jan Capacity Utilization, exp 75,40%, last 75,50% USD / 14:15
• Jan Manufacturing (SIC) Production, exp 0,20%, last 0,20% USD / 14:15
• Currency Flows Weekly BRL / 14:30
• Feb NAHB Housing Market Index, exp 67, last 67 USD / 15:00
• Fed Chair Yellen Delivers Semi-Annual Testimony to House Panel USD / 15:00
• Dec Business Inventories, exp 0,40%, last 0,70% USD / 15:00
• Feb 10 DOE U.S. Crude Oil Inventories, exp 3500k, last 13830k USD / 15:30
• Feb 10 DOE Cushing OK Crude Inventory, exp 400k, last 1143k USD / 15:30
• Fed’s Harker Speaks in Philadelphia USD / 18:00
• Fed’s Rosengren to Address NY Assoc for Business Economics USD / 18:10
• Dec Net Long-term TIC Flows, last $30.8b USD / 21:00
• Dec Total Net TIC Flows, last $23.7b USD / 21:00
• Jan Foreign Direct Investment YoY CNY, exp 1,40%, last 5,70% CNY / 23:00
• Jan Industrial Production YoY, exp 3,00%, last 3,20% RUB / 23:00
• Jan Tax Collections, exp 137290m, last 127607m BRL / 23:00
• Jan Trade Balance, exp -$10265.0m, last -$10369.3m INR / 23:00
• Jan Exports YoY, last 5,70% INR / 23:00
• Jan Imports YoY, last 0,50% INR / 23:00

The Risk Today:

EUR/USD‘s selling pressures continue. the pair has broken strong hourly support given at 1.0581 (16/01/2016 low). The road is wide open towards support at 1.0454 (11/01/2017 low). Expected to see continued decrease. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD is still trading below strong resistance given at 1.2771 (05/10/2016 high). The technical structure suggests that the pair should back bouncing lower towards support given at 1.2254 (19/01/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY is pushing higher after its increase from support given at 111.36 (28/11/2016 low). Hourly resistance is given at 115.62 (19/01/2016 high). Expected to see further strengthening in the short-term. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is still strengthening after the breakout of the downtrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Nonetheless, we believe that the road is nonetheless clearly wide-open for further decline if the pair gets back below parity. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.