Predictably, the announcement of the US tax reform lacked funding details and hence has come under immediate criticism. For instance, the Committee for a Responsible Federal Budget released a rough analysis saying the plan could cost USD3-7trn over the next decade, potentially “harming economic growth instead of boosting it.” Markets reversed early gains. We stay firmly within the reflation camp and view USDJPY setbacks to 111.00 as a buying opportunity. Today’s US durable goods release may confirm that US capex is on the rise, pushing rate and yield differentials wider in support of USDJPY. Today’s ECB press conference may see a cautious Draghi relative to expectations fearing an early tightening signal may push BTP spreads wider. EURUSD should stay offered below 1.0970 with the risk of closing Monday’s opening gap down to 1.0870.
Although Chinese equity markets recouped most of their early morning losses, the divergence in their performance relative to DM equity markets witnessed since November has caught our eye. We are bearish on low yielding commodity currencies and run aggressive AUD short positions. There are many reasons suggesting AUD weakness, reaching from too low AUD-supportive interest rate and yield differentials to fund Australia’s 60% of GDP foreign liability position, to an overvalued property market running the risk of unleashing deflationary pressures once prices come off the highs. However, our best reason for running AUD shorts is that Australia has builtup capacity to deliver into the ‘old’ China, an economy expanding via commodity intensive sectors such as investment and property. An evolutionary China rebalancing its economy away from investment and property will leave Australia’s commodity overcapacity exposed.

It may be debatable whether the equity performance gap between the US and China will widen further from here or whether China’s equity markets will catch up with the better US performance. What is true is that the recent decline in China’s stock prices came along with peaking margin debt. Higher RMB funding costs may have triggered leveraged share investors to take some chips out of the market, leading to the diverging China – US equity trend. The connectivity into the FX market comes via the RMB TWI weakness and may have contributed to the increase in RMB yields. While a lower RMB TWI helps China utilise its capacity and hence is good for its growth outlook, there is a risk within the highly leveraged economy that rising debt funding costs more than undermine the positive impact coming from the FX side. The relative weakness of China’s equity market may be a symptom of this development and this morning’s disappointing release of China’s March corporate profits did nothelp China’s equity markets either (the gain for industrial profits was 7.7% lower than in the January-February period, but it was 12.7% higher than the gain in March 2016). The message seems clear: China should concentrate on bringing its funding costs lower, shifting its focus away from RMB TWI weakness. Since the RMB is quasi-pegged to the USD, this shift of China’s policy focus will work in support of the USD.

AUD, with its significant trade exposure to China, should weaken most should China reduce its resistance to the USD rising allowing the RMB TWI to rebound. China may need capital inflows into the bond market to reduce capital funding costs. Since RMB hedging tools are not as developed as in G4 currencies and hence less efficient to use, currency stability is an essential tool convincing non-RMB-based investors to allocate funds into China. Consequently, the rising USD will put AUDUSD under selling pressure. This move may be leveraged by redirected capital flows from G4 into China, pushing G4 bond yields higher. Australia’s banking sector has reduced its wholesale funding dependence over the course of the past decade, but still has one of the most wholesale funding-dependent banking sectors within G10. Hence rising G4 rates and yields mechanically increase local AUD funding costs without the RBA increasing its rates. This is why we are sceptical of Australia maintaining its real estate strength at times of globally rising funding costs.

The best case scenario for markets would clearly be the elimination of the two “extreme” candidates: if Macron and Fillon manage to top French voters’ preferences on the 23rd, we anticipate a risk on move from financial markets. The worst outcome for risk assets would be a second round featuring Le Pen and Melenchon. Although we would expect markets to be volatile for some time, such an outcome wouldn’t equate to the end of the world (yet), as it is unlikely that an extremist candidate, even if appointed President, would be able to do much harm without a parliamentary majority.
Historically, France always had two strong candidates, coming from the two main parties. This time round, there is a significant chance that none of them will be represented in the second round. Indeed, this election has faced a series of twists:

? Initial favorite candidate, Francois Fillon (center-right), has lost more than ten points in the polls, partly because of his family’s allegedly fictitious employment issues. Although only third in most polls, Fillon can count on a solid base of center-right voters to keep alive the possibility of being in the second round.
? Macron (center) has managed to emerge as a credible candidate and is now ahead in all polls – with a remaining fragility, though: his voters’ loyalty is seen as lower than than of Fillon or Le Pen’s.
? Marine Le Pen’s campaign hasn’t seen any momentum so far. Starting from a very high position, she has slowly been trending down over the past two months – still, she should still manage to access the second round. She doesn’t seem able to attract new voters, though.
? Finally, Melenchon (far-left)’s support has surged in the past few days pushing him up to the fourth position in the presidential race with a score very close to Fillon’s one. Meaning he could still make it to the final round.
If anything, as soon as the risk of “Frexit” comes into view, we believe the issue for markets will not be France leaving the euro, but the euro leaving France. The most likely reaction to such an episode of financial stress would be a political response in the opposite direction, we believe. If Le Pen and Macron move on, they expect a likely unwind of some of the “redenomination risk” premium embedded in bunds and compression in peripheral spreads. Melenchon in the second round, on the other hand, would present a risk to markets given his favorable second round polling against Fillon and Le Pen. In a favourable outcome EURUSD may move quickly towards their 1.10 3 month forecast. An adverse scenario may see a drop towards recent lows below 1.04.

Historically, exit polls provide a first estimate of results at 8pm local time. However, conclusive results could be available a little later as it could be hard to get a precise estimate of the two winners early, if results are very close. Note that although French media are not allowed to publish any results before 8:00 pm on Sunday, it is possible, as happened in the past, that medias in other countries will. Participation rates at 12pm and 5pm are also worth watching: we believe a high participation rate could be negative for Le Pen (and to a lesser extent for Fillon) – and potentially positive for Macron or Melenchon – and viceversa, providing an early indication on the direction things might take.

Through the early-2017, Canada’s economy continued to bolster; however, the sources of the accelerating growth of the nation are proving slightly different from the ones expected a few months ago, noted Scotiabank in a research report. In the hand-off from last year, the rising affordability concerns were expected to be a drag on housing and auto sales, while record consumer indebtedness and increasing interest rates would possibly hurt consumption growth.

These mild drags were expected to be countered by strengthening investment, rising non-energy exports, and follow-through on public infrastructure plans. However, housing, auto sales and consumption growth have not decelerated, whereas business capital spending and non-energy exports have not accelerated. Also, public-infrastructure spending is delayed, stated Scotiabank.

The main growth drivers of Canada’s economy continue to be the same and imbalanced. According to Scotiabank, the Canadian economy is expected to expand 2.3 percent this year, whereas it is likely to grow 2 percent next year. The sources of Canada’s GDP growth are projected to start shifting and diversifying in the year ahead, lowering the economy’s dependence on housing and consumption and increasing the contribution of exports and investment to growth, added Scotiabank.

The Leading Economic Index for the U.S. rose again in the month of March, rising 0.4 percent. This is the seventh straight rise. Of the total components, six of them contributed to the topline figure, whereas two segments contributed negatively, noted Wells Fargo in a research report.

The labor market component contributed negatively to the index. It had been contributing positively in recent time. Initial jobless claims and manufacturing hours negatively contributed 0.09 percentage points and 0.13 percentage points respectively from the topline figure.

Optimistic consumer expectations contributed 0.12 percentage points to the index, the largest contribution since December 2004. The interest rate spread contributed 0.19 percentage points. This was the largest contributor to the index in March. Meanwhile, ISM new orders and the housing permits components also contributed to the segment, adding 0.19 and 0.11 percentage points respectively. The Leading Economic Index’s upward trend continues to signal moderate economic growth in 2017, stated Wells Fargo.


Since Monday, April 10, positioning has shifted. Within G10, the largest shorts are still in USD and GBP; the largest long is now in EUR. EUR positioning moves further into long territory: All components except IMM showed an increase in EUR positioning. Global macro funds and Japanese retail accounts were big buyers, moving from neutral to long. Japanese retail accounts are now small net long EURJPY for the first time since November. Sentiment also turned less bearish, helped by a fall in USD bullish sentiment after Trump’s comments that the USD was getting too strong.

