* US Senate failed to vote for an end to the government shutdown last night as president Trump refused to budge on his demand for border wall funding.
* Trump is preparing a draft for a national emergency order to get his wall funding through.
* US Kudlow says China must deal with intellectual property theft in trade talks.
* US-Japan trade talks delay as White House focuses on China.
* This morning, ECB’s Villeroy says that external factors and uncertainty have been largely behind the slowdown.
* ECB Coeure says the slowdown has surprised the governing council.
* German IFO survey out this morning – looking for marginal weakness in the business climate, though expecting another miss.
* Last night, a report in the UK’s Sun newspaper that the DUP would accept the Irish backstop if a time limit was attached gave GBP a boost.
* Focus on next week’s start of the debates on plan B – GBP has been enjoying strong gains this week, helped by data also (healthy jobs report).
* CBI Distributive Trades Survey for Jan due out this morning.
AUD & NZD
* Uncertainty over Chinese growth this year prompting bearish calls on AUD across the board – some as low as 0.6000!
* Little on the docket to drive trade – Asia quiet, focus on risk sentiment, Wall St futures steady.
* Oil prices trying to push higher again to give the CAD a modest lift today.
* Canadian budget balance out this afternoon.
* Reports that White House has cancelled meetings with China over IP issues has been denied by Larry Kudlow.
* US press reports that the government shutdown may delay the issuance of tax refunds.
* Senate will vote again on reopening the government – 2 bills, one for Republicans to provide funds for border wall, other to open without funding – both expected to fail.
* US house price index data for Nov due later today.
* UK Trade Min Fox will use the Davos meeting to discuss replicating EU deals.
* Rees Mogg maintains that the Irish backstop is the only obstacle standing in the way of ERG (Brexiteers) voting for PM May’s deal.
* BoE’s Broadbent speaking later on this morning.
* CBI Industrial Trends Orders for Jan out mid-morning.
* All eyes on tomorrow’s PMIs and the ECB meeting thereafter – EUR in limbo until then.
* French Jan business confidence index down from 103 to 102 as expected.
* EU’s Moscovici says economic clouds are down to external factors.
AUD & NZD
* NZ CPI came in a touch higher at 1.9% vs 1.8% but is net unchanged from prior reading.
* Westpac-Melbourne Institute leading index down -0.2% in Dec.
* Nov retail sales due out this afternoon.
* API weekly crude stocks data out this evening.
* Yesterday, we heard president Trump say that the Chinese growth data shows the need for a trade deal.
* The US is set to proceed with the extradition of Huawei executive according to the Canadian press.
* US existing home sales due later on today.
* Cabinet member Rudd tells the PM that a number of MPs are ready to quit if she pushes for a no deal Brexit.
* Growing calls from Tory MPs to allow for a delay in Article 50.
* EBS FX and Swaps operation moving to Amsterdam.
* UK employment report and public borrowing figures out this morning.
* German ZEW survey is this morning’s focus in the Eurozone.
* EU Commission has cut Italy’s growth forecast in 2019 to 0.6%.
* Key weight for EUR this week will be the ECB on Thursday as well as the Jan PMIs the same day.
AUD & NZD
* Chinese CEOs are targeting Australia as a major growth market according to the Australian press.
* Global growth downgrade by the IMF adding to negative risk tone this morning.
* NZ BusinessNZ services PMI falls to 53.0 in Dec from 53.5.
* Oil prices having less of an impact on the CAD as we see a broad-based pick up in USD demand.
* Lower Gold prices highlight early year demand for USDs away from all other major currencies.
* Canadian manufacturing and wholesale sales for Nov due out this afternoon.
Bearishness in EURUSD continues, in this weekly chart price bounced off the 1.1490-1510 area and has now moved toward the uptrend line marked on the chart.
If the trendline breaks we may move lower toward the 1.10 level.
The trendline level could be used as support.
The downtrend which started at the beginning of 2018 is still intact.
1.13 has looked sticky in the past and looked like a base formation but if it breaks the lower low, lower high sequence continues.
1.1186 is the 61.8 Fib retracement level.
EURUSD seems to be oversold and the repricing of the rate hiking cycle by the Fed did point to USD weakness. The Gov. shutdown does not seem to have affected the USD as much as expected but Europe has its own issues with Italian and French budgetary concerns as well as Macron policy discontent in France. Stock markets have moved back to being risk on and the US-China trade deal could unwind some of the USD strength. Having said that its still a pretty bearish looking chart, keep an eye on the trendline and the consolidation low of 1.1216 for clues.
