Hawkish Yellen has been supported by strong headline labour market releases, however we warrant attention on a softer average hourly earnings release. The participation rate rose slightly indicating there is stillsome slack in the labour market.TheUST 10y yields closed the weekabove the key 2.50% level with the next resistance level being 2.60%. We continue to stay bullish on dollar as yield differentials continue to suggest strength against low yield DM (Developed Market) currencies.
In the lead up to the March meeting we expect dollar strength and if the Trump Administration provide more clarity on fiscal policy than we will see further support on the reflation theme and USD strength. Markets will be eagerly awaiting the March 14-15 FOMC(Federal Open Market Committee) meeting to assess the dot-plot to see what changes if any have been made to the future rate path projections.
Figure 1 Daily DXY (Source: Tradingview)
We continue to stay bearish EUR with the diverging economic backdrop leaving the ECB(European Central Bank) on the sidelines while political uncertainty will continue to weigh on the EUR. We see the recent EUR rally as an opportunity to sell.
The ECB may have made an upward revision to headline inflation but this is mainly due to higher energy prices while core inflation remains muted. If the Wilders’ Freedom Party(PVV) exceed polls expectations in the Netherlands Elections (15 March) there will be more uncertainty about the French Elections (April 23, May 7) and markets will start to question the stability of the Eurozone pushing the EUR lower.
Figure 2 EURUSD (Source: Tradingview)
Long USDJPY is the best way to trade yield spreads widening as the BoJ (Bank of Japan) maintain their 10y JGB yields near zero. Having been on the brink of deflation for the past century, the BoJwill not be quick to tighten financial conditions even as inflation picks up. This will result in lower JPY real yields that will transfer into downward pressure on JPY. Lower real yields is also currently driven by weak inflation figures with a majority of inflationary pressures being stimulated by a weaker currency and high energy prices, however we view these asbeing unsustainable factors.
Figure 3 USDJPY (Source: Tradingview)
GBP has been driven mainly by politics as data continues to surprise to the upside. We view GBP as undervalued but see risk to another test of the lows in cable. As Article 50 is triggered over the next few weeks we should see Brexit headlines reappearing triggering GBP weakness but we would use this as an opportunity to short EURGBP. Risks to a medium-term bullish GBP are if markets price in further BoE(Bank of England) easing due to a deterioration in the UK economy.
Figure 4 GBPUSD (Source: Tradingview)
The SNB(Swiss National Bank) continue to intervene in EURCHF seeing the 1.06 support level holding. Traders will use CHF as a political hedge and we see this as an opportunity to go long EURCHF after the Netherlands election if the populist PVV don’t receive as many votes as polls expect triggering a potential unwind of short EURCHF positions.
Figure 5 USDCHF (Source: Tradingview)
The RBA(Reserve Bank of Australia) left the cash rate at 1.50% and maintained their wait and see tone. The board remains optimistic on the growth transition however they noted they expect inflation to remain low, income growth has been soft and employment has been concentrated in part-time jobs.Governor Lowe has given us the impression they seem comfortable with AUD around these leaves. Speculation in iron ore futures has driven prices to an inflated level and we expect a pullback to occur however fundamentals are still strong. We have a bearish view on AUDUSD and AUDCHF as we see 2y yield differentials diverging, risk sentiment coming off and a pullback in iron ore.
Figure 6 AUDUSD (Source: Tradingview)
NZDUSD has broken through key support levels and has no near term support levels. We are bearish AUDNZD but wait for an appropriate level to enter. We see AUD more exposed than NZD to a China slow down. New Zealand has closed their output gap and we see RBNZ(Reserve Bank of New Zealand) as more likely to hike rates in 2017 than the RBA. NZDUSD should continue to depreciate as it becomes more sensitive to US yields.
Figure 8 NZDUSD (Source: Tradingview)