Weekly forecast - page 23
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Investors brace for 2017 shocks after surprise 2016 run
After a late-year rally fueled by the U.S. election pushed stocks to surprising new peaks, investors are wary that the market could be primed for a spill to start 2017.
The benchmark S&P 500 .SPX is set to post a roughly 10 percent price gain for 2016 and around 12 percent on a total return basis, including reinvested dividends. That tops the single-digit increase expected by market participants polled by Reuters a year ago, with more than half of the advance coming after Donald Trump's Nov. 8 presidential victory.
The Dow Jones Industrial Average .DJI was on pace to rise more than 13 percent for 2016, with a total return above 16 percent.
From here, though, investors expect the S&P 500 to rise by mid-single-digits in 2017, according to a Reuters poll earlier this month.
Reflecting the renewed bullishness for equities, U.S.-based stock funds pulled in $11.8 billion in the week ended Dec. 28, data from Lipper showed on Thursday, marking a sharp reversal from most of the year.
But investors see several warning signs for 2017, including stocks at traditionally expensive valuations; investors registering particularly bullish sentiment; and the Federal Reserve primed to raise interest rates several times this year.
Meanwhile, a market lifted in part by hopes for Trump's policy agenda could be deflated should any of those hopes be dented once he begins in office. The S&P has rallied by more than 5 percent since Election Day, while the Dow has climbed by more than 8 percent.
"If anything, we head into the new year with the likelihood we will probably see some near-term weakness in equities primarily because of the move we’ve seen higher," said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York. "You will see some winning trades being taken off the table and, in general, a reset."
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USD: Any Weakness Early This Month To Prove Temporary
Looking at how spot is trading relative to interest rate spreads and looking at our short-term FX valuation models point to the US dollar being very well priced for continued good news on the economy. The 2-year yield spread has moved notably given the surge in the US 2-year yield to 1.21% - a level just below the high in December of 1.27%, which was the highest since August 2009.
The move since Trump’s victory is close to 50bps and hence the data from the US will have to continue to show notable strength in order to avoid a correction lower in short-term yields. There will be plenty of data this week to test the level o US yields and any downside surprises in the US could see the EUR/USD rate correct higher ahead of Trump’s inauguration on 20th January. However, we would argue that the dollar is more vulnerable against other currencies. Again based on our short-term models, the dollar has over-extended versus the yen, Australian dollar and the Norwegian krone. Any disappointment this week in the US data may well see these currencies out-perform.
That said, as stated above any move weaker for the US dollar will likely prove temporary and would be more a reflection of the large gains recorded since Trump’s victory in November. The US economy is certainly on a much firmer footing than at this point last year when expectations of Fed tightening faded rapidly and the dollar weakened notably. That is unlikely to be repeated this year and if anything the markets will ultimately begin to contemplate the possibility of the Fed raising rates at the March FOMC meeting. In that regard the minutes of the December FOMC meeting, released tomorrow, may prove interesting.
But any US dollar weakness early this month should not be viewed as the start of a sustained period of dollar depreciation.
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The GBP/JPY pair went back and forth during the week, showing signs of exhaustion. There is quite a bit of support at the 140-level underneath, which should be essentially what I would consider the “floor” in this market. I see the 150 level above there should be massively resistive though, so expect volatility. I like the idea of buying this pair on dips, as we have recently broken above a rather significant resistance barrier. Am a buyer, and not a seller, unless of course we managed to break down below the 138 handle where I would have to rethink my entire position.
USD: Buying USD Dips. Bullish.
We believe the current USD correction offers an opportunity to enter long USD trades in line with USD bullish view. The current period bears little resemblance to the beginning of last year which led to a lasting peak in USD for many months as the Fed turned more dovish. We still believe in the reflationary theme and expect a hawkish Fed, expectations around fiscal policy and the threat of protectionist measures will keep USD supported. The Fed minutes this week show the Fed is comfortable with the market's hawkish interpretation of the SEP dots. Crowded positioning remains a risk in the near term in addition to disappointment on the policy front.
EUR: Selling Rallies. Bearish.
The development in real yields and ECB policy offer good reasons to be short the EUR. The ECB has developed a dovish framework even as signs of inflation are appearing in the Eurozone. While the EUR REER trades 22% above its low point reached in 2000, the increasing economic divergence within the Euro bloc and the rising populist risk via upcoming elections in Holland, France and Germany all argue for a weaker EUR. As global inflationary pressures rise and risk appetite stays strong, we would expect the EUR to weaken. We add a short EURUSD limit order to our portfolio this week.*
JPY: Buying USD/JPY Dips. Bearish.