Non-commercial IMM accounts were the only ones who sold EUR, but their net short EUR positioning remains near the smallest since May 2014. The French election this Sunday will be the main driver for EUR; see our expectations for EURUSD under different scenarios here. JPY positioning remains neutral: Investors’ JPY positioning was mixed. Among Japanese investors, retail accounts were JPY sellers but Toshin accounts were buyers. Among global investors, global macro funds were sellers, but non-commercial IMM accounts were large buyers, and sentiment turned bullish, with the percentage of bullish JPY traders rising by nearly 20% on the week. We remain bullish on USDJPY strategically.

GBP short positioning unchanged: GBP was the second most sold currency among non-commercial IMM accounts, bringing these accounts’ short GBP positioning back near the historical high. Global macro funds were also large sellers. On the other hand, Japanese retail accounts doubled their long GBP positions last week, and sentiment became less bearish. This short positioning is likely to contribute to GBP strength on any positive news, as shown by the GBP rally today after the announcement of early elections. We still like EURGBP shorts on positioning differentials and the potential for GBP to develop a safe haven status should markets get worried about Eurozone political risks.

After the U.S. Vice President Mike pence visited the demilitarized zones between the South and North Korea and warned that the United States’ strategic patience with North Korea is over and sent a message to North Korea to not to test the resolve of President Trump, Russia has issued a warning to the United States against unilateral action in the region. Vice President Pence said, “In the past two weeks, the world witnessed the strength and resolve of our new president in actions taken in Syria and Afghanistan……North Korea would do well not to test his resolve or the strength of the armed forces of the United States.”

Speaking at a news conference, the Russian foreign minister Sergei Lavrov said that this is a very risky path. He added, “We do not accept the reckless nuclear missile actions of Pyongyang that breach UN resolutions, but that does not mean that you can break international law………I hope that there will not be any unilateral actions like the one we saw recently in Syria.” Russia has also warned the United States against further unilateral actions on Syria.

China is reportedly working with the United States to resolve the issue with North Korea. However, the North Korean regime has so far remained defiant. It test fired a ballistic missile to commemorate the 105th birthday of the country’s founder Kim Il-Sung but the test failed as the missile detonated immediately after launch.

The independent centrist candidate Emmanuel Macron is still the favorite candidate to become the next French President. Odds of his presidency still hovers above 50 percent, far higher than any of his rivals, however, the odds have declined from 67 percent just three weeks ago to 52 percent as of now. While nobody can predict with certainty on who might win on May 7th, one thing is certain that the French are looking for changes and they are looking for it so hard that for the first time main political parties are not at all expected to make it to the round two of the election that will be on May 7th. The incumbent President is so unpopular in France that his approval rating at one point declined to just 4 percent and that legacy would continue to hurt his socialist party for years to come. That is probably is the main reason for his not running for re-election.

Shadow of his disastrous legacy is one of the reasons why the odds are declining for Macron. Many lawmakers of the socialist party are openly supporting Emmanuel Macron against his closest opponent Marine Le Pen. President Hollande has openly declared that it his duty to make sure that Le Pen doesn’t’ win the Presidency. The former Prime Minister under Hollande government of the Socialist Party Manuel Valls has openly declared his support for Mr. Macron instead of his own party’s candidate Benoît Hamon.

Mr. Macron is increasingly being seen as an extension of the establishment and the current socialist government and that is not a good portrayal on an anti-establishment year.

Defying demand for a general election for months, the UK Prime Minister has finally decided to hold a snap general election on June 8th in order to receive a mandate from the people of the United Kingdom to take the country through the two-year Brexit process. She surprised many politicians as well as the market with her announcement from the Downing Street. The decision reportedly came after consultations with senior figures and advisors within the party. The recent state of the opposition Labor Party which is fighting internal battles and revolts against the leadership of Jeremy Corbyn might have also influenced the decision. The recent opinion polls show that Theresa May’s conservative party is as much as 21 percent ahead of the main opposition, so holding an election now would likely provide Ms. May with a stronger majority in the parliament.

In addition to that, a win by Ms. May would also end the criticism that she has not contested her post; instead, it was given to her as the former Prime Minister David Cameron resigned after the referendum. This surely adds to the political uncertainties in Europe.

The pound initially suffered a shock selloff on the news but recovered and now trading stronger for the day at 1.264 against the dollar.

The opposition Labour party leader Jeremy Corbyn has welcomed the decision.

Energy • US crude oil inventories: Yesterday’s EIA report showed that US crude oil inventories fell by 2.17MMbbls over the week, the first significant decline seen this year. However Cushing, Oklahoma crude inventories increased by 276Mbbls, taking total Cushing inventories to a record 69.4MMbbls. • Chinese oil imports: Latest data from China showed that crude oil imports over March totalled 38.95m tonnes, which is a new record for monthly imports. Crude oil inflows for the month were 19% higher YoY, and 23% higher MoM. Stronger imports have come about as a result of declining domestic production.

Metals • China iron ore imports: Preliminary Chinese customs data shows that China imported 95.56m tonnes of iron ore over the month of March, which is 11% higher YoY, and 14.5% higher MoM. Iron ore inventory at Chinese ports remains at elevated levels, and we expect import demand to slow moving forward as a result. • Chinese aluminium exports: China exported 410,000 tonnes of unwrought aluminium and aluminium products over the month of March according to preliminary customs data. This is significantly higher than the 260,000 tonnes exported over February, but still 2% lower YoY. The stronger price environment should support higher Chinese output, leading to an increase in the country’s exportable surplus.

Agriculture • Malaysia cocoa grinding: Latest data from the Malaysian Cocoa Board shows that cocoa grindings over 1Q17 totalled 54,384 tonnes, a 15.7% increase YoY. However the grinding numbers were almost 5% lower than the 57,029 tonnes that was processed in the previous quarter. Although this decline is seasonal, and the grinding numbers are still fairly constructive for demand. • Chinese soybean imports: China imported a total of 6.33m tonnes of soybeans over March 2017, 4% higher YoY, and 14% higher MoM. Total Chinese soybean imports over 1Q17 totalled 19.5m tonnes, 20% higher YoY. However with Chinese crush margins now negative, we should see a slowdown in imports moving forward.

EUR: French elections likely to cap EUR/USD upside around 1.07 level Naturally one would have expected EUR/USD to have rallied substantially in the face of President Trump’s $ jawboning and rising geopolitical tensions. But gains have been harder to come by recently, with the pair struggling to push above the 1.0670/80 area. It is likely that EZ political risks are playing a role, with investors wary of chasing EUR upside in the run-up to the French presidential elections. A EUR/USD move above 1.0700 looks unlikely and could be met with spec sellers.

Verbal intervention does require the backing of fundamentals to develop a lasting impact on markets. Unlike previous occasions of talking USD down, President Trump has linked his dollar overvaluation comments to the US interest rate outlook. His suggestion thathe likes low interest rates (also said in May last year)has now put the debate on the appointment of potentially dovish Fed Chair, representing a fundamental shift compared to his election campaign when he criticised the Fed for running interest rates at a too low level. A reappointment of Janet Yellen seems to no longer be categorically ruled out. Alternatively, Trump could opt for a non-conventional appointment such as from the business world, declaring implicitly that the US still had a wide output gap by saying that the economy had a higher growth potential than currently calculated and therefore could afford lower rates for longer. Yesterday’s comments have opened a new playing field and markets will have to digest its implications.

Two countries, one interest: The good news of President Trump comments was that China will not be called a ‘currency manipulator’ when the Treasury releases its currency report this month. CNY has strengthened by 0.3% to 6.8745 this morning, reaching its highest level since March 31. However, RMB has weakened in TWI terms. In respect of USD, China and the US administration have the same interest. A weaker USD has the potential to boost competitiveness for both countries – directly in the case of the US and indirectly in the case of China, where a weaker USD allows China to depreciate RMB againstnon-USD currencies such as EUR, JPY and KRW just to name the heavyweights of China’s currency basket.

