Markets become fearful ahead of Theresa May’s speech
The pound kicked off the market session down two figures and trading against the greenback below 1.20 for the first time in 32 years. The pair has since bounced back above this level.
On Tuesday, Theresa May will give a speech that some believe will be used to signal a hard Brexit and an exit from the European single market.
In the background, the Supreme Court are expected to give their final decision on the role of parliament concerning the triggering of Article 50. We believe that the chances of parliament blocking Brexit presents an underestimated risk.
Currency-wise, the market continues to wait for the doomsday effects of Brexit to kick in, a concern we do not share. The UK's most recent data supports our contrarian position. Long GBP/USD looks increasingly like the trade of the year.
US retail sales on the soft side, USD stronger amid risk-off move
December’s retail sales, released on Friday, came in rather on the soft side in spite of an upward revision of November’s figures. Advance retail sales printed at 0.6%m/m in the last month of the year, missing estimates of 0.7%, while November data was revised to 0.2% versus 0.1% first estimate. The strong figures came on the back of a pickup in demand for automobiles and gas station sales (+2.4% and +2% respectively) as the core measure - the one excluding automobiles and service stations - disappointed substantially, printing flat versus an expected rise of 0.4% (previous reading was revised to 0.3% from 0.2%).
All in all, the data showed that US consumers held back in December, failing to translate the strong Trump election rally into solid spending. The trend in core retail sales has been rather flat over the last two years with the 6-month moving average stuck below 0.5%, and sliding to 0.2% last month. Unless Trump delivers his stimulus package, we may have to deal with lacklustre consumption data over the next few months. For now, the market is waiting for Trump to provide some clarity but given the difficulty he has in delivering straightforward and coherent speeches, this may take some time. This morning, the USD is getting stronger as Brexit fears pick up and the general risk environment worsens. US markets are closed for Martin Luther King’s day.
China in Davos while Trump tweets
The symbolic significance of China’s Xi Jinping heading to Davos while Trump continues to trigger uncertainty on a wide range of topics from the USA should not be missed. Xi Jinping will become the first Chinese president to attend the World Economic Forum meeting in the Swiss Alps. In our view this global outreach by China comes at a time when Asian relations with the international community is at a crossroads.
China is presenting the world with a stable alterative to counterbalance Trump's anti-globalization rhetoric. The President-elect was never planning to attend (President Clinton was the only sitting US president to do so) with advisor Anthony Scaramucci appearing as his representative.
Given the global community's unease with Trump's unorthodox behaviour, it would be logical to expect a greater effort to calm nerves. We anticipate that 2017 will see China cement its dominance over Asia, not in military terms (as the US fears) but rather through trade partnerships to secure lasting relationships. In the short term, China will continue to struggle with growth and capital outflows yet in the long term an economic block defined by China will have an immense opportunity for demand.
In actuality, China's rebalancing strategy was only partially aimed at shifting from investment for export to consumption-driven growth, but also looking less toward the west and more towards Asia. China – US verbal war will continue to govern the headlines this week with Trump challenging the “One-China” policy and China's forceful rebuttal. Yet, in the longer term, China's strategy should not be overlooked.
AUD/USD - Trading Around The 200-DMA. 
The Risk Today
EUR/USD's momentum is still positive despite ongoing consolidation. Strong resistance is given at 1.0874 (08/12/2016 high). Hourly support lies at 1.0341 (03/01/2017 low). Expected to see continued increase. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
GBP/USD is back on getting lower within downtrend channel. The pair has definitely erased hourly support at 1.2083 (25/10/2016 low). The technical structure still looks bearish. Hourly resistance is given at 1.2262 (12/01/2016 high). Expected to monitor support at 1.1841 (07/10/2016 low). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY continues to decline after exiting the range between 116.12 and 118.66 in which the pair was during two months. Hourly support is given at 113.81 12/01/2017 low). Expected to see further downside moves.. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF's momentum is clearly bearish. Yet, the pair is still moving between hourly resistance given at 1.0344 (15/12/2016 high) and support at 1.0021 (08/12/2016 low). Key support is given at the parity. Expected to decline towards 1.0021. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
