FX Weekly Take – Month-end flows exacerbate pre-FOMC Dollar pullback

Currency markets started off in the usual cautious manner this week, but the strong month for US equities pointed to a bout of rebalancing Dollar sales which have taken a firm hold of the market in Tuesday’s session.  With the FOMC meeting to contend with on Wednesday evening, longs have been tested across the board, though more moderately so against the commodity linked currencies after the weaker than expected Chinese PMIs released overnight.  Hopes of green shoots in the aftermath of the data seen in March were pumped full of optimism, with this phraseology (green shoots) usually attributed to a pronounced dip in the economic cycle.  Levels seen in the equity markets show clearly we are a long way off that, and China’s structural shift will produce plenty of twists and turns down the road.  Nevertheless, it has served to shake some fear back in the market and the spot JPY rate is been pulled lower again – this having been a key source of the low vol landscape which has plagued FX for as long as it has.

Should the USD/JPY rate find its feet, then expect a return of the Dollar grind higher, EUR/USD shorts unlikely to feel the pain unless we break materially above 1.1325 or so.  In the interim, the mid 1.12500’s are likely to see plenty of congestion unless the Fed throw in a dovish curve-ball Wednesday evening.  All the signs are that they will stick to the plan of watching the data, and maintain an steady monetary policy tone which points to little change this year.  That futures markets are still pricing in a cut at the end of the year suggests the dovish risks to tomorrow evening have been pre-empted.  With lower core PCE allaying fears of an inflation overshoot, it is unlikely that rates curve will change its position in a material way, so for the greenback, any fresh downside from current levels is may well be contained.

Eurozone data this morning saw growth in Q1 a little better than expected at 0.4%, while inflation in Germany is back to 2.0%.  The latter may be a case of ‘be careful what you wish for’ for the ECB, as rising inflation amid tepid (weak) growth is the worst of economic developments central bankers wish to see.

In the US, house prices have dipped in more recent times – something no doubt the Fed (as any central bank) will have an eye on.  Consumer confidence is riding high, however, and if the labour market remains as tight as it has been then, then wages pressures are still expected to feed through and support consumer-driven growth.

While this dynamic has also benefited UK growth, Sterling is likely to hold a narrow range around the 1.3000 level (vs $), with today’s gains coming through the cross rate as much as it has due to Dollar weakness.  Brexit talks between the government and Labour seem to have positive of late, but scepticism will continue unless there is a workable agreement that the market can rely on.  Parliament has let down hopes many a time, so there is little room for optimism alone.

Looking past Tuesday’s session, the FOMC may offer less than that of the hard data we get on Friday so in the meantime, expect the Dollar to stabilise again after month end flows finally flush through.

It’s a one way street in FX at the moment

Just when you think the US Dollar has reached its limits, the market turns around and bites you time and again.  Buying has been pretty much broad-based if not erratic in terms of timeframe, having brushed off the Fed pause earlier in the year.  It is not so much a case of the neutral stance adopted by Powell and Co, but the market shift in the Fed funds outlook over the near term horizon which could, or dare I say should have produced a little more of an adjustment in the USD at the time.  Mid 2018, the most conservative projections were calling for 2 hikes this year, yet futures are now pricing in odds of a cut at the end of the year, if not early 2020.

Of course, central bank peers have moved in near unison, with the added concerns in some cases over the lack of policy ammunition – oh, how the ECB regret holding back on normalisation a year ago!  Much of the Fed’s normalisation process was down to creating a buffer for an eventual slowdown, which is now biting down hard on many of the world’s major economies.  Little wonder then that the greenback remains on the front foot.  Even so, the lack of material adjustment mentioned above is promoting a sense of unease over the latest round of USD buying.  As weak as the EUR is in the current climate, losses are relatively orderly given the level of slowdown in Europe.  Despite dwindling global demand, importers of European goods will show good interest to lock in favourable rates at these levels, so we expect stronger real money support for the single currency should we delve into the 1.1100-1.1000 zone.  Ahead of the European elections though, it is hard to argue for material recovery irrespective of narrowing rate differentials further out on the curve.