Commodities to undermine AUD: Australian labour market data for March were very strong on the headline, with job growth at 60.9k (20k expected) and all in the full-time sector (75k). In addition, China’s March trade balance, seeing exports growing at 16.4%, by far outpacing the 3.4% consensus expectation, while its imports expanded at 20.3%, is in line with our constructive view on the state of the global economy. However, the CRB Rind index has rolled over and iron ore prices have lost another 1.4% overnight, coming in addition to yesterday’s 2.3% decline. China’s commodity import seasonality may play in here, but China trying to curb housing sector investment and shift growth from the old, commodity consuming part of the Chinese economy towards its service sector may play in too. Anyhow, falling prices for China-related commodities have two effects. First, they should weaken AUD, in which we hold short positions, and second, they may allow international bond markets to keep rallying for somewhat longer, keeping USD selling pressure intact for now.

Does payrolls matter for the USD today? The FOMC minutes gave the market a lot of information on how the Fed is thinking about reducing monetary accommodation. In 2018 the focus will be on balance sheet reduction. The market took this as a signal that the focus in 2017 will be to use the pure interest rate tool to tighten. The market prices 38bp of hikes by the end of this year and a cumulative 70bp by the end of 2018. The strong ADP print on Wednesday has already pushed expectations higher for today’s headline NFP (MS: 195k), therefore it is the wage data that matters for the USD. Average hourly earnings above the 2.7% market expectations would drive the USD higher on the day, particularly vs the JPY. The US 10y breakeven rate has come down from the Jan high of 2.07% to 1.95% today.

Short EURGBP. The best way to play for a dovish ECB in the next 3 months is to sell EURGBP. The pair is developing strong bearish technical signals, which continue to hold as long as EURGBP stays below the 0.8610 level. Draghi and other ECB members yesterday tried to send a message that there has been a recovery in the economy, monetary policy is working but inflation needs to be sustainably close to 2% for us to consider changing policy. Emphasis was also on the sequencing of the removal of accommodative policy, should they reach their targets. We don’t think the ECB will raise rates before starting to taper asset purchases. The ECB minutes said they discussed removing the phrase “rates will remain at present or lower levels”, but that has stayed, possibly to give the ECB as much flexibility as possible, should political events cause market volatility. On the GBP side, a survey released overnight highlights some labour market tightness appearing. The Recruitment and Employment Confederation showed that companies are finding it difficult to fill jobs in London and the South, particularly in the temporary sector where staff availability fell at the fastest rate since January 2016.

SNB still intervening. After the Czech National Bank removed their EURCZK currency floor yesterday, focus will naturally turn to the Swiss. Without having a formal floor any more, we don’t think the SNB are near stopping their currency interventions since they currently have the flexibility to intervene if and whenever they like. Inflation data have been improving, with the latest headline print now at 0.6%Y, the highest since 2010. The latest core inflation print is now above zero (0.1%) but has not yet recovered to levels seen in late 2015 (0.4%). The domestic economy is still dealing with the impact of a strong currency and, more importantly, the slowdown in Chinese demand for luxury goods. For now we think the SNB will continue to intervene in the largest volumes around major risk events, with the next ones being the first and second round of the French election. Recently the SNB have been more explicit than ever before about their management of the FX reserves portfolio. Interestingly they are justifying holding a large equity position (20% of portfolio) by saying they need to do this because of the strong exchange rate. We expect EURCHF to stay stable for now.

South China Sea row intensified after Philippines President Rodrigo Duterte ordered the Philippines’ military to occupy and fortify islands in the South China Sea amid ongoing territorial disputes between China and other countries in the region. China exerts its claim on most parts of the South China Sea while Vietnam, Philippines, Indonesia, Malaysia, Cambodia, Thailand, Singapore, and Taiwan dispute such claims. Competing claims include,
• Indonesia, China, and Taiwan over waters NE of the Natuna Islands.
• The Philippines, China, and Taiwan over Scarborough Shoal.
• Vietnam, China, and Taiwan over waters west of the Spratly Islands. Some or all of the islands themselves are also disputed between Vietnam, China, Taiwan, Brunei, Malaysia, and the Philippines.
• The Paracel Islands are disputed between the PRC/ROC and Vietnam.
• Malaysia, Cambodia, Thailand and Vietnam over areas in the Gulf of Thailand.
• Singapore and Malaysia along the Strait of Johore and the Strait of Singapore.
Duterte told journalists at a press briefing that following his visit to a military base located in the Philippines western Palawan province, “It looks like everyone is making a grab for the islands there. So we better live on those that are still unoccupied. What’s ours now, we claim it and make a strong point from there….We tried to be friends with everybody but we have to maintain our jurisdiction now, at least the areas under our control…… There are about nine or 10 islands there, we have to fortify……I must build bunkers there or houses and provisions for habitation.”
The defense secretary Delfin Lorenzana has confirmed that President Duterte’s order by saying, “The president wants facilities built such as barracks for the men, water [desalination] and sewage disposal systems, power generators (conventional and renewable), lighthouses, and shelters for fishermen…”
The reactions from other countries including China are yet to emerge in response to this Duterte land grab.

Geopolitical tension intensified between the United States and Russia as the United States attacked the Assad regime by launching 59 tomahawk cruise missiles targeting airports in response to an alleged chemical weapon attack by the Assad regime. This week, the Assad regime reportedly used chemical weapons that claimed the life of 80 people including women and children in the rebel-held town of Khan Sheikhoun in Idlib province. Speaking at the Mar-a-Lago resort in Palm Beach Florida, President Trump confirmed the ordering of the missile launches. He said, “I ordered a targeted military strike on the airfield in Syria from where the chemical attack was launched…..It is in the vital national security interest of the US to prevent and deter the spread or use of deadly chemical weapons.” US missile attack reportedly destroyed 14 Syrian jets and destroyed much of the air facility in the area. Pro-government journalists in Syria have warned that actions like these will only boost the morale of the terrorists.

This action taken by the Trump administration puts it in direct conflict with Russia, who gave a different narrative of the situation. According to Russia, the Syrian government attacked a rebel-held arms depot in the area, which contained the chemical weapon; Sarin nerve agent.
The US Secretary of State warned against reading too much into the attack as according to him, the stance of the current administration is Syria remains unchanged and he insisted that the missile attacks only show that the President is willing to take decisive actions when called for.
While most of the US lawmakers lauded the President’s action, some still remain skeptical and feel that it is plausible that the Russian narrative could be true. Prominent senators like Rand Paul, Ted Lieu condemned the President’s action as he did not seek congressional approval before the attack. Senator Thomas Massie said that it was not in the interest of the Assad regime to use chemical weapons and believes that the Russian narration might be true.

Russia had already warned the United States on military actions against Assad regime saying that it will have negative consequences. Next few weeks would see a flurry of activities on this front and the attack has triggered a lot of uncertainties.

The UK gilts traded flat Tuesday, showing modest gains, following the country’s lower-than-expected construction PMI released today. Also, investors are eyeing the February manufacturing production data, scheduled to be released on April 7 for further direction in the debt market.

The yield on the benchmark 10-year gilts, which moves inversely to its price, hovered around 1.05 percent, the super-long 30-year bond yields fell nearly 1 basis point to 1.64 percent while the yield on the short-term 2-year traded flat at 0.10 percent by 10:10 GMT.

The seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index (PMI) dropped from 52.5 in February to 52.2 in March, to signal the joint-slowest upturn in overall construction output since the current period of expansion began in September 2016.

“Survey respondents noted that the resilient economic backdrop and receding Brexit-related anxieties have helped to stabilize client demand after the disruption to development projects last summer,” said Tim Moore, Senior Economist, IHS Markit.

