News and Events:
Golds limited recovery
We believe that a significant portion of the gold sell off was triggered by the rally in US long-dated yields. The steepening of US yield curves was driven by renewed inflation expectations in the US on the back of president-elect Trump’s expected fiscal stimulus plan.
While details of Trump’s plans remain ultra-light we do see that even the $600bn in spending and $4.4trn in tax breaks over a ten year period expectation implied by Fed fund futures are still not significantly pricing in rate hikes in 2017 (likelihood of a 25bp hike in Dec is nearing 95%). This would indicate that without additional information or execution we will remain scpetical that these levels will result in yields. Therefore, we expect the selloff in bonds and gold to taper in the near term.
Gold has become less of an inflation hedge and more of safe haven and a central bank currency debasement hedge (Trump now seen in less destabilizing terms and central bank stimulus is easing). This means that with the cost of carry due to the rally in bond yields increasing investors are liquidating gold. $1220 should provide support, while the recovery bounce could reach $1250/60.
Trump still in effect
No matter where in the world an investor is located there is a Trump issue driving market volatility. Say what we will about the new president-elect but he has absolutely disrupted the system. We suspect that Trump will immediately target a quick fiscal stimulus boost. He and close advisors have repeatedly indicated that a spend on infrastructure and military is coming, while congress’ appetite for fiscal austerity is clearly waning. A fiscal spend of $600bn should boost GDP growth 0.3% or 0.4% making for an easy win. The steady rotation out of long-end yields into short, and equites and capital flow from EM into DM looks to have been the smart move.
A spend of this size in an economy already showing signs of inflation is rational (tactical, not speculative). We expect that the greenback has a bit more to run as the story gets digested. Yet, mid and long term forecasts of USD strength feel over-baked to us at this point. Given what we know markets should anticipate, stimulus equalling a fiscal spend of approximately $600bn and a tax break of roughly 4.4trn over ten years. Yet despite these impressive numbers, Fed fund probability is less than 50% for an additional hike in 2017. The Fed’s own forecast of a 3.00% normalization cycle is overly optimistic in our view and is more likely to be 1.50% given the cyclical downturn we are predicting. Considering the steady pace of economic improvement and loose monetary policy, CPI inflation is at a soft 1.7%. It is more likely that easy to get, low paying jobs are luring millennials back into the workforce which is raising the participation level rather than dropping unemployment rate and causing wage pressures.
President-elect Trump’s only dependable characteristic is his volatile nature. Even top psychoanalysts have no idea who will turn up for work on Jan 20th. The debate now making the media rounds is who gets the key positions. The latest gossip is that Mitt Romney could fill Secretary of State. For us, we remain focused on areas that will have a direct impact on trade, such as Head of Treasury and Head of Commerce. Should University of California economic professor Peer Navarro get picked for either of these positions, markets should expect US/China relations to go on a bumpy ride. Mr. Navarro has been crucial in shaping Trump’s platform on protectionism and anti-trade deals skew. Day one would likely bring the end of TPP and TIPP, while branding China a currency manipulator. The very last thing a falling trade and global demand slow down needs is a US/China trade war.
Today’s Key Issues (time in GMT):
- Sep ECB Current Account SA, last 29.7b EUR / 09:00
- Sep Current Account NSA, last 23.6b EUR / 09:00
- ESV Swedish Budget Forecasts SEK / 09:00
- BOE’s Broadbent Speaks at Conference in London GBP / 09:10
- Sep Current Account Balance, last 3368m EUR / 09:30
- Nov IGP-M Inflation 2nd Preview, exp -0,05%, last 0,16% BRL / 10:00
- Bloomberg Nov. Sweden Economic Survey SEK / 10:00
- Bloomberg Nov. Norway Economic Survey NOK / 10:05
- Bloomberg Nov. Denmark Economic Survey DKK / 10:10
- Bundesbank’s Weidmann Speaks at Euro Finance Week in Frankfurt EUR / 10:30
- Fed’s Bullard, SNB’s Maechler Speak on Panel in Frankfurt EUR / 10:45
- Oct PPI MoM, exp 1,00%, last 0,70% RUB / 13:00
- Oct PPI YoY, exp 4,20%, last 5,10% RUB / 13:00
- Oct Unemployment Rate, exp 5,40%, last 5,20% RUB / 13:00
- Oct Real Disposable Income, exp -3,70%, last -2,80% RUB / 13:00
- Oct Real Wages YoY, exp 2,40%, last 2,80% RUB / 13:00
- Oct Retail Sales Real MoM, exp 2,00%, last -1,40% RUB / 13:00
- Oct Retail Sales Real YoY, exp -3,00%, last -3,60% RUB / 13:00
- Oct CPI NSA MoM, exp 0,20%, last 0,10% CAD / 13:30
- Oct CPI YoY, exp 1,50%, last 1,30% CAD / 13:30
- Oct Consumer Price Index, last 128,8 CAD / 13:30
- Oct CPI Core MoM, exp 0,30%, last 0,20% CAD / 13:30
- Oct CPI Core YoY, exp 1,80%, last 1,80% CAD / 13:30
- Oct CPI SA MoM, last 0,20% CAD / 13:30
- Oct CPI Core SA MoM, last 0,10% CAD / 13:30
- Bloomberg Nov. Canada Economic Survey CAD / 14:00
- Fed’s George Speaks in Houston USD / 14:30
- Fed’s Dudley Gives Welcoming Remarks, Answers Questions in NY USD / 14:35
- Oct Leading Index, exp 0,10%, last 0,20% USD / 15:00
- Nov Kansas City Fed Manf. Activity, last 6 USD / 16:00
- Fed’s Kaplan Speaks in Houston USD / 18:30
- Oct Tax Collections, exp 110000m, last 94770m BRL / 23:00
- Oct Formal Job Creation Total, exp -85000, last -39282 BRL / 23:00
- Frankfurt Hosts Euro Finance Week Conference EUR / 23:00
The Risk Today:
EUR/USD keeps on going lower. Hourly resistance is given at 1.0521 (13/04/2016 low). The technical structure suggests further decline. Expected to see continued bearish pressures. In the longer term, the death cross indicates a further bearish bias despite the pair has increased since last December. Key resistance holds at 1.1714 (24/08/2015 high). Strong support is given at 1.0458 (16/03/2015 low).
GBP/USD has exited medium-term uptrend channel. Resistance stands far away at 1.2674 (11/11/2016 high). Expected to see confirmation of a new bearish trend by breaking hourly resistance lies at 1.2380 (15/11/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY ‘s buying pressures are important. Hourly resistance now lies at 109.76 (16/11/2016 high) while hourly support lies at 107.77 (15/11/2016 low). Hourly support can be found at 108.56 (17/11/2016). Expected to see further upside moves. 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 buying pressures are important. Yet, some profit taking are likely to start and we may expect further retracement. However, hourly resistance at 1.0058 (16/11/2016 high) has been broken, Hourly support is given at 0.9929 (15/11/2016 low). 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.
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