Despite a decent chunk of market participants likely extending their Christmas break through this week, it could actually be quite an interesting week and one where there is clear opportunity.
The economic calendar actually holds a number of key data points, which in theory won't alter the game when it comes to monetary policy settings, but it would cause a reversal in the weak US dollar, long commodity trade, which has been so prevalent of late.
- China: Taking a quick step back though and over the weekend while there have been a few geo-political headlines which shouldn't impact markets too greatly, we saw China release its manufacturing and service PMI data for December, which printed 51.6 and 55.0 respectively, with the service data above consensus. Today (at 12.45pm AEST) we get the Caixin manufacturing print and although this is a fairly important data point one suspects it will have a minimal impact on markets today, unless, that is, we see a collapse, which again seems unlikely.
- Europe: In the absence of any impactful data points locally, although on Friday we do get Aussie November trade data, the eyes of the market fall partially on Europe and also on the US. In Europe, we get manufacturing data tonight and then services data on Thursday, resulting in the composite figure, although this is largely expected to be unchanged. Importantly, Germany released inflation data on Friday, which at 1.6 per cent year on year was the highest in five years and creates elevated expectations for a stronger print in the full euro zone inflation print on Friday, where economists expect this at 1.4 per cent headline and 1 per cent core. EUR/USD closed the year above $US1.2000 and while Europe was undoubtedly a huge economic success story of 2017, it worries me that long EUR is such a huge consensus trade now and many of the sentiment readings on EUR/USD or the crosses suggests the single currency is a market darling right now. Consensus trades tend to have a poor record of eventuating.
- US dollar: So the USD is key this week and the event risk for the USD is high, where there will be some building focus on US political issues, although economic data points will be somewhat more influential. So on the docket we get the December ISM manufacturing report (Thursday at 02:00), with calls this remains elevated at 58.2 We also get service ISM data, ADP private payrolls and the non-farm payrolls report on Friday night, where the headline print is expected to come in at 188,000 jobs, while average hourly earnings is expected at 2.5 per cent. Perhaps the highlight though falls on Thursday morning (6am AEDT), where we get the December FOMC minutes and recall since the actual Fed meeting the USD index has lost around 1.7 per cent.
- Inflation: So the minutes will be explored, especially around the collectives view on the language used to express their confidence that inflation is genuinely expected to pick up. With the market pricing in a 68 per cent chance of a March hike and two hikes for 2018, there will close inspection to assess just how shaky their confidence is for any pick-up in inflationary trends. If the minutes go the same direction as prior minutes then this weak USD position will be absolutely validated, especially with a rising consideration about the US's fiscal position. That said, the USD is under-loved and oversold and it won't take much to promote a bout of profit-taking from the shorts.
- Aussie dollar: AUD/USD has been a natural recipient of the weak USD, as the moves in the broad USD sell-off has resonated, with copper gaining for remarkable 16 days, although it did pull back 0.3 per cent on Friday. Gold has worked well and pushed into $US1307 on Friday (the highest levels since October) and I feel should work well in 2018. AUD/USD closed out the year close to US78??, which is a nearly 7 per cent above the streets forecast for the pair at the start of 2017 and actually marked a run of six days of gains (and 14 days out of 16). The pair has been supported into the five-day moving average (EMA) really since mid-December, so as long as the pair doesn't close below this average then it's onwards and upwards, but it's had a good run and I would certainly be surprised to see a reversal of sorts this coming week. For what it's worth, the consensus (mean) for the year ahead sits at US78??, with estimates ranging from US85?? to US67??.
- ASX: Aside from the China data, there is little to move markets from the weekend's news flow, and interbank FX markets are basically unchanged so far. Remarks from North Korean leader Kim Jong-un seem to be construed as somewhat of an olive branch, so watch Korean markets as a guide today but shouldn't impact markets more broadly. Aussie SPI futures did not trade on the Friday night session, but there was some focus on the late session sell-off in the S&P 500, where the index fell 0.5 per cent in the last 30 minutes and one questions if that could be a signal of things to come in 2018! The move should affect our open though and our call for the ASX 200 open sits at 6026, -39 points or 0.6 per cent. BHP and CBA's ADR are indicating lower opens.
- Low volumes: The question then, given volumes will be poor, will be whether those who are in the market use this weakness on open to accumulate new positions or will it set a precedence and we see the selling manifest on itself. Certainly watching the materials plays will be of interest to get a sense if traders do genuine see a fragility in the weak USD, long commodity trade in what is an extended position and with even risks due this week.
SPI futures down 27 points or 0.5 per cent to 6019
AUD flat at 78.00 US cents
Major global financial markets were closed for the January 1st holiday
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