The Pound and the not so Pretty Penny

While the Dollar has eased against some of the majors this week, down 0.13% against the EUR and 0.33% against the Yen, any hopes of the pound getting through the week relatively unscathed, the political doors firmly shut for Christmas, were dashed from the start of the week.

Cable has fallen for four consecutive days this week to leave the pound down 1.85% against the Dollar for the current week, with the rest of the day to go before the pounding can take a Christmas break.

With Cable sitting at $1.2265, down 0.15% for the day, it certainly looks ominous for the pound, inflation and household spending going into the New Year, the markets likely to wake up to a post-holiday hangover like no other with just a week remaining before Britain enters that 3-month period of chaos,which is expected to end with the government invoking Article 50.

The BoE just a week ago removed any hopes of a rate hike over the near-term, pointing to a likely weakening in the UK economy going into the New Year, while also stating that inflation was no longer likely to overshoot, the pound having stabilized. Cable has fallen a whopping 2.96% since that statement, the markets intent in showing Carney and the team just what they think about stability.

It had been a quiet week with no material stats out of the UK to provide direction for the pound, which is not always a good thing and Thursday’s 0.57% slide came despite a mixed bag of data out of the U.S, which included disappointing personal spending figures for November, the markets able to swallow the weak inflation numbers with Trump expected to resolve the FED’s inflation issues in the New Year. The only real good news out of the U.S being a better than expected 3rd estimate GDP number for the 3rd quarter, the economy growing by 3.5%.

So, with cable down going into the European session, it makes for an interesting morning session in Europe, with economic data out of the UK this morning unlikely to provide the markets with any inspiration, the data limited to 3rd quarter GDP and business investment figures, which are revised numbers and forecasted to be in line with previous estimates and the 3rd quarter current account deficit, which is forecasted to widen.

Even if the GDP numbers were upwardly revised, the doom and gloom of what lies ahead, acknowledged by the BoE in its economic growth outlook, leaves the pound with little Christmas cheer.

In a recent report I dared broach the topic of parity and we would have to go back to February 1985 for cable’s historical low, when pair touched $1.05. We won’t need too many more 2-3% weekly falls before the markets start making more sizeable bets against the pound ahead of the end of March Article 50 timeline.

The BoE has been clear that it will have to act in the event of any disorderly decline in the pound and we could well see Carney tested going into the New Year, with sub$1.20 levels certainly not unreasonable, particularly if inflationary pressures build and the economy begins to wane.

Inflation continues to be one of the key immediate risks to the UK economy, talk of the BoE having to lift rates would provide some immediate relief to the pound ahead of court rulings in the New Year, which include a possible review of Article 50 and the currently irreversible process.

Stocks, Bonds and Currencies Consolidate Ahead of Holiday

European equities are mixed and hovering near unchanged ahead of the long holiday weekend. The dollar is slightly softer, while oil prices continue to give back some of its recent gains. Monte Paschi Officially request state aid, as its effort to raise EUR 5 billion capital from markets fails. U.K. Q3 GDP unexpectedly increased quarter over quarter and French Q3 GDP confirmed at 0.2% quarter over quarter, as expected.

Monte Paschi officially requests state aid as its effort to raise EUR 5 billion capital from markets fails. The bank said in a statement that it will ask the government for a precautionary capital increase. Italy, which tried to avoid a large-scale bank bailout during the height of the crisis has already started to ready a EUR 20 billion fund to support the country’s troubled lenders and Prime Minister Gentiloni announced that the EU has agreed Italy’s plan. The fund will allow banks to request precautionary recapitalization, which will see some bondholders taking a hit. Holders of Monte Paschi Tier 1 securities will get stock worth 75% of the nominal value of bonds, while Tier 2 bonds, mainly held by retail investors, will be converted at 100% of nominal value. It is expected that the government will pump more money into the bank than the EUR 5 billion Monte Paschi tried to raise in markets.