What has been surprising of late is the lack of positive leeway in the commodity currencies.  The Canadian housing market has been widely acknowledged as a key concern for policymakers in Canada, much in the same way as it is for Australia.  However, despite the worries over China and demand there-from, positive data readings, not least of all the PMIs have failed to bolster the AUD to any significant degree.  The correlations with base metals prices including Copper seem to have evaporated.  Instead, we are now looking at a move below 0.7000 as the market readies up for anticipate rate cuts from the RBA (RBNZ), while the CAD has pierced 1.3500 against the USD in response to a further accommodative shift from the BoC on Wednesday.

As for GBP, even the UK pessimists could not have called the calamitous performance in the House of Commons in recent weeks.  The latest weight around Sterling’s neck is a potential change in Tory leadership, with pro Brexit names lining up, led by Boris Johnson and Dominic Raab.  So much for the vote to take no deal off the table – a move which eventually led to a Cable move close to 1.3400.  It has been one way since, with 2 Brexit delays underlining the political paralysis and reducing odds of a soft Brexit in the process.  At this stage, it is a little early to say whether the retreat below 1.3000 can extend beyond the 1.2800-1.2660 support zone, but with the USD sizzling again, one cannot rule it out.  GBP bulls will be looking for some positive developments from cross-party talks, though discussions are reportedly going nowhere fast.

As such, there is only one currency which offers any peace of mind in the current climate, though expect the market to pounce on any viable alternatives should they present themselves.  Liquidation risk is increasing by the day, so in terms of price action, it is reasonable to believe that USD gains will be hard-fought from current levels.

FX Weekly Take – positive risk mood extends further into currency world

The opening theme of the week is very much a product of both risk sentiment and central bank action.  The CHF has been sold off with a vengeance as markets return to full strength today and we can only assume the investors are pulling their money out to seek improved yields as the SNB warn of further rate cuts should the need arise.  With interests already deep in negative territory, the assumption was that the Swiss central bank would stick on current policy, with the deposit rate commanding a 0.75% premium to hold cash in CHF reserves.  SNB’s Jordan last week said that rates could go lower still, and this has prompted the latest sell-off which has carried the USD rate to 1.0200 at time of writing. They also remain committed to intervene against CHF strength and we saw this in play in the mid 1.1100’s in EUR/CHF at the start of April.

The SNB will target the EUR rate with any smoothing operations (as many like to call it), as they would (as any other central bank in this situation) focus on their largest trading partners.  As all longer-term market participants will remember, the central bank is and have been specific in their timing of any interventions, and the latest moves will serve as a buffer to the European election risk coming in May.  The resilience of EUR/USD to recent data as well as upcoming events should consider this as a material factor in its support.  This is conjecture to a large degree, but in a low vol environment, sizeable flow will naturally impact in clear sight.

Further afield, it seems prospective central bank perceptions are also playing their part.  If one is to place confidence in the Chinese data of late, then AUD is the best proxy of this, yet we see a retreat in the spot rate back towards 0.7100, having failed to mount a serious attempt on the 0.7200 level last week.  RBA projections of a rate cut have been spreading fast, just as they have for the RBNZ, with the NZD/USD rate back under 0.6700 again and eyeing a move towards the flash crash lows seen at the start of the year.

The CAD is in the immediate line of fire as the BoC announce on rates tomorrow.  While there is no change expected, there is a good chance that they will further walk back on their policy outlook.  Having communicated a path of further hikes over the near term horizon, the global trade outlook may force them to take a softer line and pre-emptive CAD selling is taking this risk into account.  Resistance above 1.3400 has been well documented on the charts, leading to a narrow range with parameters at 1.3300 on the downside briefly breached.  We are back at the top end again today and a move to 1.3500 looks inevitable if the BoC deliver what many anticipate.  Under the circumstances, higher oil prices are having little impact, much in the same way as firmer industrial metals have deviated away from AUD.

