The Dollar Index was under pressure throughout the week. The FOMC Minutes was Neutral. Few policymakers noted that median Fed projections published in December would bring too many rate hikes in 2018, but a few others stated that more hikes would be required in 2018 than implied by the projections. Policymakers generally saw medium-term inflation outlook as little changed, though “several” were concerned that persistently weak inflation may have hampered inflation expectations. Also, the Nonfarm Payrolls missed expectations with only 148K jobs gained, well below the 190K forecast, while the unemployment rate held steady at 4.1% and wages remained at 2.5%, however, November’s wage growth was revised down to 2.4% from 2.5%. The employment data for October and November were also revised to show 9,000 fewer jobs created.
- FED Speaks: Bill Dudley, Eric Rosengren, Raphael Bostic, James Bullard and John Williams are expected to deliver comments in the week ahead. Also, Neel Kashkari and Charles Evans, both of whom voted against the December rate hike, are among the list of speakers.
- US Producer Price Index: The headline PPI rose by 0.4% in November, meeting expectations. A reading of 0.2% is expected for December. Core PPI surprised to the upside with +0.3% and 0.2% is expected now. Even though the PPI figures are seen as a prelude to inflation, the recent rises haven’t resulted in higher consumer prices.
- US Retail Sales (Friday): The US Retail Sales rose by 0.8% in November while core sales jumped by 1%. As per the prediction model, It is expected the US Retail Sales to show an increase of 1% (Consensus: 0.4%) for the month of December. The Motor Vehicles and Parts Distributors contributes to 20% to the overall Retail Sales and is expected to increase by around 8%. The Non-store Retailers are expected to show a growth of around 27% as this month includes the Christmas sales. Also, Electronic Appliances, Clothing and Clothing Accessories, Sporting Goods and General Merchandise Stores are all expected to show substantial growth as a result of Christmas shopping.
- US Consumer Price Index (Friday):In November, headline CPI inflation rose by 0.4% but core CPI disappointed with only 0.1%. It is expected the US CPI to come in at 0.2% (Consensus: 0.2%). The forecast model is based on a multi-regression analysis by using Producer Price Index and Consensus as the explanatory variables to estimate the parameters. This is the last report for 2017 and will be closely watched for clues on inflation.
- In the week ahead, the focus will fall on to U.S. inflation data, US Retail Sales data and comments by a number of Fed speakers for further clues on the timing of the next rate hike. However, the Fed funds futures have priced in a more than 67% chance the U.S. central bank will hike interest rates in March, which has dropped from 71% seen before the NFP report.
In Europe, German jobless rate fell to a record low at 5.5%, with a number of unemployed down 183K compared with the year earlier. The eurozone PMI Composite hit 58.1, its highest level in 80 months. Both these data points signal that the growth in the eurozone region continues to expand and accelerate. Also, recent comments from ECBs Nowotny and Coeure hinting that the policymakers are becoming comfortable in talking about the end of the central bank’s QE program in September 2018 if the eurozone economy continues to progress.
- German Elections: German Chancellor Merkel’s conservatives and social democrats have agreed to hold explanatory talks on possible government from Jan 7th. The five-day talks will include Merkel’s Christian Democrats (CDU), its sister party the Christian Social Union (CSU), and the Social Democrats (SPD). This is seen as her last chance to form a stable coalition.
- ECB Meeting Minutes (Thursday): The European Central Bank began reducing its bond-buying scheme in January, in a decision made already in October. However, there are differences between the policymakers regarding the decision to keep the QE open ended as seen in latest comments. Comments regarding the QE will be closely watched.
- German Trade Balance (Tuesday): Germany’s trade balance surplus results in a surplus for the whole eurozone. In October, Germany had a surplus of 19.9 billion euros. A similar figure of 20.7 billion is expected.
- Unemployment Rate (Tuesday): The jobless rate has fallen in the past few years since topping 12% in 2013 and reached 8.8% in November. A drop to 8.7% is expected for December.
- Jens Weidmann Talks (Friday):The president of the German central bank, the Bundesbank, is expected to speak in Bavaria. With the German Coalition talks beginning, the leaders from the three potential allies have previously met on 3 January to discuss preliminary issues, and have sounded optimistic based on a joint declaration that stated, “Confidence has grown, and we go into the talks with optimism.” Also, the upward revision in the eurozone PMI, rise in German retail sales and drop in unemployment points towards a stronger eurozone economy. However, the December inflation estimate fell to 1.4% and ECB’s Draghi is expected to highlight the inflation issue before talking about taper possibilities.
While the Dollar was weak against most currencies in the past week, it has been rising against the Japanese Yen as risk appetite is the driving reason behind the move. U.S. stocks started the New Year with fresh record highs, despite the overall weakness of the Dollar and the 10-year U.S. – Japanese Yield spread reached its highest level in 9 years, in favor of the Dollar. Also, Bank of Japan Governor Kuroda stated that they will continue patiently with easy monetary policy, which further weakened the Yen.
- Geopolitics: South Korean Unification Ministry spokesman Baik Tae-hyun told reporters that North Korea informed Seoul that it has accepted the offer to initiate talks. This will be the first high-level contact between the two countries in more than two years. The talks will be held on Tuesday, with the agenda being “issues related to improving inter-Korean relationships, including the Pyeongchang Olympic Games.”