We like buying the recent dip in USDJPY as our core views have not changed. We continue to expect USDJPY to rise to our 130 target in mid-2018. Reflationary impulses support our structural bullish USDJPY view. US fiscal and monetary policy are leading to higher interest rates in the US. At the same time, the BoJ's yield curve management ensures that higher global rates push rate differentials against JPY. Crowded positioning, particularly by the fast money community, remains a risk to ourview and is probably at least partly to blame for USDJPY's recent fall.
GBP: Tough Times Ahead. Bearish.
We reiterate ourview that GBP is likely to weaken to reach its cyclical low in 1Q17. Post-Brexit investment spending weakness should become more evident in the data, following the downside surprise in 3Q16 business investment. Ahead of the government triggering Article 50 by end March, the split position between 'hard' and 'soft' Brexit will come increasingly into focus. Tensions within the government may also become more visible, particularly if the Supreme Court gives the Parliament additional rights to decide on the exit negotiation strategy.
CHF: Driven By USD. Neutral.
Given our expectation for a USD correction, USDCHF - which is predominantly driven by the USD leg - could retrace to around parity, which we would use to buy. The latest Switzerland CPI print was encouraging as inflation escaped negative territory, driven predominantly by imported inflation turning less negative, suggesting the SNB is likely to maintain its current policy. While CHF has not strengthened on the back of safe haven demand from rising volatility in CNY, the key events to watch are the inauguration of President-elect Trump in 2 weeks' time and the Eurozone political events throughout the year. This week, we watch FX reserves.
CAD: Weak Data A Riskto Bullish View. Bullish.
We expect CAD to outperform other commodity currencies. CAD is not as vulnerable as MXN to trade protectionism given a prior free trade agreement which would take effect if the US backs out of NAFTA, though this remains a risk. However, a better US economic outlook (from other policies like fiscal stimulus) should benefit Canada. The main risk to our call is the weaker data we have seen recently. The BoC's new core inflation measures show a decline recently and December GDP was weaker than expected. We still don't expect BoC easing though, as Poloz noted that it would take a "significant departure" in the outlook for that to happen.
AUD: Market Too Hawkish on RBA. Bearish.
We are bearish AUD and expect it to underperform NZD. The market has priced too hawkish a path for the RBA despite little improvement in the data. 3Q GDP contracting 0.5% and a poor trade report show that despite the better external environment, Australia's economy is still struggling. Australia remains vulnerable to falling house prices and will also be hurt as China's mini-cycle recovery slows. While the RBA may not cut rates for the foreseeable future, in ourview it will make sure the market reflects its easing bias, weakening AUD. AUD is also particularly vulnerable to rising US interest rates given its high yield status (relatively speaking) and current account deficit.
NZD: Outperformance vs AUD. Neutral.
We expect NZD to outperform AUD but weaken against USD. New Zealand's economic outlook has improved with high migration and booming housing supporting growth. The half-year update this week from Bill English confirmed this, with growth being revised higher and rising budget surpluses. This is likely to be enough to offset the RBNZ worries over the inflation outlook and, in particular, the exchange rate. However, we don't rule out another rate cut or even FX intervention, though the latter would occur only after substantially more FX appreciation. We expect NZDUSD to continue to depreciate due to our expectation for USD to rise but we expect NZD outperformance of AUD in the near term unless we see worsening data in New Zealand or dovish rhetoric from the RBNZ
Week Ahead: USD's Reign, Trump's 100 Days, Trading ECB & BoC
The Presidential inauguration on 20 January will start the clock on the first hundred days of the Trump administration – a period where investors expect to see the hopes that have fuelled the USD rally since last November as confirmed. Indeed, the risk of disappointment due to bipartisan politics in Congress or delays on the back of a lengthy ‘vetting’ process for some of Trump’s nominees is non-negligible. That said, we expect Trump to start delivering on at least some of his policy pledges, ranging from comprehensive tax reform and deregulation to the erection of trade barriers against selected countries in Q1.
Even though we recognise that some positives are in the price we maintain our bullish USD view, expecting further convergence between the Fed and market’s rate hike expectations to boost the rate advantage of the currency. In addition, US tax reform should trigger repatriation inflows into the USD. Last but not least, we suspect that the FX markets are still to fully price in the risk of US protectionism, which should weigh on global risk sentiment, trade and growth. We thus see further USD outperformance vs risk-correlated and commodity currencies like AUD and CAD, and expect FX vols to advance in the coming months.