The SEK is also coming under fire today with the Riksbank still seen following the ECB rather than taking the lead in response to domestic pressures.  Inflation will eventually have its say and I expect the SEK to outperform the EUR as accommodative policy in Sweden will kick in at some point and force the Riksbank’s hand – irrespective of what plays out for and at the ECB.

GBP is a waiting game at the moment, and valuations are a pure aggregation of the risks to the outcome of the Brexit process which has been delayed to Oct 31 at the latest.  Growing speculation over Theresa May’s tenancy at No 10 has been a negative driver of the Pound of late, leading to the latest dip under 1.3000.  Should 1.2950 give way, then 1.2900 and pre 1.2800 will again pose obstacles for sellers amid the uncertainty.  It is somewhat unattractive to sell at current levels given Cable was expected to return to 1.5000-1.5500 levels in the event of the UK voting to stay in the EU in 2016, so even allowing for USD strength since then, 1.4000 is not an unreasonable reach in the event of a soft Brexit, which is still very much on the cards.

EUR/GBP will have to grapple with the upcoming risks as we have already discussed, so no longer represents the best way to express ones bearish outlook on the UK and/or Brexit outcomes. 0.8675-0.8725 remains a tough area of resistance, and a breakout of the upper level would represent a major fallout in GBP sentiment.

There is little to say on EUR/USD that has not been covered already.  The EUR is a funding currency in the present day, and while future rate pricing leads one to believe the currency will catch up with the curve, now is not the time as yield seekers continue to reap the benefits of US rates.

FX Weekly Take – Just how long with this low volatility last for?

The question in the title is the question which is on everyone’s’ lips at the moment, everyone and anyone focused on currencies at least.  As is widely telegraphed, G10 implied and actual vol rates have been depressed to levels last seen in 2014, and at a time when global risks are plenty.  We need hardly mention Brexit, trade tensions with China or the European economic slowdown, which as we have seen from reactions to the PMIs in recent months, has hit global sentiment through the equity markets.  How quickly stocks recover comes as little surprise these days.  After a healthy tranche of Chinese data recently, fears have abated with the added backdrop of what many now see as the end of the Fed tightening cycle.  I would concur with this view at this stage, with last years projections of a neutral rate of 3.5% (10yr) a clear stretch, as proved by the reaction in risk assets when Treasuries hit 3.25%..  We are at neutral now and a stable inflation rate along with mixed US date validate this.

So what is driving the FX markets? In short, carry.  All one has to do is look at the USD/JPY rate to see that currency investors are happy to earn differentials, with the major currency pairs all having seemingly reached their extremes against the greenback for now.  This seems to be the effective response to the change in Fed stance to neutral, and one would have reasonably expected to see a more pronounced adjustment in the USD but for the concurrent shift among central bank peers.  The USD has still managed to claw out new highs in certain cases, as confidence plays and will continue to play a key part in currency flow at present.

EUR/USD eventually took out the previous cycle low of 1.1215, but only managed to extend this by less than half a cent, and the 1.1150-1.1200 zone provided ample support from which we are attempting to form a base.  The above area has some historical context in that it formed the final platform from which the EUR generated its move through to 1.2000+ levels.  How economic climate has changed, yet it is not hard to see why as all export-dependent regions are suffering at the moment.  In light of this, the recent improvement in Chinese data could have lightened the mood on the EUR, but ahead of the European elections, it is hard to put faith in any meaningful recovery, and so it has proved as we struggle through 1.1300.  Recent concerns from policymakers at the ECB that growth forecasts could be a little optimistic in the second half of the year have also pulled the rug from under the feet of the EUR this morning, so near term consolidation is as good as it gets for now.  Do not rule out a fresh push towards 1.1400 however.  USD softening may offer this opportunity as liquidation risk cannot be discounted given current exposure.  We may even see an improvement in the next round of Eurozone PMIs for April which are due out on Thursday.