* US Sen Grassley says president Trump is inclined to impose car tariffs.
* Grassley also says that govt shutdown may also delay trade talks.
* Chinese FDI (foreign direct investment) in the US falls significantly.
* Philly Fed manufacturing index due out this afternoon.
* PM May statement last night urged parliament to come together and find a way forward and a deal which appeals to all.
* Party leaders met with PM May last night, with the exception of Labour leader Corbyn who insists she rules out no deal first.
* At least 130 UK business leaders have urged parliament to seek a second referendum.
* UK Dec RICS House Price Balance falls to its lowest level since Aug 2012; -19.%.
* EU CPI out this morning – second reading expected to confirm a headline rate of 1.6% while the core rate sticks at 1.0%.
* German govt looking for ways to exclude Huawei from 5G auction.
* ECB’s Lautenschlager speaking later today – yesterday said not surprised by the dip in inflation, still sees economy within ECB forecasts.
AUD & NZD
* Risk sentiment will dictate price action in the related currencies – NZD the underperformer, now a cent off the recent highs.
* AUD also down as Chinese growth concerns will continue to put a cap on the commodity linked currency.
* Australian home loans for Nov fell 0.9%, though a drop of 1.5% expected.
* Also feeling the turn in risk sentiment, USD/CAD pushes back above 1.3300 this morning.
* Canadian ForMin Morneau says Brexit will not affect Canada but will impact on global economy.
* Oil prices holding their ground, though off the recent highs.
By now, it should have become painfully obvious that USD demand is now predominantly a function of the weaknesses elsewhere, rather than expressing a positive view on the US economy. Naturally, it is hard to argue against a more favourable position stateside, but the US is not without its risks, which will be exacerbated every time the Fed decides to hike. The normalisation process was long overdue, and I argued that the Fed was perhaps a little too hesitant in tightening as Fed chair Yellen, at the time, wanted to wait for clear signals. Well they came through, and while the market focused on the twin deficits, the USD index was pounded into the ground and few could see a reason for the turnaround. And now here we are.
The market cannot get enough USDs, and at a time when the balance sheet is slowing contracting, the backdrop of year-end shortage maintains a relative bid in the greenback despite the prospects of a dovish hike tomorrow night. It would not surprise me if the Fed decided to stick on this one, and as per Jerome Powell’s rhetoric, watch the data. There is, however, one distinct drawback in taking this course of action, that being the perception of yielding to political pressure. President Trump makes no secret of his disappointment in the current Fed path, though come 7.00pm tomorrow evening, we will know through the dot plot whether there has been any moderation in how policymakers now believe the normalisation process should continue – if at all.
Anyone choosing to stick to the script need only look at the housing market, where yesterday’s NAHB House Price Index took another dip from 60 to 56, having fallen from 68 in the previous month to this. Domestically, neutral rates may be closer than the Fed thinks, and their recent commentary is certainly moving this way. Any suggestion of a pause tomorrow night will confirm Fed concerns, so in this respect, perhaps some of the outliers for an unchanged stance are a stretch at this point. The level of market dependency for direction from central banks has been raised significantly in recent years. so policy communication has to be dealt with kid gloves these days. In this regard, we do expect the Fed to direct market participants towards the data and coerce the mindset towards what is actually happening in the economy. It is long overdue.
That said, it is hard to steer the market away from the USD at the present time. The EUR is riddled with political instability in the region, exacerbated by the Brexit fallout, and the domestic data has taken a hammering from export-led weakness. The Pound, as undervalued as it is, faces a crisis of a magnitude not seen since the ERM debacle in the early 1990s and global trade worries continue to weigh on the majors closely tied to Asia. Australia, along with Canada also faces serious housing concerns as well as private debt thereon, and with Oil prices dropping like a stone, we cannot count on the traditional followthrough in the Canadian economy which has been a staple default scenario as a tailwind of US growth.
We still see room for a modest correction in the USD should the dot plot fall in line with market expectations. Whether this can effectively mark a more significant turnaround at this stage is in the balance. It will take some significant improvement in some of the USD’s major counterparts for this to develop, and this is clearly not going to happen overnight. The JPY and CHF look the obvious choice in the current climate, though both the BoJ and more so the SNB will have something to say on this, so the playing field is a bumpy one, to say the least. EUR/USD is making all the running this morning alongside a reluctant push lower in USD/JPY. 116.00 and 111.35-30 are levels we are watching for in either case.
(EUR/USD Technical Analysis)