UK Q3 GDP Unexpected was Revised Higher

UK Q3 GDP was unexpectedly revised higher in the third release of the data, to 0.6% quarter over quarter growth from 0.5% quarter over quarter, though the year over year figure was nudged downward, to 2.0% from 2.2% previously estimated. Q1 and Q2 growth were also revised lower, to 0.3% quarter over quarter and 0.6% quarter over quarter, down for 0.4% and 0.6%, respectively. Growth of 1.0% quarter over quarter in the predominant service sector drove the quarter over quarter expansion in the economy in Q3, helping mask one or two worrying signs, including a 0.4% drop in business investment and a 0.6% erosion in disposable incomes. Creeping price pressures, caused by the weaker pound and which most economists expect will erode real incomes of households, and Brexit-related uncertainty, which is also ready suppressing business investment, suggests 2017 will be a challenging year for the UK economy.

French Q3 GDP confirmed at 0.2% quarter over quarter, as expected. The more up to data consumer spending number for November came in higher than expected at 0.4% month over month, down from 0.8% month over month, but higher than Bloomberg consensus and our forecast, which had predicted a more marked deceleration from the strong October data. More signs that that overall growth picked up again in the last quarter of the year.

Get Ready for the Holidays !

The traders need to be off by now for the holidays. Or that’s certainly what the markets seem to think so. There has not been much movements in any of the markets for the past couple of days and whatever moves there have been, it is just pushing of the prices here and there with no specific direction and with no specific fundamentals in play. We saw more of the same yesterday and the markets certainly seem to be in a holiday mode.

Yesterday, we saw a range of news from the US and Canadian regions. While the Canadian news was mixed, the news from the US was positive for the dollar but that was not enough to push the pairs in any specific direction. The lull in the markets has ensured that it is only range and consolidation trading that is going on in the markets and it is better for the investors and long term traders to stay away.

Today is a holiday in Japan and with the upcoming Christmas holidays as well, we believe that the tight ranges are going to exist in the market today as well. We have the current account data from the UK and the GDP from Canada but we do not think either of this would be considered important enough to bring in much volatility. So, take some rest and ensure that you are relaxed and well rested for the upcoming challenges in 2017 which is likely to be as volatile and as exciting as any.

 
For more detailed analysis from the author, please visit NoaFX.

U.S. GDP Beats the Estimate but Durable Goods, Jobless Claims and PCE Disappoint

The U.S. economy grew more than previously estimated in the third quarter, according to a report from the government on Thursday. The Commerce Department said gross domestic product climbed by 3.5 percent in the last quarter, reflecting an upward revision from the previously reported 3.2 percent increase. Traders had priced in a modest upward revision to 3.3 percent from 3.2 percent.

The numbers indicate the GCP increased at its fastest pace in two years, much faster than the 1.4 percent growth revealed in the second quarter.

The internals of the report revealed that consumer spending climbed by an upwardly revised 3.0 percent in the third quarter. This was higher than the previously reported 2.8 percent increase.

Additionally, core consumer prices, which exclude food and energy prices, showed that the pace of price growth slowed to 1.7 percent in the third quarter from 1.8 percent in the second quarter.

Finally, the pace of GDP growth was upwardly revised. This reflected increases to non-residential fixed investment and state and local government spending.

Durable Goods Report

The U.S. Commerce Department reported on Thursday that new orders for U.S. manufactured goods showed a significant pullback in November. However, during the previous month, new orders for U.S. manufactured goods jumped significantly.

The report showed durable goods fell by 4.6 percent in November after surging up by 4.8 percent in October. Traders were looking for a decline of about 4.4 percent. Economists blamed the steep drop in durable goods in November on a pullback in orders for transportation equipment. They plunged by 13.2 percent in November after spiking by 12.3 percent in October.

Other U.S. Economic Reports

Initial jobless claims surprised traders by jumping to 275,000 last week. This was greater than the expected 256,000. There was very little reaction to the news because it may just be a one-time event. This report will become more significant if the increases start trending.

U.S. Personal Consumption Expenditure (PCE) price index for November was unchanged on the month, following a 0.3% gain the previous month. The annual increase also remained unchanged at 1.4%. The Fed’s target for PCE is 2%.

The December rate hike was based on this indicator moving toward the 2% target. If it comes out weak in January then this may delay the next Fed rate hike.

U.S. Personal Income was unchanged in November, coming in at 0.0%, according to the Commerce Department. Traders were looking for a reading of 0.3%. Personal Spending also missed the estimate with a reading of 0.2%, below the 0.4% forecast.