Underperforming across the board now is the CAD, where next week‘s BoC meeting is being viewed with a dovish leaning.  Add in housing market concerns along with one of the highest levels of household debt amongst developed nations and it is not hard to see why traders are ignoring the usual correlations such as Oil price and broader risk sentiment.  Sticking points around the 1.3400 may prove temporary, so at this point, I am not going to rule out a return to 1.3600-50 against the USD.  Positioning may be better served away from the greenback, though it again begs the question where?  Watch out for Canadian inflation numbers tomorrow, which are spiced up with trade data from both sides of the border.

One currency I had high hopes for was GBP.  Parliament and now the government have distanced themselves from a no deal exit, and while softer Brexit options, including a customs union attached to the withdrawal deal and/or a second referendum, outnumber a negative outcome, the balance has been tipped again as Westminster is abuzz with talk of a general election.  Would it break the deadlock? Can the country stomach it? Strong arguments for no in both cases, but nevertheless, this has reined in the prior aggregate of probabilities which could have warranted a Cable move towards 1.3300-1.3400.  1.3380 was the peak of optimism after the House of Commons voted against a no deal, and this looks pretty safe unless there is a breakthrough in cross-party talks continuing during the Easter Break.

There were faint hopes that the market would refocus a little on domestic data, though the healthy employment report on Tuesday morning did little to shake GBP out of its tight ranges, with EUR/GBP hemmed into 0.8620-60 for now.  Cable has covered 1.3070-1.3100 over Tuesday’s session at the time of writing and highlights the lack of conviction in the absence of any major news, leading to this heavy congestion. Inflation data tomorrow is likely to be a non-event, and this is exacerbated by fading market (and business) expectations of a rate hike inside the next 12 months.

Elsewhere, growing interest in the Nordics seems to favour the NOK over the SEK with the cross rate having pierced the 1.0900 level and showing little sign of relent. The Norges bank is going against the grain and has hiked rates by 25bps this year, with another move in June priced in by a little over 50%.  In contrast, the Riksbank is happy to sit on the sidelines with negative rates, and the narrative is that the Swedish central bank is waiting for the ECB to pull the trigger first.  Perceptions will change if inflation feeds through.  CPI is back close to 2.0%, growth is healthy in relative terms as are public finances alongside a positive current account, so I fail to see what there is not to like with the SEK further down the line. Naturally, negative rate differentials are a factor as I have pointed out already, so the obvious route looks to be EUR/SEK looking ahead.

However, price action seems to warrant caution here, as bouts of EUR weakness have tended to have upside impulses to EUR vs SEK, NOK, and PLN.  Contagion fears can spark sharp corrections, so Eurozone data risks have and will dent sentiment on no-EUR Europe.   The NBP could also surprise with a hike over the coming year, again due to a pick up in inflation, though we are still some way off the central bank’s 3.5% upper limit.  Even so, it seems the EUR (PLN) cross rate is eyeing a move on 4.2500 support in anticipation of this.

Finally, AUD looks intent on holding 0.7000l.  The figure level sees plenty of 2-way business and with commodity prices higher on the back of the near term improvement in China’s PMIs, it is not hard to see why.  Resilience in the currency is all the more impressive given expectations of rate cuts later this year – something which gained some traction after the RBA minutes on Tuesday.  It is too early to say if this is priced in, just as it is to say China’s slowdown has been halted in its tracks.  For now, it is a case of making hay while the sun shines and there is nothing to say AUD/USD gains will top out at 0.7200.  0.7300 and 0.7400 targets have equal significance on the daily charts if we do break higher, but these constitute medium-term targets in a positive risk environment – of now.  There has been a breakdown in the correlation with equities in recent months so there is an element of catch up play here.  The AUD/JPY proxy has fought its way back into the picture as a result with the recent range break of 79.60-80 aided by the carry hungry USD/JPY rate.