When oil price bottomed around $27 per barrel last year in February, many predicted a major reversal and the dark days for producers to be over. Yet, more than a year after the bottom, the oil market is struggling to cope up with the supply glut and lack of clarity. A deal by OPEC and 11 participating non-OPEC countries to reduce production by 1.8 million barrels per day has failed to soothe the market concerns. Every day, contrasting forecasts continue to appear in the media suggesting a spike in oil price or a tumbling to the bottom once again. So, how can you know which side to take? We at FxWirePro believe (despite our guidance and forecasts) that readers should make up their own views (a must, even if they are trading on our calls) based on facts. Here are the key factors that one needs to watch to understand the market dynamics that might lay ahead,

US production has been recovering since it bottom in July last year. Though the country is producing lesser amount crude compared to the pre-oil-crush levels, production has increased by 719,000 barrels since July. The number of active oil rigs operating in the US has more than doubled since it bottomed around in May last year. It is currently at 662 and the production is at 9.147 million barrels per day.
OPEC deal is likely to serve as the most crucial factor to watch out for. On May 23rd, OPEC ministers are scheduled to meet at the Vienna headquarters to decide on the deal extension. Mark your calendars for that date. We expect the OPEC and participating non-OPEC countries to extend the current production cuts deal.
The level of inventories would also play a crucial role in price discovery. Declining inventories would invariantly result in a higher crude oil price. As of now, inventories in the US rests at 533 million barrels, the highest ever. Recently, the gasoline inventory has come down but still higher at 239 million barrels when compared to historical data. The OPEC deal has pushed the oil market to backwardation but the inventory is yet to come down significantly.
Demand has been growing at a rapid pace since 2016 thank to lower oil price and contribution from countries like India and China. But experts expect higher demand this year from the United States as record numbers of cars and trucks were sold during the winter and holiday season.
New projects would play a very significant role for future prices. Recently Goldman Sachs have warned that many projects adopted during the $100 per barrels crude oil are set to come online this year and in the next few and would lead to higher than expected production. On the other hand, International Energy Agency has warned that lower level of investments due to 2014 oil price crash and continued lower price would eventually lead to supply constrain and eventually higher oil price.
These five fundamentals would be crucial in determining oil price in the months and quarters to come. WTI is currently trading at $50.6 per barrel and Brent at $2.8 per barrel premium.

The German bunds slid Friday, after reading wider-than-expected decline in the country’s unemployment rate during the month of March. Also, investors remain keen to watch the Eurozone’s March consumer price inflation, scheduled to be released shortly today.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 1 basis point to 0.34 percent, the long-term 15-year bond yields rose 1/2 basis point to 0.54 percent and the yield on the short-term 2-year bond traded 1 basis point higher at -0.73 percent by 08:20 GMT.

German unemployment unexpectedly dropped to a new record low in March as Europe’s largest economy powered ahead.

The jobless rate fell to 5.8 percent, from 5.9 percent, and the number of people out of work slid by a seasonally adjusted 30,000 to 2.6 million, data from the Federal Labor Agency in Nuremberg showed on Friday. Economists in a Bloomberg survey forecast no change in the unemployment rate and a 10,000 decline in the number of people seeking work.

“The job market continues to develop favourably. With the onset of spring activity, the number of unemployed people has declined, employment growth is continuing unabatedly, and demand for new employees continues to be high,” Bloomberg reported, citing Detlef Scheele, Board Member, German Labor agency.

Energy • US crude oil inventories: Yesterday’s EIA report showed that US crude oil inventories increased by 867Mbbls over the last week, below the 2MMbbls stock build that the market was expecting. The lower-than-expected build was due to higher refinery throughput, which increased from 15.8MMbbls/d to 16.23MMbbls/d over the week. A higher refinery throughput rate and a decline in refined product inventories suggest strong demand currently. • Russia oil output cuts: According to reports, the Russian Energy Minister has said that the country has cut oil output by 200Mbbls/d so far, versus their agreed cut of 300Mbbls/d. However, the country expects to reach this target by the end of April. With regard to extending production cuts, Russia has said that it is too early to decide on whether an extension is needed.
Metals • Grasberg copper mine: Reports suggest that the Indonesian government and Freeport have finally completed discussions on converting the company’s current mining license to a new one. With Freeport apparently now agreeing to this new license, we should see Grasberg resume copper exports, while the mine is likely to ramp up operations once again. • Australian cyclone aftermath: Following the cyclone that hit Queensland, a number of coal mines in the state that were forced to shut are now looking to restart mining operations. However, currently, ports and rail lines remain shut. The scale of damage to infrastructure is still unknown.
Agriculture • Ivory coast cocoa export tax: There are reports that the Ivorian government is considering cutting the export duty on cocoa, from the current 22%. This comes at a time when Ivory Coast has seen a rebound in domestic production, evident through higher port arrival data. A lower duty does potentially mean increased exports from the country. • Brazilian robusta coffee imports: It appears that the government is close to deciding to allow the importation of up to 1m bags of robusta for re-export. Imports were initially approved, but this led to protests from coffee growers, which prompted the president to quickly reverse the decision.

The pace of credit growth to households and businesses in the Eurozone edged lower in February, data from the European Central Bank showed Monday. The broad money measure, M3, rose 4.7 percent year-over-year in February, slower than the 4.8 percent climb in January, missing expectations for a 4.9 percent rise. The Eurozone money supply growth eased for the second straight month in February.

Within M3, the annual growth rate of deposits placed by households stood at 5.4 percent in February, down from 5.5 percent in January. While, deposits placed by non-monetary financial corporations registered a decline of 2.0 percent.

The ECB has maintained an ultra-loose monetary policy with low interest rates and stimulus measures which have helped bolster credit growth in the Eurozone over the last two years. The narrower aggregate M1, which includes currency in circulation and overnight deposits, remained unchanged at 8.4 percent in February.

Details of the report showed that the annual growth rate of total credit to euro area residents decreased to 4.3 percent in February from 4.6 percent in the previous month. The yearly growth rate of credit to general government moderated to 9.8 from 10.5 percent.

The Australian bonds sharply rebounded on the first trading day of the week Monday as investors poured into safe-haven assets tracking firmness in U.S. Treasuries amid losses in riskier equities and oil. Also, the lower-than-expected reading of the latter’s manufacturing PMI added to the upside sentiment.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, slumped 6-1/2 basis points to 2.70 percent, the yield on 15-year note plunged nearly 7 basis points to 3.10 percent and the yield on short-term 2-year traded 5 basis points lower at 1.73 percent by 03:50 GMT.

The seasonally adjusted Markit Flash U.S. Composite PMI Output Index registered 53.2 in March, to remain above the 50.0 no-change value for the thirteenth consecutive month. However, the latest reading was down from 54.1 in February and signalled the slowest expansion of private sector output since September 2016.

Further, At 53.4, down from 54.2 in February, the headline seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) signalled the slowest overall upturn in business conditions since October 2016.

The Reserve Bank of India (RBI) is expected to maintain status quo throughout this year, keeping the repurchase rate steady at 6.25 percent in 2017. However, beyond this year, the next move is likely to be a rate hike rather than a cut as the RBI policy committee remains keen to maintain price stability.

Apart from domestic considerations, the RBI will also keep an eye on global developments, especially the direction of US Fed policy. Further compression in the US and Indian long term rates, coupled with US dollar strength could induce volatility in the financial markets. Stability, therefore, will be a priority for the RBI, prompting a status quo stance on rates, DBS Bank reported in its latest research publication.

The central bank surprised on two counts in February. Benchmark rates were left unchanged in contrast to expectations for a cut. The policy stance was also shifted to a neutral bias from accommodative earlier, pulling the brakes on the easing cycle that started in early 2015.

“Under the flexible inflation targeting regime within +/-2 percent of the mid-point of 4.0 percent, the RBI will not be required to hike immediately in case of an overshoot. Nonetheless, the rate bias is tilted more towards hikes than cuts going forward,” the report said.