Markets

Volume continued to come in well-below average across the board on Thursday. The markets were mixed with higher risk stock indexes marginally lower along with the Dollar Index and Gold. Crude oil was up 1.26% on the U.S. economic data, a softer dollar and OPEC cut expectations.

European Stocks are Mixed with Italian Shares Outperforming

European stock markets are mostly slightly down in thinning holiday trade, with the DAX posting a small loss and the FTSE 100 down as well. The Italian MIB is outperforming and still holding on to a 0.33% gain amid Monte Paschi rescue hopes, but while U.K. and German indices remain at lofty heights investors seem reluctant to push levels out further like the U.S. where stock futures are lower and the Dow Jones is struggling to crack the much watched 20000 mark. In Asia the ASX managed to extend its Christmas rally, but elsewhere markets also closed mostly with a loss and in Hong Kong developers remained under pressure. Oil prices continued to drop following Wednesday’s larger than expected rise in crude oil inventories.

Oil prices are down for a second day, moderately extending declines sparked by the unexpected build in U.S. crude inventories in the latest reporting week. Libya also announced that it is expecting to deliver a further 270k barrels per day of crude, which follows news earlier in the week that pipelines from two of its key oil fields had reopened. This would add to Libya’s prevailing 600 bpd output, which itself was recently doubled. WTI is presently at $52.28, two cents above the low, which is a two-session low. Prices are still up 2.8% compared to last week, and up by 9.1% in compared to last month, which reflects the apparent commitment of OPEC and other key producers to trim supply.

The ECB’s Weidmann fears pressure could unduly delay rate hike. The Bundesbank central bank said in an interview with Germany’s Wirtschaftswoche that his concern is “that in case of unsound fiscal policy, monetary policy could come under pressure to forgo an interest rate increase even though a tightening would be warranted”. Considering the ECB’s track record so far, this clearly is a justified concern as Draghi’s policies seem to a large extent driven by a desire to keep peripheral yields down.

Italian Retail Sales Were Stronger than Expected

Italian October retail sales stronger than expected at 1.2% month over month, up from -0.5% month over month in the previous month. The marked improvement at the start of Q4 ties in with strong German and French numbers that month and backs expectations for an overall acceleration of GDP growth in Q4 across the Eurozone. Consumption remains a main driver and with headline inflation moving higher again as negative base effects from energy prices fall out of the equation wage pressures should also start to pick up again next year.

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Daily Economic Calendar – A Packed Day of Data Amid Dull Markets

To begin a busy day of data, we have the UK Consumer confidence data which is expected to come in at -8 but which has actually come in at a slightly better rate at -7 showing that the UK consumers have so far largely shrugged off the gloom surrounding Brexit. Following that, we have the Italian Retail sales data for October during the London session which is expected to move towards positive territory at 4%.

Towards the NY session we have the inflation expectations which is expected to come in at 1.4% YoY followed by the GDP reading, Durable Goods Data and Unemployment Claims data from the US with the GDP reading being a key data point to watch out for.

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Another Slow Day in The Markets

It has been another slow day in the markets so far with the holiday mood still gripping the markets and traders not being in their desks and going out on their holidays to enjoy themselves. This has resulted in very few trades and low liquidity in the markets and this is showing up in the prices which keep getting tighter and tighter in the different pairs. The majors did not have any major moves yesterday as they preferred to spend their time in consolidating for the bigger battles ahead. The dollar strength keeps coming and going moving the pairs this way and that but due to the lack of liquidity, there does not seem to be any specific direction to the moves.

Yesterday, the only important data of note was the weekly oil inventory data which came in larger than expected and this pushed down the oil prices as this means that the supply is more than what was expected. Today morning, the important piece of data was the New Zealand GDP data which came in much better than expected at 1.1% against the expected value of 0.8%. This showed that growth was expanding and is extremely positive for the economy. This could also mean that the NZ Central bank would be on hold in 2017 and may even start thinking about hiking rates if the good data begins to show up in other parts of the economy as well.

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Trading Hours on Christmas and New Year 2016

Christmas holiday and New Years Eve is just a week away. Traders and investors will have the time to kick back and enjoy spending time with the family, open presents and watch old movies.