FX Weekly Outlook – 18-22 March 2018

I think it is fair to say that the currency markets are treading carefully at the moment, with implied volatility rates heavily subdued as we see congestion and consolidation across the G10. Through much of 2018, the US economy was head and shoulders above the rest of its major counterparts, and this was clearly reflected in the respective exchange rates. However, the pace of activity has clearly slowed, and optimistic calls for another 4 rate hikes from the Fed were soon dampened, not least of all due to the impact on stocks once long end yields reached key levels – notably 3.45-50% in the 30yr. 10yr topped out around 3.25%, but the Fed’s stance clearly unnerved investors who piled out of US stocks at the end of last year.

 
Since then, we have seen a recovery which has outperformed expectations for the most part. All 3 major indices are pushing on key technical levels, bolstered by hopes of a US-China trade deal which will ultimately do little to address the fears over the China slowdown and the impact of global growth as a result. Nevertheless, the carry trade follows sentiment in stocks, and with the BoJ maintaining its current policy of asset purchases, we can see little past ongoing JPY weakness at the present time. Naturally, the correlation with equities will play a major part in future direction, though we can only see a material turnaround in JPY if or when the Japanese central bank hints at potential tapering. There is a clear alignment in the way in which US stocks and USD/JPY continue to grind higher, albeit with limited progress, though this should be enough to suggest sideways price action in the latter.

 
Sterling has been the only currency offering improved volatility and movement seen around the Brexit votes last week saw the Cable rate testing under 1.3000 to the downside. This was ahead of the meaningful vote on Tuesday evening, and with news from the Attorney General that the improved concessions offered little change to the risk of being ‘trapped’ in a customs union, the market pre-empted a second defeat for Theresa May, which eventually came to pass. 1.3000 managed to hold after a failed attempt on Sunday night to test the 1.2900-50 support area, and as it becomes apparent that the vote to reject no deal was going to attract a majority, the spot rate pushed higher and eventually went on to test 1.3400. We failed just ahead of this, and we have effectively set a near term range, where either side will only be tested once we get a clear outlook on the Brexit process from here on out.

 
As it stands, statute keeps a no deal Brexit come 29 March on the table even if last week’s votes say otherwise. This should preserve the above range at the very least, if not, develop into a slow grind lower back into the mid 1.3100’s where we note a bank of support looking to position for a deal (of sorts) come the end of March or June. We suggest a longer delay in Brexit will likely further confuse the market, and lead to a wait-and-see period of consolidation.

 
EUR/GBP has provided a strong outlet for reflecting lower odds of a no deal outcome, but this has accompanied a period of EUR weakness which saw the EUR/USD rate falling to marginally new cycle lows in the aftermath of the announcements from the ECB earlier this month. Whether the latter has developed a meaningful base in the near term depends on the data series from Europe. Ultimately, Europe is heavily export-dependent, so it is hard to see a significant recovery based on the fundamental backdrop, as slower global growth will continue to reduce demand. EU elections later this year will infuse a further period of uncertainty, as will the Brexit outlook which – as we have seen – has also dictated some of the play in the EUR in recent months.
We saw 1.1175-1.1200 as a key area which managed to hold firm post ECB, so from here, a move and hold above 1.1450 is what could potentially signal the prospect of higher levels, though the driver, in this case, would be USD weakness more than renewed confidence in the EUR.

Weekly FX Outlook – 11/03/2019

No surprises for guessing where all and sundry expect the volatility to come through this week as the Brexit circus rolls out the main acts starting with the meaningful vote on Tuesday evening.  Sparing the rundown on what to and what not to expect, the plethora of coverage makes it pretty obvious that either parliament votes for the current deal or we effectively decide on ruling out a no deal and ensure a soft quasi Brexit.  Do the probability of outcomes warrant a material drop in the Pound at this stage?  We would suggest not, as it is clear both sides will suffer in a no deal scenario and anyone keeping tabs on parliament will see there is a majority to reject this – irrespective of how this impacts on the UK’s negotiating leverage.  Our base case scenario is that – albeit at the 11th hour – one or both sides will avoid the worst of possible outcomes.