After the new healthcare bill that was supposed to replace the current bill, which is popularly known as the ‘Obama-care’ failed to pass through the congress last week, the relation between the US President Donald Trump and the House majority leader Paul Ryan has probably taken a turn for the worse. The new bill was expected to be put to voting on the House on last Thursday, a day marked by the seventh anniversary of the old bill. But the voting was initially postponed to Friday and then it was again canceled on Friday. As the opposition and the media targets ‘dealmaker’ Donald Trump for this failure, President Trump has allegedly showered his anger and frustrations towards Paul Ryan.

On March 25th, President Trump tweeted, “Watch @JudgeJeanine on @FoxNews tonight at 9:00 P.M.” He usually endorses shows via his tweeter account whenever he is either due to appear or appeared already in a show but in this one he wasn’t there. Instead, it was all about criticism against the Republican Party for failing to pass the new health care bill. In that show, Judge Jeanine Pirro called for the resignation of Paul Ryan from his post as the House leader.

A rift between Paul Ryan and Donald Trump is not a new phenomenon. There were clashes many a time during the campaign but after the election, they were getting along well and a rift between the White House and congress will be in nobody’s interest. Trump has also taken a jab towards congressional freedom caucus which remains allegedly behind the failure.

The consensus expects the ECB to allocate EUR110bn via its target LTRO after allocating EUR62.2bln at its last operation. Given that this is the last TLTRO allocation, demand could be heavy and should the allocation exceed the EUR110 expectation,excess EUR liquidity will be parked at the front end of the EUR curve pushing rates lower, which at the margin is a EUR negative. However, for developing a more pronounced bearish impact on the EUR the liquidity boostneeds to impact the 2-year EUR swap. A decline of the German Schatz yield is not sufficient for driving the EUR lower. ECB’s Nouy (8am) and Lautenschlaeger (3pm) will speak today.

EM and risk outlook stays relatively supported but we see risk aversion alert signs across the board. While investors focus on US politics and especially on today’s vote on the repeal act of Obamacare, other developments should, in our view, not remain unnoticed: a research paper published by two Fed economists and released by the Brookings Institute suggesting US interest rates staying low with the Fed tolerating inflation overshooting targets, the ECB’s targeted LTRO allocations, and the continued fall of iron ore futures. Despite equity markets retracing some of the post-election rally, US monetary conditions have become more accommodative with the falling USD contributing most to this easing. Foreign conditions have turned from providing hefty headwinds as experienced from 2012-16 into tailwinds, helping US reflation gain momentum over time. Accordingly, we prepare for putting on FX trades that benefit from a steeper US yield curve. Short EURSEK and long USDJPY fall into this category. While short EURSEK should work from now, USDJPY’s current downward momentum suggests waiting for 109.50 or for a stabilisation above 112.50 before establishing longs.

US vote: Today markets will wait for the outcome of the vote but FX investors should note that the vote is not scheduled for a specific time. At the moment the vote count may be low so the Republican leaders need the time to gather votes, indicating why no specific time is provided. There is even a risk the vote may be delayed if the leaders feel the vote may not pass.

Watching iron ore. The PBOC-run Financial News newspaper highlighted that the recent rise of RMB money market rates should be put into the context of recent money market operations. China seems to be tightening its monetary conditions to deal with excessive leverage. Importantly, tighter RMB lending conditions have sparked China’s USD denominated loan demand, pushing its USD denominated liabilities up again. Should this loan-related USD inflow into China end up into a higher FX reserves (see chart below) – thus providing an additional signal that offshore USD liquidity conditions are on the rise – EM markets should see further inflows. Meanwhile, China has seen the ratio of mortgage loans to total credit of commercial banks reaching uncomfortably high readings. It has been China’s property and infrastructure investment driving commodity – including iron ore – demand. Authorities are now directing growth away from the property market which suggests that commodity prices may ease. Falling iron ore prices will not bode well for the AUD. Within this context we recommend using the AUD as a funding tool for high yield EM longs and for a long GBP position. GBPAUD has moved away from levels suggested by relative forward curves.

The Westpac-McDermott Miller New Zealand consumer confidence index edged slightly lower in the March quarter. Survey showed that people grew wary about the short-term economic outlook, but extended the nation’s run of optimism to six years.

The Westpac McDermott Miller consumer confidence index fell 1.2 points to 111.9 in the March quarter, but remained above the long-run average of 111.4. The present conditions index decreased 0.2 points to 111.2 and the expected conditions index fell 1.9 points to 112.4.

“March’s slight fall in confidence mainly reflected some anxiety about the upcoming election. It might also reflect concerns around housing affordability or political developments offshore, both of which continued to hit the headlines in recent weeks,” said Westpac Banking Corp senior economist Satish Ranchhod.

The latest economic data showed GDP figures showed that on a per-capita basis, household spending rose by around 2 percent last year which reflected a healthy level of spending confidence. With a growing confidence of consumers in their own household financial security, and a positive outlook for the New Zealand economy we could expect continuing positive consumer sentiment to translate into sustained growth.

Growth in Japan is holding up nicely and economic activity has gained momentum since 4Q16 with the pickup in the global capex and manufacturing cycle. Inflation has started to push back above the waterline. But as Governor Kuroda emphasized at a press conference last week, inflation expectations remain stuck, something highlighted by this year’s spring wage negotiation projected to produce only modest wage increases. With price pressures nailed to the floor, the Bank of Japan (BoJ) doesn’t seem to be in a hurry to raise rates.

“With our USD rates forecasts pushed upward, we now expect that the BoJ will taper its asset purchases at a somewhat slower pace than previously and that QE will end in H2 2019, instead of mid-2019. JGB rates unchanged,” said DNB markets in a research note to clients.

There is an ongoing debate whether the BoJ will have to raise its 10-year bond yield cap because of the lack of JGB liquidity. There seems to be still a split of views inside the BoJ on whether the Bank should or should not raise the 10-year yield target when the real interest rates decline further. The longer the BoJ keeps the 10-year yield target unchanged, the more rapidly it will have to adjust the target later.

Analysts expect the BoJ to maintain the current 10-year yield target through year-end, but if it sees greater yen weakness, it would adjust the target in 2H17. BoJ will have to strengthen communication strategy with forward guidance on its yield curve control (YCC) policy to manage market expectations. It would probably provide the conditions under which the BoJ would raise the 10-year yield target.

“While we expect the BoJ to introduce forward guidance on its yield curve control (YCC) policy relatively soon, we think it would do so in July at the earliest, when the BoJ reviews its economic outlook and discusses its monetary policy stance in the Outlook Report. If it may take time to build a consensus among the board members on this issue, delaying its introduction until October,” said J.P. Morgan in a report.

USD/JPY trades below 100-day moving average. The pair is tracking DXY lower, amid holiday-thinned markets (Japan closed for Vernal Equinox Day) and lack of fresh fundamental drivers. Technical studies are bearish, RSI and stochs are biased lower and MACD has shown a bearish crossover on signal line. 112 levels in sight, violation there could see test of 111.60 and then 111 levels.