Yet, for those who have open positions or can’t get enough of trading, financial markets are open during this time of the year. Trading in the holidays period can be tricky as volatility is low, However, some traders feel more comfortable with low trading volume and can turn markets liquidity into their benefit.

So there is one question left, When do markets open on Christmas holiday and New Years Eve?

Friday December 23rd, 2016: Markets open as usual

Sunday, December 25th, 2016: Markets close

Monday, December 26th, 2016: Markets open at 19:00 EST (Tuesday, 00:00 GMT)

Friday, December 30th, 2016: Markets open as usual

Sunday, January 1st, 2017: Markets close

Monday, January 2nd, 2017: Markets open at 19:00 EST (Tuesday, 00:00 GMT)

Pay attention that historically, liquidity tends to be low as traders take a break during Christmas and New Years. Low trading volume increases risk so we recommend to be cautious.

we wish you a merry Christmas and a happy new year!

European Shares Consolidate Despite Rally in Crude Oil

European stock markets are mostly down, with FTSE 100 and DAX little changed on the day, while Eurozone peripherals and especially Spain underperform. Banks are once again in focus, after Spain’s bank lost a European court ruling that said their floors on mortgage rates even as interbank rates dropped, was wrong. A Bank of Spain official said the maximum amount of mortgage floors that will be affected by the ruling is slightly above EUR 4 billion. The DAX is struggling to move higher after reaching new highs for the year yesterday. Oil prices are higher following the larger than expected draw in both crude oil and gasoline as reported by the American Petroleum Institute.

Spanish bank shares under pressure as the IBEX drops around 0.80% following a European Court of Justice ruling that requires lenders to reimburse mortgage customers who were overcharged on interest payments. The court ruled that lenders had incorrectly applied a “floor” to mortgage rates, even as inter-banking lending costs fell to a record low in the wake of the ECB’s very expansionary policy.

French Producer Prices Where Stronger than Expected in November

French producer price inflation jumped higher in November, with the annual reading rising to -0.2 % year over year from -0.8% year over year, this follows a much higher than expected German number yesterday, where the annual rate rose to 0.1 %year over year from -0.4% year over year and Portuguese readings on Monday, which saw the rate jumping to 0.0 %year over year from -1.0% year over year. A further sign that with base effects from lower oil prices falling out of the equation headline rates could come back up quicker than anticipated. Deflation risks are clearly no longer on the agenda and that not just due to the ECB’s accommodative policy.

Crude prices have logged a nine-day high of $53.77, since settling to $53.58, which is still a net 0.5% up on the day. Prices were boosted by API data that showed a 4.15 million barrel draw on U.S. crude inventories in the latest reporting week. Crude prices are now showing the biggest December gain since 2010, and this despite the USD index reaching a 14-year high this week. The next focus will the EIA weekly inventory report were consensus forecast are for a 2.5 million barrel draw, which would the fifth straight week of declining stocks.

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Dow Hits its 17th Record Close since the Election, US Bond Yield Rise

On rather low volume, thanks to the re-holiday liquidity drain, the financial markets in the United States moved higher as the Dow Jones Industrial Average continues to march towards 20,000.

At session highs the Dow Jones was within 13 point of hitting that milestone before it closed up 90 points after hitting a new intraday high. Financial stocks like Goldman Sachs helped to buoy to exchange. The Dow is now 25 point away from 20,000.

Global stocks and currencies are trading quiet on Wednesday morning as markets await the holidays. Oil edge higher on expected oil inventory to trade $53.72 per barrel, up 0.81%, natural gas also rise 2.88% amid inventory report and political concerns over gas supply.

However, we should put this move into some perspective. It is not about hitting that above mentioned milestone as we have had a strong rally since the election. Since November 8 the Dow has surged nearly eight percent and notched 17 record closes.

The global benchmark, the S&P 500 was up 0.3 percent as financial plays rose one percent. The tech heavy Nasdaq Composite gained 0.5 percent after hitting a new all-time high earlier in the day.

One of the biggest reasons for the markets to be moving higher, despite geopolitical tensions like the terror attack in Berlin, is the lack of economic data and the light volume before the holiday break. The lack of economic news has given the bulls the reigns to move the markets higher. As the week continues into Christmas and next week into the New Year, investors will be hard pressed to find a catalyst. There is not a lot that can end the current bull market.