From a purely technical perspective then, we look to the 1.2850-1.2950 zone as a significant area which should define whether we could see an early base forming, so soon after 1.3000 gave way last week.  We anticipated a little more support ahead of this psychological level, but late week/pre-weekend fear and jitters gave Sterling little chance of stability in this context.  We maintain price action and the time zones they trade in have a strong bearing on where and how far levels can be stretched.  It abundantly clear that traditional technical analysis is losing touch with the modern day trading patterns.

From a fundamental perspective, EUR/GBP perhaps confounded many with the way it pushed higher on Friday, so soon after the dovish actions by the ECB sent the EUR down through cycle lows to test the 1.1175-1.1200 area vs the USD.  EUR/USD is now widely expected to test towards 1.1000 over the coming weeks, though we will need to contend with further support in the low 1.1100’s to challenge this pivotal level.  Given its historical relevance, we would argue that only the prospect of an existential Eurozone crisis will drive the EUR below here.

From current levels, we will need to assess how the medium term outlook develops in the key member states, with Germany’s economy having caused justifiable concern as its manufacturing PMIs remain below the 50.0 mark.  Only this morning, we saw industrial production falling 0.8% in Jan, as well as its trade surplus narrowing once again.

In the current climate of fragile global demand, all export-reliant regions are undergoing testing times, and US-European trade tensions are still lingering in the background.  This may be alleviated for a temporary period if US talks with China can yield positive results, as we expect some presumptuous follow through into the EUR.  For now, trying to establish a base in EUR/USD is not only premature but also offers little prospect on the upside based on the economic climate at present.

Optimism over a US-Sino trade deal was reinforcing the carry trade up until the middle of last week, after which time the cumulative impact of central bank caution (heightened by the ECB) led to a brief fallout in risk assets.  This seems to have stabilised again with Wall Street equities grinding higher again pressing on the JPY once more.

USD/JPY managed to hold off a resistance area capped by 112.30-35 last week, which may well serve as a longer-term top, but as long as 110.25-30 holds firm on the downside, we expect flights to safety favouring the USD to some degree, which will continue to takes out a large tranche of volatility in this pair.

There is also a lack of response to a softer tone from the Fed, which as is now widely acknowledged as a positive backdrop for risk assets in DM.  It is our belief that the only real catalyst for a sharper move in USD/JPY is likely to come from any tapering expectations from the BoJ, who at present, stick to their ultra easing bias though global asset purchases.

The commodity-linked currencies seem to be drawing little inspiration from broader sentiment, with dovish turnarounds from the RBA and BoC proving to be the ultimate driver for AUD and CAD respectively.  The traditional correlations have been sporadic, to say the least, but we can see little respite for the AUD as long as fears over China’s slowdown persist and the how slowing demand will eventually impact on Oil prices and the Canadian economy.  The BoC made a point of citing caution on activity and output based on the outlook for Oil prices ahead.   CAD buyers are likely to be tempted in should we see a spike above 1.3500, but at this stage, broader themes have not ruled out a stronger move towards the 1.3600-1.3800 region as yet.

AUD/USD set out its parameters at the start of the year by hitting levels in the mid 0.6700’s, and at some stage, we expect a move back to test these levels if/when China’s slowdown gathers prominence again.  After the recent stimulus measures from China, we would have expected a stronger response from the 0.7000 area, but the reluctance perhaps tells its own story.  0.7120-0.7170 is a region we are keeping an eye on, but the lack of momentum suggests this area will contain trade unless we get a material turn in the US data.
USD prominence continues to highlight, or more so reflect the lack of viable alternatives at present, though net exposure is making for a challenging environment in G10 FX as USD strength also has its limits.  Markets are pricing in a flat year at the Fed, and this is consistent with our view.  Policymakers still believe there is scope for another hike this year and next, but only significant wage inflation will force their hand against a sensitive equity market.