As expected, the US Federal Reserve hiked interest rate by 25 basis points in its March meeting. However, aside from the rate hike, there were no major changes in the FOMC forecast or statement, except for few minor tweaks. With March meeting gone, there are now seven upcoming meetings this year and the Fed has forecasted hikes in two of them. Let’s look at the market pricing of the hikes, (note, all calculations are based on data as of 16th March)

May 3rd meeting: Market is attaching 94 percent probability that rates will be at 0.75-1.00 percent, and 6 percent probability that rates will be at 1.00-1.25 percent.
June 14th Meeting: Market is attaching 46 percent probability that rates will be at 0.75-1.00 percent, 51 percent probability that rates will be at 1.00-1.25 percent, and 3 percent probability that rates will be at 1.25-1.50 percent.
July 26th meeting: Market is attaching 38 percent probability that rates will be at 0.75-1.00 percent, 50 percent probability that rates will be at 1.00-1.25 percent, 11 percent probability that rates will be at 1.25-1.50 percent, and 1 percent probability that rates will be at 1.50-1.75 percent.
September 20th meeting: Market is attaching 21 percent probability that rates will be at 0.75-1.00 percent, 45 percent probability that rates will be at 1.00-1.25 percent, 28 percent probability that rates will be at 1.25-1.50 percent, 5.5 percent probability that rates will be at 1.50-1.75 percent, and 0.5 percent probability that rates will be at 1.75-2.00 percent.
November 1st meeting: Market is attaching 20 percent probability that rates will be at 0.75-1.00 percent, 43 percent probability that rates will be at 1.00-1.25 percent, 29 percent probability that rates will be at 1.25-1.50 percent, 7 percent probability that rates will be at 1.50-1.75 percent, and 1 percent probability that rates will be at 1.75-2.00 percent.
December 13th meeting: Market is attaching 10 percent probability that rates will be at 0.75-1.00 percent, 32 percent probability that rates will be at 1.00-1.25 percent, 36 percent probability that rates will be at 1.25-1.50 percent, 18 percent probability that rates will be at 1.50-1.75 percent, 3.5 percent probability that rates will be at 1.75-2.00 percent, and 0.5 percent probability that rates will be at 2.00-2.25 percent.
The probability is suggesting,

There hasn’t been much of a change after the FOMC. The market is still pricing a hike in June and a hike in December. It is still not clear why the market is predicting two hikes in H1 and just one in H2. This is probably because the market is pricing the Fed would keep additional room for easing.
We suspect that if the price of oil tumbles further, so would be the hike odds.

The New Zealand bonds remained weak at the time of closing Friday, tracking softness in the U.S. counterparts amid a quiet trading session that witnessed data of little economic significance. Also, investors will remain focused on the GlobalDairyTrade (GDT) price auction, scheduled to be held on March 21.

The yield on the benchmark 10-year bond, which moves inversely to its price rose 1 basis point to 3.29 percent at the time of closing, the yield on 7-year note jumped nearly 1-1/2 basis points to 2.86 percent while the yield on short-term 2-year note also dived 1 basis point higher at 2.13 percent.

New Zealand’s economy expanded 0.4 percent q/q over the final three months of 2016. That was below consensus expectations and the softest quarterly growth experienced since Q2 2015. Q3 growth was also revised lower to 0.8 percent q/q (from 1.1 percent previously reported). As such, annual growth eased to 2.7 percent y/y.

New Zealand’s Dairy prices fell 6.3 percent in the latest GDT price auction, following a 3.2 percent decline a fortnight ago. Within this, powder prices performed poorly, with whole milk powder prices falling 12.4 percent to USD2,794/MT, and skim milk powder prices falling 15.5 percent. Meanwhile, AMF continues to be well-supported at high levels, edging down only 0.8 percent.

New Zealand’s current account deficit narrowed as expected in Q4, leading to the smallest annual deficit (2.7 percent of the gross domestic product) since September 2014. Looking forward, there seem to be risks skewed towards modestly larger deficits on the back of higher global interest rates and a slow closure of the domestic credit-deposit growth gap, but this is not a cause for alarm.

The unadjusted current account deficit narrowed to USD2.3 billion in Q4 (from USD5.0 billion), broadly in line with consensus expectations. In annual terms, the deficit narrowed to 2.7 percent of GDP, which is the smallest deficit since September 2014 and well below its historical average of 3.7 percent.

In seasonally adjusted terms, the current account deficit also narrowed (by slightly more than we expected), printing at USD1.6 billion, down USD0.4 billion from Q3, driven by a further increase in the services surplus to an all-time high of USD1.2bn on increased international tourist spending, offset by a mildly larger goods deficit. The income deficit also narrowed by around USD0.4 billion to USD2.0 billion as income from New Zealand’s offshore investments increased in the quarter.

Further, net external debt of deposit-taking institutions rose a touch in the quarter to just over USD105 billion. However, that was offset by reduced external borrowing from the central government and ‘other’ sectors, meaning that the county’s total net external debt position actually fell to USD143.5 billion or 55.0 percent of GDP, the lowest since 2003.

The Japanese government bonds remained flat Wednesday as investors await to watch the Bank of Japan’s (BoJ) 2-day monetary policy meeting, scheduled to be held on March 15-16, announcing its decision on Thursday.

The benchmark 10-year bond yield, which moves inversely to its price, hovered around 0.09 percent, the long-term 30-year bond yields also traded flat at 0.87 percent and the yield on the short-term 2-year note remained rose by 1/2 basis points to -0.25 percent by 05:10 GMT.

The BoJ is expected to keep monetary policy steady on Thursday and stress that inflation is nowhere near levels that justify talk of withdrawing massive stimulus, as weak consumer spending casts a cloud over an otherwise healthy pick-up in the economy.

Further, at the two-day rate review that ends on Thursday, the central bank is expected to maintain its short-term interest rate target at minus 0.1 percent and a pledge to guide the 10-year government bond yield around zero percent via aggressive asset purchases. Analysts also expect the BoJ to keep intact a loose pledge to maintain the pace of its annual increase in Japanese government bond (JGBs), which is JPY80 trillion (USD696.62 billion).

The New Zealand bonds nose-dived Thursday, tracking weakness in the U.S. counterpart, with the 10-year yields sinking to over 2-week low after investors crowded demand in safe-haven assets, following lower-than-expected fourth-quarter gross domestic product (GDP).

The yield on the benchmark 10-year bond, which moves inversely to its price plunged 10 basis points to 3.28 percent, while the yield on 7-year note also slumped 10 basis points to 2.85 percent while the yield on short-term 2-year note dived 6-1/2 basis points to 2.12 percent by 05:50GMT.

New Zealand’s economy expanded 0.4 percent q/q over the final three months of 2016. That was below consensus expectations and the softest quarterly growth experienced since Q2 2015. Q3 growth was also revised lower to 0.8 percent q/q (from 1.1 percent previously reported). As such, annual growth eased to 2.7 percent y/y.

On the back of stronger terms of trade, nominal GDP rose 2.1 percent q/q (7.5 percent y/y), while real gross national disposable income (RGNDI) surged 2.8 percent q/q, the strongest quarterly lift since Q1 2010. In per capita terms, RGNDI rose 2.3 percent q/q. The benefits of this real income boost should not be discounted.

WTI dropped more than 9 percent last week as investors fear increased production in the United States and non-compliance within OPEC with the agreed production deal. WTI is currently trading at $48.7 per barrel and Brent at $51.9 per barrel.

Key factors at play in crude oil market –

February report shows that OPEC still remains in full compliance with the deal as a group but many members are yet to adhere to the agreed levels. Iran’s production crossed the agreed level in February but the country is still in compliance based on average monthly production.
Saudi Arabia could be bypassing the OPEC deal by increasing exports of refined products.
US production rose from 8.428 million barrels in last July to 9.09 million barrels per day last week. This is the highest level of production since last year. Payrolls are once again rising in the oil and gas sector according to ADP job numbers.
Some OPEC members are calling for no continuation of the deal when it expires in June.
Backwardation in the oil market extends further, currently at $1.05 per barrel.
API reported a draw 0.531 million barrels of crude oil.
Today’s inventory report from US Energy Information Administration (EIA) will be released at 14:30 GMT. Trade idea –

We expect the WTI to extend gains towards $59 per barrel, and then towards $67 per barrel. However, a decline towards $46 per barrel in the short term can’t be ruled out. We don’t suspect the oil price to break below $42 stop loss area for the long call.

A rate hike from the US Federal Reserve’s Federal Open Market Committee (FOMC) today is almost a certainty. The policymakers would conclude their two days of meeting today and announce the decision at 18:00 GMT, followed by a press conference by the Fed Chair Janet Yellen. As of data available for March 14th, the participants in the financial markets are pricing with 91 percent probability that there will be a 25 basis points rate hike. The market is pricing the next hike to be in June and the third hike to be in December.