Looking at the US Treasuries and currency markets, the selloff in the 10 year note continued pushing the yield towards 2.5597 percent. The shorter term two year note yield rose to 1.2326 percent.

The Treasury yields, in turn, held to support the US Dollar. The Dollar index rose 0.12 percent during the US trading session. The EUR/USD Forex market is trading at 1.039 and the yen was fetching 117.80 against the Dollar.

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Daily Economic Calendar – Oil Inventory Data Headlines a Lean Day

Looking ahead to today, we have the Public Sector Net Borrowing from the UK that will be released during the London session and this is likely to continue to be weak due to the ongoing risks surrounding the Brexit process. Then we have the Eurozone consumer confidence which is expected to come in at -6 and with all the fundamental and geopolitical risks around it, we expect the confidence to be low, comparable to previous months.

Moving on to the NY session and we have the oil inventory data and this will be closely watched as oil has been in the news of late due to the agreement of a deal between all the oil producers to cut their production to raise the oil prices and so this inventory data assumes significance in this context. One the corporate earnings side, we have the Accenture results topping the line on a lean day.

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Quiet Morning so Far

There is not much happening in the markets all around the world this morning. The economic news have dried up and with the holiday season almost on to us, we see a sense of boredom and low liquidity settling into the markets and this usually drives down the volatility and there is not much to look forward to in terms of trading.

It is all about the dollar so far in the markets and it has been so all of this week. The strength of the dollar has been waxing and waning during the course of the week and all other currencies have been swaying this way and that based on the strength of the dollar. The strength of the dollar is here to stay for the next few months atleast and irrespective of the bounces and the correction that may happen in the different pairs, the overlying theme will continue to be the strength of the dollar and the markets and the traders have to get used to that.

Looking ahead, we do not have much economic news from any part of the world today and the only piece of data is the oil inventory from the US which could affect the oil prices but with the lack of liquidity in the market, we do not expect any strong moves.
For more detailed analysis from the author, please visit NoaFX.

U.S. Stocks Inch Higher; Dow Nears Historic 20,000 Level

Demand for higher-yielding assets are helping to boost U.S. equities on Tuesday, while pressuring commodities and currencies.

U.S. Equities

The major U.S. stock indexes are trading higher on Tuesday as investors returned their focus to the prospects of a strong economy in 2017, given Donald Trump’s plan to rebuild America through massive fiscal spending. There was also little reaction to the geopolitical events in Turkey and German on Monday, suggesting they are isolated incidents and not likely to effect the global economic outlook.

At mid-morning, the Dow was up about 90 points, slightly below the 20,000 historical target. The Blue Chip average was led higher by financial giant Goldman Sachs. The benchmark S&P 500 Index was led higher by financial and telecommunication stocks. The NASDAQ Composite reached a new all-time high.

Volume is expected to be low and should continue to drop off as the week progresses. On Monday, the U.S. composite volume totaled 6.17 billion shares, the lowest since November 25, when only 3 billion shares were traded.

There are no major U.S. financial reports due on Tuesday, but investors will get the opportunity to react to a slew of earnings reports.

Treasury Yields

U.S. Treasury yields rebounded from Monday’s weakness and investor shrugged off the events in Turkey and Germany and returned their focus to the strength of the U.S. economy and expectations of higher interest rates in 2017.

The yield on the benchmark 10-year Treasury notes rose to around 2.5764. The 30-year U.S. Treasury Bond came in at 3.156.

Gold

Gold fell on Tuesday as investors reacted to a strong U.S. Dollar and rising equity prices. Gold tends to compete for investment capital with stocks so the often move in opposite directions. Essentially, the market is saying, “do you want to own paper or hard assets?” At this time, investors want the paper. If gold does rally, it will likely be fueled by short-covering and position-squaring ahead of the Christmas holiday.

Crude Oil

West Texas Intermediate and Brent Crude Oil traded higher on Tuesday as investors started to think about the possibility of shrinking global supply. This line of thinking is being fueled by predictions of a steep draw in U.S. crude oil stocks.

According to Reuters, Wednesday’s U.S. Energy Information Administration’s weekly inventories report is expected to show a 2.4 million barrel draw down.