FXDaily Morning Report – FOMC risk as the pace of balance sheet runoff in question

A WSJ report last week set the cat amongst the pigeons on Friday, as the question over the balance sheet runoff was brought to light.  While it is now widely acknowledged that the Fed is set to pause on its series of rate hikes, some are now considering the possibility that the pace of quantitative tightening may be addressed in order to further ease up financial conditions for both the financial markets and the real economy.  Despite the fact that equity markets have materially stabilised, the story has gained traction and the USD has softened as a result, with notable losses seen against some of its weakest counterparts.

The EUR is a clear case in point, with the ECB now clearly concerned about the persistent weakness in the Eurozone data, in what has so far been assumed to be a correction in the strong pace of activity seen through 2017 and very early 2018.  As a result, the governing council sees risks skewed to the downside, though this was already firmly priced into the markets given rate normalisation has been pushed further out into 2020.  Nevertheless, EUR/USD only managed a brief dip below 1.1300 and has since tested back above 1.1400 again in what looks set to be some very tight ranges ahead as we go into the FOMC meeting this week.
Elsewhere, the Brexit mood has been lifted by widespread agreement within the House of Commons that a no deal outcome should be avoided at all costs, but how this then translates into affirmative action remains to be seen as we look to the start of the debates on the various amendments which will be put forward and voted on from Tuesday this week.  In recent weeks, GBP has readjusted the risk probability of a hard Brexit, though optimism may start to run out in the days ahead as we get back to acting on the way forward.  Optimism is one thing, but can only carry GBP so far.  NY desks, followed by Asia today, pushed the Cable rate through 1.3200, but we are seeing some moderation this morning as the realisation that a no deal Brexit is not completely off the table yet.
We then come onto the Fed impact on risk.  Should the FOMC communicate openness towards a resumption in reinvestment, then we expect to see risk assets receiving a further boost over coming weeks.  There are however many crosswinds to consider this week, not least of all the earnings reports out of the US from a number of key names – Caterpillar today, Apple on Tuesday.  We also have the Chinese delegation traveling to Washington this week to resume talks on trade, and while there have been mixed signals from members of the Trump administration on progress – of the lack off – we know at that intellectual property remains a core issue in breaking the deadlock and avoiding an increase in tariffs, which would come into effect at the start of March if negotiations do not bear any positive results.

In the meantime, AUD, NZD, and CAD continue to stay on the front foot, though conviction looks unconvincing as yet.  Based on the fact that bearish sentiment on stocks can return at any moment, bullish sentiment is a long way off, with recent moves here looking corrective at best.  We could pick out the CAD as perhaps the pick of the bunch given Oil prices have stabilised.  There is also the backdrop of continued expectations that the BoC remains on course to raise rates again at some point this year, narrowing differentials with the US as the Fed decides to pause for now.

Ending with USD/JPY, the spot rate is caught between a rock and a hard place.  As USD sentiment will be tempered by that of the mood in stock markets, we look set to remain in a state of limbo over coming sessions, so expect little in the way of movement unless we get poor earnings results this week.  109.80-110.30 continues to provide strong resistance up top, but we cannot help but think that the early Jan ramp in the JPY, and subsequent sharp reversal, has underpinned the downside in the near term.

Forex Analysis: Morning Bullets

USD

* 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.

EUR

* 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.

GBP

* 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.

CAD

* Oil prices trying to push higher again to give the CAD a modest lift today.

* Canadian budget balance out this afternoon.

Forex Market Analysis – Morning Bullets

USD

* 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.

GBP

* 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.

EUR

* 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.

CAD

* Nov retail sales due out this afternoon.

* API weekly crude stocks data out this evening.

Forex Analysis: Morning Bullets

USD

* 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.

GBP

* 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.

EUR

* 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.

CAD

* 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.