USD Slides Ahead Of FOMC Meeting

News and Events:

Fed meeting likely to be a non-event

The Federal Open Market Committee kicked-off its two-day monetary policy meeting yesterday and will announce any modifications later today. There is no doubt that the Federal Reserve will leave its benchmark rates unchanged after lifting them by one notch at the December meeting. Instead, the market will focus on the Fed’s assessment of the potential direct and indirect effects of Donald Trump’s presidency on the economy. The January meeting is a light one, meaning that there will be no new economic forecasts or a press conference, just a statement.

Given the highly uncertain environment that has emerged since the investiture of Trump, and the rain of executive orders that has ensued, we expect that the Fed will play for time and avoid giving any strong signals. Moreover, the recent relatively disappointing economic data from the US (GDP, durable goods orders…) has eased the pressure on the Fed, which would translate into a less aggressive pace of tightening for the year ahead. Indeed, we remain sceptical that the Fed will be able to hike rates three times this year.

In the FX market, the US dollar took another hit on Tuesday as investors start to really wonder whether a Trump presidency will be in any way positive for businesses in general. The dollar index slid 0.85% yesterday and is currently struggling to reverse the negative momentum. We continue to expect further dollar weakness in the short-term as the November-December rally was exclusively driven by speculation. However, the growing risk-off sentiment will slow down the dollar sell-off as investors take shelter from the uncertainty stemming from Trump’s political style.

Watch for further CHF appreciation

Swiss PMI manufacturing came in slightly below expectations at 54.6 against 55.9 exp (56.2 prior read). Declines could be seen in output and order backlogs but none of these were significantly troublesome or enlightening. Overall, the Swiss economy continues to hum along at a decent pace despite the strong currency and late winter. Yet the sleepless nights continue for the Alpine economy as the SNB battles to manage the negative effects of an overvalued currency. J&J’s purchase of Actelion has caused EURCHF to drop below 1.07 on the back of speculation of massive demand for CHF (Although as my colleague Arnaud Masset points out, it is unlikely that all $30bn will be converted). The European political outlook is becoming significantly more unstable as accusations mount against French presidential hopeful, Fillon. This has caused an uptick in migrations into the safe haven swissie. Meanwhile stateside, US President Trump’s focus on perceived currency manipulators has temporarily shifted from China to German and Japan, suggesting that it is only a matter of time before the SNB’s exchange rate policy also comes under scrutiny. We continued to see further downside risk in EURCHF as macro headwinds increase and the SNB continues to allow great exchange rate flexibility as the inflation outlook improves. We anticipate a bearish extension back towards 1.0623 support. In USDCHF the break of key 61% Fib retracement lvl and 200D MA indicates further bearish pressure towards 0.9537.

China is showing, at best, some signs of stabilization

China’s outlook has the full attention of world markets. Last night saw the release of important economic data, including manufacturing PMI which came in higher than expectations at 51.3 in January versus 51.4 in December. As we know, a figure above 50 indicates expansion. This marks the sixth straight month of expansion.

It is true that the housing boom has boosted demand for manufacturing products as new buildings are on the rise. Industrial firms selling raw materials have also enjoyed an upsurge in profits as commodity prices show some solid potential lately. Nonetheless, as the manufacturing PMI approaches the 50-mark, some fundamentals are beginning to cause fears – mainly that the housing market is on the decline.

In addition, we are currently concerned that China’s fiscal deficit, which widened in 2016 will continue to do so in 2017. The PBoC has injected a lot of liquidity into the banking system through its MLF tool (medium-term lending facility) and this may cause issues at some point, particularly as it can drive downside pressures on inflation. We firmly believe that strong economic risks are ahead for China. We remain bullish on the pair USDCNY towards 7 in the medium-term.