In other potentially bullish news, Russian Energy Minister Alexander Novak told Russian newspaper Verdomosti that Russia may extend a production cut beyond the first half of the year if needed.

Stocks Gyrate Following Berlin Attack; BOJ Leaves Rates Unchanged

European stocks are slightly higher on the day, bouncing from negative territory following suspected terror attacks in Berlin.  The Bank of Japan left monetary policy unchanged as widely expected. Bunds and gilts were higher on the day but have eased.  The dollar continues to gain traction pushing the EUR/USD currency pair below the 104 handle and oil prices continued to rise recapturing the 53 handle.

Suspected terror attacks killed 12 injured 48 at Berlin Christmas market. In what looked eerily like a repeat of the events in Nice earlier in the year, a truck rammed into crowds at a Christmas market in Berlin. German officials said it was a probably terror attack and a suspect believed to be the driver was arrested, while a passenger in the truck was killed. Die Welt newspaper reported that the driver was a refugee from Pakistan and the attacks will likely further fuel populist movements across Europe ahead of elections in France, the Netherland’s and Germany next year and undermine Merkel’s position after her seemingly open door refugee policy already prompted wide spread criticism even if Merkel quickly qualified her policies and the door to Germany is closing again. It will certain add to geopolitical risks and risk aversion especially as the attack follows on the heels of the assassination of the Russian ambassador to Turkey in Ankara yesterday.

In Asia, the Bank of Japan left monetary policy unchanged, as had been widely anticipated in markets. This left interest rates at -0.1%, unchanged since January. The new QQE with yield curve control anchor, announced in September’s was maintained, along with the Y80 trillion per year asset purchase and Y6 trillion ETF purchase targets. The “inflation-overshooting commitment,” also first announced in September and where the BoJ is committing to expanding the money base until CPI exceeds the year over year target of 2% and stays above target, was also reaffirmed. The central bank noted that the economy was recovering at a modest pace highlighting a pickup in exports.

In Europe the Eurozone reported a current account surplus that widened in October. The Eurozone posted a current account surplus of EUR 28.4 billion in October, up from EUR 27.7 billion in the previous month, with three months’ trend also picking up as the services balance improved, while the surplus in the goods balance narrowed somewhat in October. The primary income balance widened to EUR 6.1 billion. The unadjusted current account balanced showed an accumulated surplus of EUR 343.0 billion in the 12 months to October, up from EUR 317.3 billion in the corresponding period last year, with improved surpluses in both goods and services balances. The October financial account showed direct and portfolio investment inflows of EUR 65.1 bin in October and accumulated inflows of EUR 699.1 billion in the 12 months to October this year, a sharp rise compared to the EUR 344.7 billion in the 12 months to October 2015.

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Trump Stock Market Rally Continues, US Dollar is on Fire

On Monday, US financial markets drifted higher on low volume trade. Traders bought some recently less-favored sectors and some post-election play lagged as the Electoral College confirmed Donald Trump would be the next President of the United States. US futures continue to rise on Tuesday morning along with most global indices.

The US Dollar strength continues on Tuesday morning as the greenback climbs versus most currencies. US dollar index trades at 103.34. USD/JPY climbed to 118.70, 0.90% after BoJ left interest rate unchanged. EUR/USD is trading below 1.04.

What we saw was a technicality of overflow in equities. People picked up plays that had been lagging and overall gains on the markets have been coming smaller and smaller. Telecommunications, which are the second best performer on the S&P 500 since the election led gainers rising 1.1 percent. This was followed by real estate, industrials and technology stocks.

Both real estate and technology plays are two of the biggest laggards since Election Day. Financial stocks are the top performer and have been clinging on to slight gains while energy stocks have been the third worst performer since the election and moved lower on Monday.

There is still a lot of consolidation in the equity markets and the path of least resistance is higher. This means we could still see the S&P 500 tack on some solid gains this week into the New Year.

As far as technology plays were concerned, the Nasdaq 100 hit a new all-time intraday high while all three of the major indices came within three quarters of percent of their record highs.

Turning to economic news, the flash Markit PMI for December printed at 53.4. This was down from the 54.6 print for the month of November.

