WEEKLY OUTLOOK 30 January – 3 February 2017

A QUICK LOOK AT GLOBAL FINANCIAL MARKETS

EMERGING MARKETS

Main event of the week has been Donald Trump’s immediate actions after inauguration in January 20 like cancelling partnership in Transatlantic Trade and Investment Partnership (TTIP) and making an executive order to construct a border wall with Mexico. At the weekend by another move, Trump signed another executive order that limits immigration and refugees from some Muslim countries. The order suspends the refugee admissions program for all countries for 120 days. Extension of measures to close American economy to outside, combined with stimulus programs in US economy that would trigger higher number of rate hikes are expected to hurt EMs, primarily the ones struggling with already fragile economic and political environment. According to Nomura, Fed may come with four rate hikes this year as a result of which most hit country from risky environment will be Turkey and LatAm countries. They expect 400 bps and 175 bps policy rate hikes in Turkey and Mexico respectively while the only country expected to growth higher than Nomura’s heat map suggests is Russia in a downside risk scenario. At the weekend S&P downgraded Turkey’s long term sovereign debt rating outlook to “negative” from “stable” while Fitch took back Turkey’s investment grade rating which was awarded in November 2012.

Despite Trump’s disappointing moves, market reaction was not as harsh as expected in neither developed nor emerging markets last week. Mexican peso has somewhat eased below 21.0, having seen above 22.0 a week before. Turkish lira continued to tumble and lost another 1.6% against USD on a weekly basis, reaching 3.881.

 

There will be several releases to help us gauge economic activity in emerging markets this week. Manufacturing PMI for January in China will be announced on Wednesday at 9:00 a.m. GMT+8. Market consensus is 51.2 against previous realization of 51.4. There is no consensus for non-manufacturing but December reading in index was 54.5. A weak standing will be no good news for new year’s growth performance.

January Nikkei manufacturing PMI will be announced on Friday for Hong Kong, Singapore, India and Indonesia on Wednesday where there are no consensus estimate for the releases. Data are important as Hong Kong PMI in December stood at 50.3, only slightly above critical threshold of 50, India PMI is 49.6 and Indonesia PMI is 49.0. Index levels need to exceed over 50.0 for markets to see sustainable recovery in Asian economies. Singapore PMI the meantime was somewhat stronger at 52 in December.

In LatAm, December unemployment rate In Brazil, to be released on Tuesday will be one of the main release of the week. Market consensus is a rise from 11.9% to 12.0% however expected recovery in Brazil might get it lower in the period ahead. Hence, market would not consider an in line realization with consensus as a reversal in economic activity. Another release important for Brazilian economic activity will be December industrial production to be announced on Wednesday at 9:00 a.m. GMT-2. It is expected to post 1.0% growth over previous year, following 1.1% contraction in the previous month.

 

Russia will announce its interest rate decision on Friday at 13:30 GMT+3. Market consensus is no change in policy rate at 10.0% as inflation is seen as a major risk by the CBRT. Additionally, preliminary GDP growth in 4Q16 will be announced on Thursday. Forecast for preliminary results is -0.3% while 3Q16 registered -0.4% GDP growth. Weakness would hurt ruble against USD which is already depreciating by the Central Bank’s FX purchases to help exporters.

 USDRUB

In Turkey, main event of the week will be January inflation where there will be significant revision in data calculation methodology. Inflation at the end of December stood at 8.5%, surprising market on the upside while it will remain elevated due to high food prices after bad weather conditions. It may exceed December realization, barring any revisions to past data. Market expects monthly inflation to stay at 1.8%, while y/y inflation expectation is 8.6%. Data will be announced on Friday.

MAJOR MARKETS

Trumpflation trade which refers to boost to economic activity and hence asset prices by Trump administration has been on play throughout the week. GDP growth in US in 4Q16 disappointed the markets with a weak standing of 1.9% against market consensus of around 2.5% however it will probably be considered as past data and market will shrug off the weakness soon with the expected measures like tax cuts. Dollar index which slid below 100 this week due to expected loosening in fiscal policy barely exceeded 100.0 at the end of the week.

 Dollar Index DXY

Data agenda is quite heavy this week in US this week. FOMC decision will be one of the main market movers while first tier data in terms of market impact like ISM manufacturing and service as well as non farm payrolls in US will also be widely followed. No rate change is expected from the FOMC meeting result of which will be announced on Wednesday at 2 p.m. Eastern. However market will seek a hint over the timing of next Fed rate hike. ISM manufacturing to be announced on Wednesday is expected to rise to 55.0 in January from 54.7 a month ago while ISM service due Friday is expected slightly ease to 57.0 from 57.2 within the same period. Non farm payrolls in the meantime will be announced on Friday and is expected to rise to 170k from 156k a month ago. Average hourly earnings growth is expected to slightly ease to from 2.9% to 2.8%. Any realization better than market consensus will boost DXY which is dragged down by Trump administration's expected loosening in fiscal policy.

 us10

In Eurozone, GDP, unemployment and retail sales will be the main releases of the week. GDP in 4Q16 is expected to remain flat at 1.7% compared to previous quarter while unemployment rate at 9.80% is also expected to show no change from the previous month in December. Both data will be announced on Tuesday and any realization better than expectations will support EUR/USD. Another important data will be inflation estimate to be also announced on Tuesday. Expected inflation is expected to pick up from 1.1% to 1.5% while core inflation is expected to remain flat at 0.9%.

 EURUSD

 In UK, BoE will hold its monetary policy meeting and announce its decision on Thursday at 12:00 local time. Policy rate and asset purchase program are expected to show no change from 0.25% and 435 bln GBP however any statement regarding the fate of program would be reflected in GBP/USD. The latter hovers above 1.25 as of last week. Another important release will be January PMI manufacturing and service to be announced on Wednesday and Friday respectively. December manufacturing PMI which stood at 56.1 is expected to ease to 55.9 in January while service PMI is also expected to come down from 56.2 to 55.8. Any weakening in the index during Brexit process would be considered negative for British economy.

GBPUSD

In Japan, BoJ will hold monetary policy meeting and announce its decision on Tuesday at 12:00 GMT+9. The BoJ’s increasing the amount that it buys from bond market has prevented doubts over whether the Bank would consider tapering quantitative easing. The decision has led USD/Yen to exceed over 115.0 within the week. Any comment on a possibility to further increase bond buying would further hurt Yen against dollar. Another important release in Japan will be December industrial production. Data will be announced on Tuesday at 8:50 a.m. Market expected y/y industrial production to come down to 3.0% from 4.6% a month ago. This would also not help Yen.

USDYen

03 Jul 18 (Tue)

03:05 pm


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