Today’s Key Issues (time in GMT):

• Jan Manufacturing PMI, exp 51,2, last 51,4, rev 51,6 NOK / 08:00
• Jan Markit Spain Manufacturing PMI, exp 55, last 55,3 EUR / 08:15
• Jan PMI Manufacturing, exp 55,9, last 56, rev 56,2 CHF / 08:30
• Jan Markit/ADACI Italy Manufacturing PMI, exp 53,3, last 53,2 EUR / 08:45
• Jan F Markit France Manufacturing PMI, exp 53,4, last 53,4 EUR / 08:50
• Jan F Markit/BME Germany Manufacturing PMI, exp 56,5, last 56,5 EUR / 08:55
• Jan F Markit Eurozone Manufacturing PMI, exp 55,1, last 55,1 EUR / 09:00
• Jan Barclays Manufacturing PMI, exp 47,5, last 46,7 ZAR / 09:00
• Jan Markit UK PMI Manufacturing SA, exp 55,9, last 56,1 GBP / 09:30
• janv..31 FGV CPI IPC-S, exp 0,65%, last 0,63% BRL / 10:00
• Jan Danish PMI Survey, last 64,3 DKK / 10:00
• Dec Industrial Production MoM, exp 2,40%, last 0,20% BRL / 11:00
• Dec Industrial Production YoY, exp 0,60%, last -1,10% BRL / 11:00
• Dec MLI Leading Indicator MoM, last 0,30% CAD / 12:00
• Jan Markit Brazil PMI Manufacturing, last 45,2 BRL / 12:00
• janv..27 MBA Mortgage Applications, last 4,00% USD / 12:00
• janv..30 CPI WoW, last 0,10% RUB / 13:00
• janv..30 CPI Weekly YTD, last 0,50% RUB / 13:00
• Jan ADP Employment Change, exp 168k, last 153k USD / 13:15
• Jan Markit Canada Manufacturing PMI, last 51,8 CAD / 14:30
• Currency Flows Weekly BRL / 14:30
• Jan F Markit US Manufacturing PMI, exp 55,1, last 55,1 USD / 14:45
• Jan ISM Manufacturing, exp 55, last 54,7, rev 54,5 USD / 15:00
• Jan ISM Prices Paid, exp 65,5, last 65,5 USD / 15:00
• Jan ISM New Orders, last 60,2, rev 60,3 USD / 15:00
• Jan ISM Employment, last 53,1, rev 52,8 USD / 15:00
• Dec Construction Spending MoM, exp 0,20%, last 0,90% USD / 15:00
• janv..27 DOE U.S. Crude Oil Inventories, exp 3000k, last 2840k USD / 15:30
• janv..27 DOE Cushing OK Crude Inventory, exp -200k, last -284k USD / 15:30
• Jan Imports Total, exp $12286m, last $11525m BRL / 17:00
• Jan Exports Total, exp $14335m, last $15941m BRL / 17:00
• Jan Trade Balance Monthly, exp $2049m, last $4415m BRL / 17:00
• Jan New Car Registrations YoY, last 13,06% EUR / 17:00
• Feb 1 FOMC Rate Decision (Upper Bound), exp 0,75%, last 0,75% USD / 19:00
• Feb 1 FOMC Rate Decision (Lower Bound), exp 0,50%, last 0,50% USD / 19:00
• Jan ANZ Job Advertisements MoM, last 1,60% NZD / 21:00

The Risk Today:

EUR/USD‘s momentum has increased sharply. Hourly resistance area is given at around 1.0800. Hourly support lies at 1.0590 (19/01/2016 low) and 1.0341 (03/01/2017 low). Expected to see continued consolidation. 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’s buying pressures are increasing again. The pair is on the road towards 1.2771 (05/10/2016 high). The technical structure is still anyway showing positive potential. Hourly support is given at 1.2466 (30/01/2016 low). Expected to show further bullish move. 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 had surprisingly exited the downtrend channel after monitoring resistance implied by the upper bound. Yet, the pair is back within it. Hourly resistance is given at 115.62 (19/01/2016 high) A break of hourly support given at 112.57 (17/01/2017 low) has confirmed further bearish pressures. 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‘s momentum is bearish. Yet, the selling pressures are being reduced below parity. Key resistance is given at a distance at 1.0344 (15/12/2016 high). The road is clearly wide-open for further decline. 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.