Our medium-term bullish USD view notwithstanding, we suspect that it may take concrete details of Trump’s economic plan for the USD-rally to resume in earnest. In the near-term, markets could remain in a ‘holding pattern’ with FX investors waiting for fresh incentives to buy USD. The US data and the Fed speakers next week should support market expectations of pacier rate normalisation and prevent further erosion of the existing USD-longs, however.
Elsewhere, the ECB and the BoC policy meetings will attract some attention even if they may fail to leave a lasting imprint on the markets. Indeed, both meetings should reiterate the banks’ current policy outlook. That said, we maintain our view that the current levels in USD/CAD represent an interesting buying opportunity and stick to our long position.
EUR could continue to underperform smaller currencies like SEK and NOK but outperform GBP. The outlook for the latter remains clouded by lingering political uncertainty ahead of Brexit (PM May will speak on the Brexit negotiations next Tuesday) and data that could confirm the recent weakening of the UK labour market
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USD. USD Correction Largely Over. Bullish.
We believe the current USD correction is largely over and expect more USD strength, particularly against the low yielders. Yellen's speech was important as it indicated Yellen was one of the median SEP dots supporting three rate hikes, keeping US front end rate expectations supported. In addition, US data has continued to come in on the strong side this week, with better jobless claims and inflation figures. Trump's comments inject some uncertainty but, as we note in the overview, we don't think this will change the appreciation trend of USD. We expect reflationary themes to push USD higher from these levels.
EUR: Dovish ECB. Bearish.
The ECB retained its dovish language in the latest meeting, even though there are signs of rising inflation in some EMU countries. President Draghi suggesting that policy should be tightened only when inflation is sustained and euro-area wide, implies that the ECB may remain accommodative for some time, given the wide divergence between the core and periphery economies. This will keep EMU nominal yields relatively low, and as global and EMU inflation rises, real yields will decline, weakening the EUR. We remain short EUR/USD.*
GBP: Tactical Short-Covering Rally. Bullish.
We think there is potential for GBP/USD to rally back to 1.27/1.28 before moving lower again towards our quarterend target of 1.17. We think the key takeaway from PM May's speech was that either the UK will have access to the single market or the business model will be changed, both of which we see as GBP-supportive in the short term. The market is still short GBP, suggesting that there is room for positioning adjustment to lift the currency. This week, the main events to watch are the Supreme Court ruling and GDP.
CHF: Driven by Global Risk. Neutral.
The SNB's Jordan commenting that negative rates are necessary and have worked well in Switzerland suggests that negative rates are here to stay for some time and the central bank is unlikely to change policy anytime soon. Therefore, USDCHF is likely to remain driven predominantly by the USD leg, and is likely to have more upside on real yield differentials. The key event that will affect global risk and CHF this week is President-elect Trump's inauguration speech. If global risk appetite weakens, CHF is likely to benefit from safe haven demand.
CAD: Turning Bearish CAD. Bearish.
We are turning bearish on CAD as we think yesterday’s BoC meeting was a game changer for the near-term CAD trajectory. The BoC followed its moderately dovish statement and MPR with an even more dovish press conference, which emphasized the limited positive impact from US fiscal stimulus and the still-challenging Canadian economic outlook. With its projections for the output gap closure to not be until mid-2018, it seems hard to justify the market still pricing 10bps of hikes this year. With the BoC dovish, increasing worries over NAFTA and the market still long CAD, we expect CAD to weaken as rates markets price at least a flat curve over 2017. We have entered a long USDCAD trade on the back of this change in view.*
AUD: Waiting for better levels to sell. Neutral.
AUD has continued to perform well and despite our bearish medium-term view, we are waiting for better levels to sell. In addition, commodity prices such as iron ore and other metals continue to rally, allowing AUDUSD to break out of the top end of a long held channel at 0.74. With USD rising, AUD may stop its upward trajectory but we are still waiting for catalysts on the domestic or external side (namely China) to enter short positions. Longer term, we see the RBA becoming more dovish and even cutting rates as the economy’s overreliance on trade with China and its overextended housing market may start to reduce consumption.
NZD: USD Drives NZDUSD Pair. Neutral.
We still see the NZD outperforming the AUD over the medium term and closed our trade last week on the back of AUD's aggressive short-term rally. Generally NZDUSD has been driven by the USD side of the pair lately with less focus on domestic development but this week's CPI print will be important. Inflation is expected to bounce back to its highest YoY level in almost two years, which would help confirm the current pricing of the one hike by the RBNZ over the next year.