Federal Reserve Board Chair Janet Yellen said that the US had its strongest job market in a decade. There are also signs that wage growth is starting to pick up. These comments came at a speech she was giving at the University of Baltimore commencement ceremony.

Last week, the Federal Reserve raised its Fed Funds rate for the second time in a decade. They also surprised the markets by steepening their rate hike path in 2017 to three rate hikes. Investors were expecting two.

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Daily Economic Calendar – Yen Falls after BoJ Meeting

Looking ahead at the economic agenda for today, we have the BOJ interest rate decision which remained unchanged at -0.1%. The yen has suffered a lot lately and so, the Japanese currency continues to weaken after the BoJ statement. Before that would be the RBA minutes of the meeting held in the early part of December where the RBA chose to keep rates unchanged but expressed concern at the pace of progress of the economy. The tone of the minutes would be crucial to determine the short term direction of the AUD.

Later on, we have the German PPI where the November expectations are expected to come in at -0.2% YoY. Then we have the corporate earnings from some of the biggies like Nike, Fedex, Blackberry and General Mills.

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BOJ Leaves Policy Unchanged

There have been 2 major announcements on the economic front in the morning as the RBA released the minutes of the meeting that was held in the first week of December and where they had decided to leave the rates on hold. The minutes said that the rising AUD could complicate the economic recovery. It also expressed concern over the labor market which has delayed its recovery and overall, it is concerned about the uncertainty surrounding the economy and the jobs market. This opens the door slightly for rate cut but with the next rate announcement in February only and with no clear indication of a cut yet from the RBA, it will be left to the data that will come along in January for the market to form an opinion on whether the economy is on the recovery path or not. If the data continues to come in bad, then we can safely expect a rate cut in the near future.

The other major announcement was the BOJ rates and policy decision and both of these have been maintained at status quo. The rates have not been changed and the policy has also been maintained with no changes with the BOJ continuing its policy of buying JGBs at the current pace. This piece of news caused weakness in the yen and with a press conference from Kuroda scheduled for a couple of hours later, we could see some more volatility in the yen related pairs during the course of the day.

Overnight, we had the unfortunate geopolitical events of the Russian Ambassador to Turkey being shot dead and several people in a Christmas market being killed in Berlin, though it is still not clear whether they are to be classified as terrorist events. We also had Yellen expressing happiness with the way the labor and wage market is growing in the US and this has helped to keep the dollar momentum going, which is expected to continue for the rest of the day.
For more detailed analysis from the author, please visit NoaFX.

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U.S. Stocks Edge Higher as Investors Await Labor Market Speech by Yellen

U.S. equity markets are trading marginally higher on Monday, but volume is extremely low. This may be because of central bank activity early Tuesday or an early Christmas break for mutual fund managers and institutions. Technology stocks are the biggest gainer.

Early Tuesday, the Reserve Bank of Australia will deliver the minutes from its recent monetary policy meeting. The Bank of Japan will hold a monetary policy meeting itself. It is expected to issue an upgrade for its economic outlook. It is not expected to alter its current strategy.

In U.S. economic news, the Flash U.S. Markit PMI Services for December was 53.4, down slightly from 54.6 in November. Later today, Fed Chair Janet Yellen is scheduled to speak on the job market in the afternoon at a University of Baltimore graduation commencement.

U.S. Treasurys

U.S. Treasury yields were down slightly on Monday as investors awaited the speech from Yellen at 1830 GMT. The benchmark 10-year Treasury Notes yield was lower at around 2.551 percent. The yield on the 30-year Treasury Bond was also lower at 3.136 percent.

Volume in the Treasury markets could be down this week as we begin the Christmas and New Year holiday season. Last week, the Fed raised interest rates for only the second time in ten years and projected at least three hikes for next year.

Forex

March U.S. Dollar Index futures were lower on Monday, but the market remained near its 14-year high. Volume is light, but it’s been enough to prop up the market at times as investors continue to pin their hopes on the fiscal expansion plans by President-elect Donald Trump and next year’s anticipated rate hikes.

The USD/JPY was under pressure as investors reacted to Japan’s better-than-expected export data from November. Position-squaring and profit-taking ahead of the BOJ meeting also weighed on the Forex pair. The Dollar/Yen was underpinned by firmer stock prices.