- With no tier one economic data to be released from Japan in the week ahead, the pair is expected to be driven by the Dollar Index, geopolitics and the risk appetite.
The Canadian Dollar strengthened after an optimistic Canadian labor report. After adding nearly 80K jobs in November, Canada added other 78.6K jobs in December, significantly beating the 2K consensus. This resulted in the Unemployment Rate falling to 5.7%, its lowest level in 4 decades. Also, stronger Oil prices have resulted in additional gains for the Canadian Dollar.
- BOC Business Outlook Survey (Monday): The BOC releases its business outlook survey in the week ahead. It is expected a strong signal in the BOC Business Outlook Survey. In the recent releases, it was noticed that it has been used to send signals about the economy and future rate hikes. Any potential signal about rising inflation or tighter capacity, it will clear the way for a hike and strengthen the Canadian Dollar.
- Housing Starts (Tuesday): The report showed a rise to 252.1K in November from October’s downwardly revised 222.5K, driving a six-month trend to its highest point in almost 10 years. A strong reading is expected for December as well.
- Oil: WTI opened above $60 per barrel for the first time since January 2014, as the prices were buoyed by large anti-government rallies in Iran, inventory draws, colder weather and supply cuts led by OPEC and Russia. U.S. crude oil inventories have fallen by almost 20% from highs seen last March, to 431.9 million barrels. However, prices settled lower as major pipelines in Libya and the UK restarted and U.S production soared to the highest level in more than four decades.
- The recent stellar Canadian Jobs reporthas resulted in the odds of a rate hike this month increasing to 70% from 40%. Also, continued strength in Oil prices is expected to strengthen the Canadian Dollar further.
With lack of Brexit developments, the pair was driven largely by the weakness in Dollar Index. The UK manufacturing and construction PMI decreased, however, services PMI and house prices increased. UK Chancellor Hammond said he would not rule out a customs union with the EU as they would be guided by what brings the greatest economic advantage to the U.K. This was seen as a sign that the government is aiming for a soft Brexit.
- Brexit: U.K. Politicians continue to work towards a Brexit deal, as the next significant event being the parliamentary debate on January 16 and 17. However, with lack of Brexit updates, the UK Politics is expected to drive the pair as UK PM Theresa May said on Sunday she would be making changes to her team of ministers soon following the forced resignation of her deputy Damian Green in December.
- Industrial Production (Wednesday): The Industrial Production is expected to rise 0.4%, after a flat reading in October and the U.K. Manufacturing Production for November is expected to increase 0.3% following an increase of 0.1% in the preceding month.
- UK NIESR GDP Estimate (Wednesday): The NIESR forecasted real GDP growth of 0.5% for the final three months of the year, similar to the September quarter. A reading of 0.2% is expected.
- BOE Credit Conditions Survey (Thursday):The last Bank of England’s credit condition survey indicated that lenders cut the amount of unsecured credit available in the third quarter of 2017 at the fastest rate since 2009, with a further significant reduction seen in the fourth quarter.
- The mixed report of UK PMIs for December did not provide enough support for the Pound. Also, the Pound is expected to come under pressure in the week ahead due to renewed political jitters, with anticipation for Theresa May’s cabinet reshuffle.
The Australian Dollar continued its strong run gaining on four out of five trading days. The Australian Dollar is nearly up 4-cents in less than a month. The Chinese Caixin Services PMI for December came in at 53.9, its fastest rise since August 2014. The Australian Dollar was also supported by the metals as Iron Ore rose to $76.54 a ton, leaving it at the highest level since September 13 last year and Copper price increased after China cut scrap imports by 94%.
- Retail Sales (Thursday): The Retail Sales for October showed an increase of 0.5%, following three months of dismal readings. An increase of 0.4% is expected for November as the Australian NAB Cashless Retail Sales Index showed a strong growth in the month of November (1.6%) and was boosted by strength in household goods retailing (1.6%).
- The recent Australian Trade Balance report reported a deficit, while the previous reported surplus had also been revised to a deficit. November’s report is the biggest deficit in over a year, and is the second deficit month in a row, which is expected to weigh on the Q4 GDP.
The pair had a neutral week with USD/CHF trading between the 0.97 and 0.98 range. With lack of fundamentals from Switzerland, the pair was driven by the Dollar Index.
- Consumer Price Index (Monday): The CPI for November fell to 0.8% y/y from 0.9% seen in October. A similar reading is expected for the month of December.
- Unemployment Rate (Tuesday): The Unemployment Rate for November dropped to 3%, the lowest level seen since December 2012. It is expected to remain unchanged.
- Retail Sales (Tuesday): Since April 2017, the Swiss Retail Sales have reported negative readings in almost all months, with its biggest drop for 2017 seen in the October reading, which came in at -3%.
In the week ahead, the focus will fall on to U.S. inflation data, US Retail Sales data and comments by a number of Fed speakers for further clues on the timing of the next rate hike. However, the Fed funds futures have priced in a more than 67% chance the U.S. central bank will hike interest rates in March, which has dropped from 71% seen before the NFP report.
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