We have prepared an FOMC dashboard that segregates members in three distinct groups, Hawks, Doves, and unknowns based on their remarks and commentaries made in public forums, focusing on the March interest rate decision. That dashboard is also suggesting that there will be a hike today. We have found that except for Minneapolis Fed President Neel Kashkari, all the other members are hawkish heading to the rate decision. We also couldn’t confirm the views of Daniel Tarullo, who has recently resigned and this is his last rate decision meeting.

The US dollar index is currently trading at 101.38, down 0.25 percent for the day. The dollar has been struggling to head to higher highs despite a full market pricing (almost) of a hike in March and three this year. So, the dollar index might see selloffs after the interest rate decision if the inflation and interest rate outlooks are not substantially upgraded beyond what was shared in the December projections. In addition to that, the major focus is on the Dutch election this week, for which the results would start appearing after the FOMC meeting.

The Australian bonds traded modestly higher Wednesday as investors poured into safe-haven assets ahead of the February employment report, scheduled to be released on March 16. Also, the Federal Open Market Committee’s (FOMC) monetary policy meeting, scheduled for later in the day will provide further guidance to financial markets.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1/2 basis point to 2.93 percent, the yield on 15-year note dived nearly 1 basis point to 3.32 percent and the yield on short-term 2-year also traded 1 basis point lower at 1.89 percent by 03:20 GMT.

Australia’s February business conditions retraced some of the previous month’s gains, but remain at levels consistent with solid growth. Confidence also eased back slightly. Business confidence also edged down in February, alongside a further deterioration in the Federal Government’s standing in public opinion polling.

“We expect the February jobs report, out later this week, to show a solid rise in employment, but over the longer term a sharper downtrend in the unemployment rate is likely necessary for a sustained boost to households’ perceptions of their finances,” ANZ Research commented in its latest research report.

The UK gilts slumped Tuesday ahead of the country’s labor market report, due on March 15 and as investors remain cautious ahead of the Bank of England’s (BoE) monetary policy decision, scheduled to be held on March 16.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 1 basis points to 1.25 percent, the super-long 25-year bond yields also rose 1/2 basis point to 1.88 percent and the yield on the short-term 3-year traded flat at 0.24 percent by 09:50 GMT.

The BoE is expected to maintain its neutral policy stance at the monetary policy meeting, scheduled to be held on March 16. Further, the central bank is also expected to hold its Bank Rate at 0.25 percent while leaving the targets for the stock of government bond purchases (APF) and the stock of corporate bond purchases (CBPS) unchanged at GBP435bn and GBP10bn, respectively.

“In our view, the BoE seems to be more worried about slower growth than too-high inflation if this is only temporary. EUR/GBP has reached our 1-3M target of 0.87 and we are currently reviewing our forecast. We still see risks skewed to the upside for EUR/GBP in the coming months ahead of and after the triggering of Article 50,” Danske Bank commented in its recent research report.

The Japanese government bonds traded narrowly mixed Tuesday as investors await to watch the Bank of Japan’s (BoJ) 2-day monetary policy meeting, scheduled to be held on March 15-16, announcing its decision on Thursday.

The benchmark 10-year bond yield, which moves inversely to its price, hovered around 0.09 percent, the long-term 30-year bond yields also traded flat at 0.87 percent and the yield on the short-term 2-year note remained steady at -0.25 percent by 06:00 GMT.

The BoJ is expected to keep monetary policy steady on Thursday and stress that inflation is nowhere near levels that justify talk of withdrawing massive stimulus, as weak consumer spending casts a cloud over an otherwise healthy pick-up in the economy.

Further, at the two-day rate review that ends on Thursday, the central bank is expected to maintain its short-term interest rate target at minus 0.1 percent and a pledge to guide the 10-year government bond yield around zero percent via aggressive asset purchases. Analysts also expect the BoJ to keep intact a loose pledge to maintain the pace of its annual increase in Japanese government bond (JGBs), which is JPY80 trillion (USD696.62 billion).

The German bunds jumped at the start of the week on Monday as investors remain keen to watch the European Central Bank (ECB) Governor Mario Draghi’s speech, scheduled for later in the day. Also, the 30-year auction, scheduled to be held on March 15 will remain crucial in determining the teh future direction of the bond market.

Besides, markets shall remain hooked to assess the speeches by other ECB members Sabine Lautenschlaeger, Vitor Constancio and Peter Praet later through the day.

The yield on the benchmark 10-year bond, which moves inversely to its price, slumped nearly 4 basis points to 0.45 percent, the long-term 30-year bond yields plunged over 4 basis points to 1.22 percent and the yield on short-term 2-year bond traded 1-1/2 basis points lower at -0.82 percent by 08:30 GMT.

The ECB kept all policy measures unchanged at last week’s meeting, which was in line with market expectations. However, Governor Mario Draghi had a hawkish tone during the Q&A session as he said the Governing Council discussed whether to remove the ‘lower levels’ from the forward guidance on policy rates.

Further, on the very short-end, German yield curve, Draghi said the ECB was monitoring distortions. The market reacted by sending German government bond yields higher by around 5bp beyond the 10Y point.

Lastly, investors will be closely eyeing February consumer price inflation, due to be released on March 16 for detailed direction in the debt market.

The Australian bonds rebounded on the first trading day of the week as investors remain glued to watch the February employment report, scheduled to be released on March 15. Further, the 10-year bond yields have formed a ‘bullish gravestone doji’ pattern after two consecutive sessions of selling activity in the last week.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, plunged 3-1/2 basis points to 2.95 percent, the yield on 15-year note also dived 3-1/2 basis points to 3.34 percent and the yield on short-term 2-year traded 1-1/2 basis points lower at 1.91 percent by 04:40 GMT.

Australia’s unemployment rate unexpectedly fell in January, despite a plunge in full-time jobs, underscoring the mixed picture of the country’s labor market. The unemployment rate held below 6 percent partly due to discouraged job-seekers giving up the hunt, underscoring spare capacity in the labor market.

The New Zealand government bonds jumped Monday at the time of closing, following expectations of a drop in the country’s fourth-quarter gross domestic product (GDP), scheduled to be released on March 15.

The yield on the benchmark 10-year bond, which moves inversely to its price plunged 3-1/2 basis points to 3.39 percent at the time of closing, the yield on 7-year note also slipped nearly 3-1/2 basis points to 2.94 percent while the yield on short-term 5-year note traded 2-1/2 basis points lower at 2.64 percent.

The rate of quarterly GDP growth is expected to soften a touch in Q4, partly related to temporary weather influences. Tight supply (rather than meaningfully softer demand) conditions are dominating. The current account deficit should remain at a historically comfortable level, ANZ research reported.

“We estimate that GDP rose by a modest 0.5 percent in the December quarter, following 1.1 percent growth in September. Construction is again expected to be one of the strongest sectors, with primary production and manufacturing likely to be the most significant drags on growth,” Westpac commented in its recent research publication.

UK industrial output slows less than expected in January, but manufacturing and construction activity both shrank more than expected. Data released by the Office for National Statistics showed Friday UK industrial production decreased 0.4 percent in January compared to a 0.9 percent rise in December.

This was the first decrease since October 2016 and was less than expected fall of 0.5 percent. On a yearly basis, growth in industrial output eased to 3.2 percent in January, in line with expectations, and compared to 4.3 percent in December.

Both manufacturing and construction activities shrank more than expected in January. Factory output was down 0.9 percent in the opening month of 2017 against expectations of a 0.4 percent decline, while construction sector output dropped 0.4 percent compared to forecasts of a 0.2 percent fall, according to the Office for National Statistics.

The figures follow a strong end to 2016, and markets were anticipating a pullback. However, there is little evidence of a dramatic slowdown as Brexit talks loom, with the falling pound continuing to underpin exports.

“The data suggest the Bank of England will adopt an increasingly dovish view in coming months, with rhetoric highlighting the downside risks to the economy posed by rising inflation and heightened political uncertainty,” said Chris Williamson, Chief Business Economist, IHS Markit

The German 10-year government bund yields climbed to 5-week high on the last trading day of the week ahead of the Eurogroup Summit scheduled to be held later in the day. Also, a hawkish stance by the European Central Bank (ECB) in its monetary policy meeting held yesterday, drove prices lower.

