Monday, January 9, 2017

USD correction is fading

The major economic headline of last week was the stronger than expected rise in hourly earnings (2.9% yoy). This triggered a rise in US yields and fade in the USD correction as rate differentials prevailed. 

The main economic fundamentals:
- The US economy seems to be expanding fast enough to create some inflationary pressure.
- Trump Administration is expected to be pro-growth (fiscal spending, deregulation, tax changes, protective policies). 
- In other developed countries the inflation appears to be bottomed as economic data are improving.
- In Europe the upcoming election in Austria, the Netherlands (both on 15th March), France (7th May) and Germany pose significant risk as the populist fores are gaining strength in some countries. 
- Though the data from the UK suggest that the Brexit impact was fairly muted, but we are yet to see the the post Brexit business investment activity and its potential implications. People may be somewhat too optimistic in terms of the softness of Brexit. 

These all suggest that USD appreciation should continue before longThough, we have to bear in mind, that significant USD rally could fuel fears about EM USD debt sustainability that could force FED to be less hawkish as it happened in Q' 2016. It could be less likely this time as global economic data is improving.

On the other hand the long USD trade is very crowded so it is not unlikely that the correction would have another leg.

SP500 and US piers fade all correction and made new highs. DOW is just a few ticks from the psychological  20,000 level. For SP500 the measured move target 2,300 is the next longer term resistance. We should watch as how it can break the Trump rally high of 2,477.

DAX is facing 11,800 (Jul 2015 high) and 12,000 (measured move) and 12,400 (April 2015 high) resistance.

The break of March 2016 low is yet to be proven to be false

The 1.2200 level broke this morning. It is a good risk reward trade to bet on the break of the 1.2100 level as it would trigger stops. 






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