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Pound To Dollar Exchange Rate: ING Forecast Decline, Sell GBP/USD Above 1.25
In the last several days we’ve reported on the bullish opinions on GBP/USD of several investment banks.
Morgan Stanley see 1.27/1.28 in the pound to dollar rate within coming weeks, and BNP Paribas offered a post-Brexit fair valuation of 1.30 for the pair based on an internal quantitative model.
Today, flying in the face of those exchange rate calls is ING, who are not only bearish on sterling, but are bearish right now!
Received early on Wednesday morning (08:00 GMT), ING’s latest research report recommends selling GBP/USD above 1.25, describing short opportunities here as “attractive”.
The British pound sits at 1.2527, very close to 2017’s highs. ING are targeting 1.21 in the pair – a move they believe will occur “within coming weeks”.
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Dollar stronger against currency basket, Fed eyed for next week
The dollar rose against a basket of currencies on Friday as the new U.S. administration keeps up a busy pace of meetings and actions with a Fed meeting next week expected to add more for investors to chew on.
USD/JPY changed hands at 1135.09, up 0.47%, while GBP/USD fell 0.45% to 1.2542 as British Prime Minister Theresa May met President Donald Trump at the White House with both pledging to expand trade ties, but also seeing some friction on talk over economic sanctions on Russia.
Trump is expected to speak on Saturday with Russian President Vladimir Putin for the first time since taking power a week ago and was asked if he would lift sanctions imposed on Russia by then-President Barack Obama over Moscow's annexation of Ukraine's Crimea Peninsula in 2014. Trump declined to be drawn in, saying it was too early to tell, but May was emphatic that any such action needed to be coordinated with European allies who also imposed sanctions.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.05% to 100.57.
The Fed releases its latest review of policy on Wednesday with the Fed Rate Monitor Tool from Investing.com showing a nearly 95% think the central bank will hold pat.
Investors took note of U.S. Bureau of Economic Analysis figures that said gross domestic product grew 1.9% in the fourth quarter of 2016, disappointing expectations for 2.2% and after a 3.5% growth rate in the three months to September. Separately, the Census Bureau said U.S. durable goods orders fell 0.4% in December, compared to expectations for a 2.6% gain. Core durable goods orders, which exclude transportation items increased by 0.5% last month, in line with expectations.
Sentiment on the greenback improved after Trump suggested the implementation of a 20% tax on Mexican goods to pay for a border wall, sparking concerns of a possible trade war between Mexico and the U.S. as Trump said a meeting to discuss a border wall and trade ties with counterpart President Enrique Peña Nieto would not happen as planned.
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Week Ahead: Long Dollars, Long Faces No More?
The USD’s recent lack of form is usually attributed to two factors. The first is market positioning, with investors sitting on extensive longs and awaiting more clarity on President Donald Trump’s economic stimulus. A second reason seems to be the fear that protectionism will go hand in hand with a ‘weak USD’ policy. This helps explain the gap between the languishing USD and elevated US rates since the start of the year.
We believe that President Trump will deliver on most of his economic stimulus initiatives, although we may have to wait for more details on the planned tax reform and deregulation. We also think that the ‘conflict’ between Mr Trump’s policies to boost the US economy and his apparent desire to prevent bouts of excessive USD strength is exaggerated. Indeed, we doubt Mr Trump would object to any USD gains so long as they reflect improving US fundamentals.
We take into account the latest market developments in our updated FX forecasts and, apart from EUR/USD, see somewhat less pronounced USD gains in Q1. The USD outperformance should extend in Q2 and Q3 as improving US data and Fed policy normalisation boost the currency. The gap between the USD TWI and the UST yields and short-term rates should start closing next week. Indeed, the February Fed statement and the US data (NFP) could emphasise the still robust US fundamentalssource
Weekly Canadian Dollar To Pound Outlook - BoE Inflation Report To Disappoint Investors?
Despite weakness in the loonie, it was the Pound to Canadian dollar exchange rate that ended the week on the decline, with the pair suffering losses of -0.3% to trend around 1.6434.The pound witnessed remarkably choppy trade last week as headwinds for both currencies kept the pairing unstable.
GBP CAD Exchange Rate Sees Choppy Trade as Brexit and Trump Fears Clash
Surprisingly, the Pound Canadian dollar (GBP CAD) exchange rate was weakened by the Supreme Court ruling in favour of Parliament having to vote on Article 50, as well as by stronger-than-expected GDP figures.
Meanwhile, oil market volatility and concerns about the impact of US President Donald Trump’s dislike of the North American Free Trade Agreement (NAFTA) upon the Canadian economy weighed on CAD.
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