CBT to hike rates, Brazil's outlook brigthens

Brazil’s inflation outlook continues to improve (by Arnaud Masset)

On Monday, the Brazilian central bank (BCB) released its latest weekly economist survey. The report showed that the central bank expected inflation to decelerate at a faster pace than anticipated as the main inflation gauge, the IPCA, is anticipated to reach 4.71% by year-end compared to 4.80% last week and 4.85% a month ago. As such, they also lowered their expectations for the year-end Selic rate level. The BCB’s benchmark rate should ease to 9.50% by the end of 2017, which is 3.50% lower than the current level of 13%.

All in all, even though the survey showed that economists did not expect growth to pick up, the broader picture keeps improving in Brazil and will sooner rather than later start to translate into firmer growth and increasing investments. Indeed, after reaching a multi-year low in 2016, foreign investments should continue to pick up against the backdrop of fading risk aversion and improved growth prospects. In addition, the downward pressure on yields should help Brazilian companies to attract fresh money as investors gradually turn their backs on Brazilian treasuries in search of higher yields. On the currency side, the Brazilian real should also profit from this new dynamic. USD/BRL will continue to move south as investors ride the still profitable carry trade and start gradually increasing their exposure to the Brazilian economy.

Confusing US Trade Policy (by Peter Rosenstreich)

President Trump's first full day in office was as confusing as his astonishing rise. Trump officially withdrew the US from the TPP deal (watch for the rise of the China-led Regional Comprehensive Economic Partnership), while Stephen Schwarzman, White House economic advisory committee chair said that Canada was not the target of NAFTA renegotiations. Mr. Schwarzman underlined Canada’s “very special status”, which was positive to say the least for a nation that exports 75% of its goods & services to the USA. However, the overall interpretation of recent events is that Trump's trade policy is completely “from the hip.” Protectionist policy setting with flexible ideology makes foreign exchange trading extremely uncertain. We are holding our midterm view that Trump's fanatical claims, focused on a pro-growth agenda, are unlikely to meaningfully materialize and that three 25bp Fed rate hikes are generally priced in therefore a rally in USD is an opportunity to reload shorts. In addition, US Treasury Secretary nominee Mnuchin's warning over USD strength should dictate real policy (contrasts with supporting a strong USD policy last week) since if a nation is gearing up for a trade war, a strong currency is unlikely to be an asset. While we wait for Trump’s next policy-related tweet, US Manufacturing PMI and existing home sales should provide further evidence of a healthy US economy.

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Gold - Failed To Break Resistance At $1221.

EURUSD

EUR/USD's momentum is still largely positive despite some consolidation. Hourly resistance is given by resistance implied by the upper bound of the uptrend channel at around 1.0750. Hourly support lies at 1.0590 (19/01/2016 low) and 1.0341 (03/01/2017 low). Expected to see continued increase towards 1.0800. 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.

GBPUSD

GBP/USD continues its increase. The technical structure is showing positive potential. Hourly resistance is given at 1.2544 (24/01/2016 high) while hourly support is given at 1.2254 (19/01/2016 low). Expected to show further strengthening. 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.

USDJPY

USD/JPY is back within downtrend channel after monitoring resistance implied by the upper bound of the downtrend channel. The road remains wide-open towards hourly support given at 111.36 (28/11/2016 low). Hourly resistance is given at 115.62 (19/01/2016 high), 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).

USDCHF

USD/CHF's momentum is clearly bearish. The pair has broken parity. Key resistance is given at a distance at 1.0344 (15/12/2016 high). The road is wide-open for further decline. 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.

Resistance and Support