EUR/USD jump driven by rise in yields
Macroeconomic overview:
- Minneapolis Federal Reserve Bank President Neel Kashkari, who this year has dissented three times in votes at the U.S. central bank's policy meetings which raised rates despite low inflation, on Tuesday repeated his view that the labor market still shows signs of slack and could be improved.
- He added that by his estimate, a million workers are sidelined and could return to the workforce if the job market continues to strengthen. "We are better off letting inflation come to us than preemptively cutting off the expansion by raising rates prematurely."
- The Fed last week raised interest rates even though inflation has weakened despite an unemployment rate of 4.1%. The decision also drew dissent from Chicago Fed president Charles Evans.
- Kashkari said his dissent also stemmed from his worry that the flattening yield curve suggests the bond market is betting on low growth and low inflation ahead, despite a tax plan that Republican members of Congress and the administration say will boost growth.
- A provision in the tax plan that would encourage companies to repatriate cash from overseas, he said, would likely spur stock buybacks rather than investment in new factories, as some Republicans have suggested is the aim.
- Still, he said, long-term bond yields do suggest investors are not worried about financing the tax cuts, estimated to add USD 1.5 trillion to the federal debt over 10 years. Over the long term, a rising federal debt is a big threat to economic growth, Kashakari said.
- U.S. single-family homebuilding and permits surged to more than 10-year highs in November, in a hopeful sign for a housing market that has been hobbled by supply constraints.
- The bullish report from the Commerce Department on Tuesday followed a survey on Monday that showed confidence among homebuilders soaring to near an 18-and-a-half-year high in December. That bolstered expectations builders will ramp up construction and help alleviate an acute shortage of homes that has driven prices higher and sidelined some first-time buyers.
- The Commerce Department said single-family homebuilding, which accounts for the largest share of the housing market, jumped 5.3% to a rate of 930k units. That was the highest level since September 2007.
- Pointing to further gains, single-family home permits rose 1.4% to a pace of 862k units, a level not seen since August 2007. The jump in groundbreaking on single-family housing units indicated housing could contribute to gross domestic product in the fourth quarter.
- It added to data on retail sales, the labor market and manufacturing in suggesting the economy was ending the year on a strong note.
- The EUR/USD rose strongly driven by a jump in European bond yields on Tuesday after Germany unveiled a plan to issue more 30-year debt next year.
Technical analysis and trading signals:
- The close above the daily cloud is bullish for the EUR/USD. The cloud spans 1.1712/1.1823 on Wednesday and has flipped to support. Slow stochs are upticking and we could see a break back into the 1.1900s. Key resistance levels are: December 14 high at 1.1862 and 23.6% fibo of November-December fall at 1.1864. A break above would open the way to 1.1960 November peak.
- We keep our long position unchanged.
USD/JPY: BoJ to keep its monetary policy unchanged
Macroeconomic overview:
- U.S. Senate approved the US tax bill. Later today, the bill is expected to be approved by the House, which already approved it yesterday, but has to vote on it again for procedural reasons.
- The dollar briefly extended its gains against the yen. Gains in the dollar were limited as many market players looked to the Bank of Japan's two-day policy meeting ending on Thursday for clues to whether the BOJ will join the U.S. Federal Reserve and European central banks in winding back stimulus.
- A speech by BOJ Governor Haruhiko Kuroda in November sparked speculation of a stimulus taper when he mentioned the concept of a 'reversal rate' - a level at which low interest rates start to have more harmful side-effects than benefits. The BOJ is widely expected at this week's meeting to keep its short-term interest rate target at minus 0.1% and pledge to guide 10-year bond yields around zero percent.
- Since the previous BoJ meeting, GDP growth has proven to be firmer than initially expected (largely driven by business investment) and inflation has maintained its slow ascent. However, it still looks too soon for any meaningful changes to the wording as the bank has an interest in maintaining the positive momentum. Therefore, we expect the statement to retain the flexibility in monetary policy.
- That said, in 2018, markets should brace for a small, yet meaningful, change in the BoJ’s stance – most likely manifested through an adjustment in the yield-curve-management program. Economic growth is on a strong footing (currently running above potential), business surveys underscore improved sentiment, the labor market is tightening and the currency is still very competitive. Overall, we expect range-bound trading for USD/PY going into year-end, but next year should see a stronger yen. The risk going into tomorrow’s meeting is that the BoJ may sound a touch less dovish on the back of the improving economic developments. We see this as a low-probability event, but if it materializes, USD/JPY would likely face downward pressure amid lower-than-usual liquidity.
Technical analysis and trading signals:
- The USD/JPY has managed to break above the daily tankan line, which is now at 112.89 on Tuesday, but marginally failed to register a daily close above. The market is subdued while stuck within the thick daily cloud, which at the moment spans wide 111.03-113.40 region. There are two important resistance levels ahead: 113.40 (daily cloud top) and 113.74 (high on December 12).
- Our short is under pressure, but it is too early to give up as there are no clear bullish signals.
TRADING STRATEGIES SUMMARY:
FOREX - MAJOR PAIRS: 
FOREX - MAJOR CROSSES: 
PRECIOUS METALS: 
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