New data from the Commodity Futures Trading Commission showed U.S. Dollar net long positions were little changed in the week to December 13. The news reaffirmed the bullish market that began with the election of Donald Trump as president on November 18. Traders should also note that net shorts on the Japanese Yen rose to their largest since early December 2015.

Gold

December Comex Gold inched higher on Monday as investors reacted to the weakness in the U.S. Dollar. Gains were capped, however, by longer-term traders betting on weaker prices because of the Fed’s hawkish tone.

Crude Oil

March West Texas Intermediate Crude Oil rallied early in the session in reaction to potentially bullish export issues in Libya. However, the early strength was negated after the U.S. Dollar rallied from its low.

European Peripherals Outperform Following Stronger than Expected IFO Report

European stocks are mixed with peripherals outperforming after the stronger than expected IFO reading. The FTSE 100 is down despite a slightly weaker pound. U.S. stock futures are moving higher, after a largely weaker session in Asia overnight, where Japanese markets were hit by a stronger Yen and the Hang Seng remained under pressure as property developers are hit by rising mortgage costs and dwindling investment from the mainland. Oil prices are down from earlier higher, with WTI holding near USD 52 per barrel.

German IFO Jumps More than Expected

German IFO jumps higher again, with the overall reading rising to 111.0 from 110.4, in line with our forecast and above our median of 110.6. After the strong German manufacturing, PMI and the jump in orders it was no surprise what the current conditions indicator was the main driver, with the reading jumping to 116.6 from 115.6, but the future expectations number also nudged higher. The December improvement meant that the overall Ifo rose to A33.0 in Q4, from 30.2 in the second quarter. The IFO institute already said last week that Q4 GDP growth could surprise on the upside and lifted its growth forecast for next year.

It seems the German recovery is coming along nicely. Yet, the very expansionary ECB policy and the tight labor market conditions also mean there is rising risk of imbalances, including an acceleration in inflationary pressures over the medium term. The low interest rate environment is also putting a strain on German banks and the German pension system, especially as home ownership rates and private sector wealth levels are lower than elsewhere in Europe.

German IFO warns ECB rates may be too low for the Eurozone. IFO head Fuest said that rates are too low for Germany, warning that while the German industry is booming, because of the cheap euro and the obvious boom in the construction sector is fueled by low returns almost everywhere else. While the ECB is taking out ever more insurance against uncertainties, it risks the buildup of imbalances certainly in the Eurozone’s largest economy, where consumers are also facing rising pension shortfalls.

The Bundsbank sees strong growth in Q4. The German Bundesbank said in its latest monthly report that the economy shifted into a higher gear in the last quarter of the year, with manufacturing likely to pick up strongly. At the same time inflation, could rise above 1% again in December. The latter would still be clearly below the ECB’s definition of price stability, but is a further sign that headline rates are trending higher and with German labor cost inflation also topping the Eurozone average, it is hard to disagree with the IFO institute that the ECB’s interest rates are too low for Germany and maybe also for the Eurozone.

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Slow Start to a Slow Week

It is likely to be a slow couple of weeks till the end of the year as the holiday season begins and the traders leave their desks to enjoy at the beaches and some sunshine. Trading is a difficult but highly rewarding job if done the right way and it is important for the traders to take time off and relax while they can and what better time to do that than the end of the year when a large part of the world is in a holiday mood and the markets tend to be slow and dull. It is of no use to fight the markets in such a situation and better to make use of this time to relax and recharge the batteries and prepare for the next year.

With the Fed announcing a rate hike and further hikes in 2017, it is going to be an interesting year ahead. We believe that the dollar would continue to gain in strength in the coming months and any period of correction in the dollar should be viewed as an opportunity to go long on the dollar. The yen and the euro are likely to be most vulnerable against the dollar along with the pound, which has its own set of issues to deal with surrounding the Brexit process.

It has been a slow morning so far with a bit of correction in the dollar strength that was seen last week. Nothing alarming so far but it is going to be keenly watched. We did have the Australian budget outlook and it was more on expected lines with the budget assuming lower oil and coal prices for the coming year and it was generally consistent with the AAA rating that It had. For today, we have the German Ifo Business Climate during the London session which is likely to bring in a bit of volatility.

 
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