The yield on the benchmark 10-year bond, which moves inversely to its price, jumped 2-1/2 basis points to 0.44 percent, the long-term 30-year bond yields surged 3 basis points to 1.26 percent and the yield on short-term 2-year bond traded 2 basis points higher at -0.84 percent by 08:10 GMT.

The ECB kept all policy measures unchanged at today’s meeting, which was in line with market expectations. However, Governor Mario Draghi had a hawkish tone during the Q&A session as he said the Governing Council discussed whether to remove the ‘lower levels’ from the forward guidance on policy rates.

Further, on the very short-end, German yield curve, Draghi said the ECB was monitoring distortions. The market reacted by sending German government bond yields higher by around 5bp beyond the 10Y point.

Lastly, investors will be closely eyeing the trade balance, due late today for detailed direction in the debt market.

President Donald Trump’s Treasury Secretary Steven Munchin has warned the both houses of congress in an open letter of the looming debt ceiling, which is expected to get hit on March 15th. The image of the letter is attached. In the letter he said that the suspension of the statutory debt limit which was done via a bipartisan budget act of 2015 will expire on March 15th of this year and from March 16th, the outstanding debt of the United States will be at the statutory limit. He warns that after that treasury will have to take up extraordinary measures to temporarily avoid defaults on obligations. He adds that after March 15th, it would halt sales of state and local government series (SLGS) and the suspension would continue until the debt limit is either increased or suspended.

Lastly, he encourages the congress to raise the limit at the earliest. President Trump has been critical of debt-ceiling increases in the past. In 2013, he had tweeted the followings,

“I cannot believe the Republicans are extending the debt ceiling—I am a Republican & I am embarrassed! Republicans are always worried about their general approval. With proposing to ‘ignore the debt ceiling’ they are ignoring their base.”

However, this time around, he is likely to support an increase.

US real yieldsare breaking higher, driven largely by nominal yields and pushing USDJPY through the 115 level. US 10y real yields (59bp)have now retraced 70% of the decline seen in the past 3 months (falling from 71bp to 30bp). Within the G10 the JPY is generally the most sensitive as real yields rise, but recently also the NOK has come up on the scale. The NOK generally moves in line with oil prices, suggesting the recent rise in nominal yields, while inflation expectations stay flat as oil prices have fallen, should keep USDNOK on an upward trend for now. USDJPY is approaching a technical level, where a move through 115.62 should mark a break of the current trading range, with little resistance before 118.60.

USD and Payrolls. Market expectations are for a strongFebruary employment print today following ADP on Wednesday. Using submission to Bloomberg, sent after the ADP, we calculate median expectations to be at 230k. Average hourly earnings will be more important for the USD relative to the headline NFP as this would suggesthigher domestic inflationary pressures. The US saw import prices from China, the source of over 20% of U.S. imports, rise 0.1% in February. According to our economists, that may not seem like much, but it was the first increase in three years. Global and local inflationary pressures could soon make markets reprice Fed rate hike expectations going into 2018 and beyond, which we think would be bullish for the USD.

ECB lookingat EUR REER. Markets perceived the ECB to have been hawkish yesterday,yet we couldn’t find much difference in the commentary relative to December. The sell-off in bunds drove EURUSD higher but we are considering it as an opportunity to sell. Inflation forecasts were pushed higher (as markets expected) with marginal tweaks to growth forecasts. Most importantly for investors looking for signals to the end of the current QE programme, Draghi reiterated several times that their current forecasts are conditional on finishing the current programme and thatunderlying inflation pressures remained subdued. We need to wait for more domestic core inflation prints.For our FX analysis, the most interesting comments were in response to a question about the US administration (Peter Navarro) saying that the EUR is too weak for Germany. After repeating what the US treasury (not classifying Germany as a currency manipulator) and Weidmann (ECB sets monetary policy for Germany) have said before, Draghi went to say, (in a comment that appeared to be offscript,) “By the way, if we look at where the [real] effective exchange rate stands today with respect to historical average, we don’t see especially that the euro is off the historical average. But the [real] effective exchange rate of the dollar is off the historical average. So it means that it’s not the euro which is the culprit for this situation.”

EUR: watching equity flows. EURUSD is currently tracking the 5y yield differential between Germany and the US.Front end rates (such as in the 2y part of the curve) point to a lower EURUSD due to the repo related distortions in the German 2y. We showed earlier this week that looking at forward rate differentials, EURUSD should be trading massively lower and could be experiencing something that we last observed in 2013. Back then it was foreign equity and bond inflows helping the currency. Today, the bond market valuations are much less attractive for a foreigner. Data from the IIFsuggests that global equity allocations to the euro area are low relative to a year ago (partly a result of political worries). We will therefore be watching for the next balance of payments release (22 Mar) to see if equity flows are limiting the downside for the EUR.

President Donald Trump’s Treasury Secretary Steven Munchin has warned the both houses of congress in an open letter of the looming debt ceiling, which is expected to get hit on March 15th. The image of the letter is attached. In the letter he said that the suspension of the statutory debt limit which was done via a bipartisan budget act of 2015 will expire on March 15th of this year and from March 16th, the outstanding debt of the United States will be at the statutory limit. He warns that after that treasury will have to take up extraordinary measures to temporarily avoid defaults on obligations. He adds that after March 15th, it would halt sales of state and local government series (SLGS) and the suspension would continue until the debt limit is either increased or suspended.

Lastly, he encourages the congress to raise the limit at the earliest. President Trump has been critical of debt-ceiling increases in the past. In 2013, he had tweeted the followings,

“I cannot believe the Republicans are extending the debt ceiling—I am a Republican & I am embarrassed! Republicans are always worried about their general approval. With proposing to ‘ignore the debt ceiling’ they are ignoring their base.”

However, this time around, he is likely to support an increase.

China’s new yuan loans fell sharply in February from near-record levels in the previous month but were still higher than expected. Chinese banks extended 1.17 trillion yuan (about 169.2 billion U.S. dollars) of new yuan loans in February, down from 2.03 trillion yuan in the previous month, central bank data showed Thursday.

The People’s Bank of China (PBOC) has adopted a modest tightening bias in a bid to cool explosive growth in debt, though it is treading cautiously to avoid hurting economic growth. Analysts polled by Reuters had predicted new February yuan loans of 0.920 trillion yuan.

China’s new yuan loans remained relatively strong in February, led by long-term household loans and corporate lending. Household and corporate long-term loans, in combination, accounted for CNY982.2bn or 84% of overall monthly new yuan loans.

The M2, a broad measure of the money supply that covers cash in circulation and all deposits, grew 11.1 percent from a year earlier to about 158.29 trillion yuan. The M1, a narrow measure of the money supply which covers cash in circulation plus demand deposits, rose 21.4 percent year on year to 47.65 trillion yuan.

“We see little chance for monetary policy to return to easing. In addition, the PBoC should continue to re-shape the interest rate curve in the money market, with higher 7-day reverse repo rates and Medium-term Lending Facility (MLF) rates,” said ANZ in a report.

Speaking with the BBC, Scottish first minister Nicola Sturgeon said that she has not decided whether to push for another independence referendum but insisted that she is not bluffing with her demands to the UK government for special concessions for Scotland. Previously she had said that she has cast iron mandate as her party was overwhelming elected in the regional election and because in the last referendum it was publicized that only by remaining in the UK, Scotland would have access to the EU single market. Her government brought a litigation saying that the parliament in Scotland should have voting power over Article 50, which was denied by the highest court. She has repeatedly accused Prime Minister Theresa May’s government of overlooking her demands.

While she kept her Scoxit referendum date thinly veiled she seemed to be agreeing on the time suggested by her predecessor Alex Salmond, who resigned after losing the first referendum. The time suggested by him is autumn 2018. According to Ms. Sturgeon, the time suggested makes sense as the major outline of the Brexit deal would be clear by then.