china stable policy

China's economy is on a steady growth path as 2016 ends, supported by a housing boom and billions in government investment, but the mood of policymakers is more cautious than celebratory as they face "complexity" in the new year.

Controlling risks has been a constant refrain in recent months as the focus of policymakers switches to taming asset bubbles and checking unbalanced growth stemming from efforts to fuel the economy with credit.

The central bank - while reaffirming a long-standing commitment to prudent policy - said on Friday it would pay more attention to maintaining a "neutral" stance and ensure that it is "neither too tight nor too loose".

"At present, China's economic and financial operations are generally stable, but the complexity of the situation cannot be underestimated," the People's Bank of China (PBOC) said.

Bank lending is on pace to top 2015's record 11.71 trillion yuan ($1.7 trillion), helping to stoke a housing boom that saw prices rise a historic 12.6 percent year-on-year in November, while fixed asset investment by state firms is growing more than 20 percent.

DOLLAR STARTS WITH A LITTLE PROFIT

Into the final week before Christmas holiday season and after such a strong reaction in the wake of the FOMC the dollar bull run is seeing a little profit taking today. However this is unlikely to turn into anything more significant than simply another chance to buy the dollar as the charts are not suggesting this minor profit taking will impact too greatly. Treasury yields are marginally lower and this has driven a dollar consolidation with the trade weighted dollar index back from Thursday’s post-FOMC high of 103.6 to 102.6. There is room for a correction back towards 102 area however further dollar strength is expected in due course. Equities are likely to see subdued volumes this week and considering the huge run higher of the past few weeks, perhaps a bit of caution to end the year should not be unexpected.

what happen to opec cut

In an "unexpected" twist, the WSJ reports that instead of cutting its crude production by 4% as it "promised" it would do in the Vienna November 30 meeting, Iraq instead plans to increase crude-oil exports in January, according to government records, immediately raising questions about its commitment to the OPEC’s landmark production agreement. Iraq’s national oil company, the State Organization for Marketing of Oil, or SOMO, had plans as of December 8, nine days after agreeing to cut production, to instead increase deliveries of its Basra oil grades by about 7% to 3.53 million barrels a day compared with October levels, according to a detailed oil-shipment program viewed by The Wall Street Journal. Those oil shipments represent about 85% of Iraq’s exports.
The list of planned tanker loadings has been circulated among potential buyers so they can gauge its availability.
When asked by the WSJ to explain this curious discrepancy, SOMO chief Falah al-Amri declined to comment about the company’s January export levels. Iraq’s oil minister, Jabbar Ali al-Luaibi, has said he would instruct SOMO to act on the OPEC output-cut agreement.

As a reminder, Iraq agreed to cut its output by 210,000 barrels a day from October levels of 4.561 million barrels a day. The country’s oil officials were among the most reluctant to go along, disputing OPEC’s statistics and threatening to pull out of the agreement until the last minute because it needs the oil revenue to fight its war against Islamic State. Iraq says it has increased its output to 4.8 million barrels a day in 2016, from less than 3 million barrels a day a few years ago, using Western and Chinese oil companies to tap into its deep crude reserves.

EUR/USD Forecast Dec. 12-16

EUR/USD was hit hard by dovish Draghi and fell back to lower ground. Fresh PMIs, as well as other events, await the euro. Will it continue lower? Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.

The ECB decided to reduce the amount of monthly bond buys to 60 billion from April 2017 but also chose to extend the program towards the end of the year and to loosen a few limits. Coupled with a dovish tone about the path of inflation, EUR/USD eventually plunged. Earlier, Italian voters rejected the constitutional changes proposed by Renzi, in another blow to mainstream politics. But here, the euro recovered quickly. In the US, the ISM Non-Manufacturing PMI beat expectations, as markets shift their attention to the FED.

Technical lines from top to bottom:
1.10 is a round number and significant resistance. 1.0960, which supported the pair in early 2016 worked as resistance in October. 1.0850, which worked as support during the same month, serves as support.
The post-Draghi low 1.0780 replaces 1.08 as support. 1.0710 is the next support line on the chart after temporarily capping the pair in April 2015.
1.0690 is the post-Trump high. 1.0570 is the bottom of the range seen afterwards.
Further below, the 2016 low of 1.0520 and the 2015 low of 1.0460 provide further support – it is the last line in the sand.

EURO REMAINS FIRM IN FRONT OF THE ECB

The bulls run on equity markets took another shot in the arm yesterday as major markets all pushed strongly higher. Wall Street continues to push into new high ground, however it was the breakout on the DAX above 10,827 which was a multi month resistance that caught the eye. This comes with the euro remaining firm just before the ECB is expected to extend its QE program by at least six months at the meeting of the governing council today. However, the interest in the press conference will be whether the ECB is at the same time also beginning to prepare for the tapering of the QE program. This would be the surprise for the market and it is interesting to see the euro having started to push higher in the run up to the meeting. Last December the ECB disappointed the market by not extending easing, something that caused a huge rally on the euro. Could we be in line for a similar disappointment? It is also worth noting that the rally in Treasury yields is consolidating and possibly beginning to roll over. This is helping to pull the US dollar lower with the trade weighted dollar index looking corrective now. If the ECB disappoints, the dollar could go into reverse mode at least for the near term.

EURO TO CONSOLIDATE WITH UNCERTAINTY AHEAD OF THE ECB

The dollar managed to unwind some of its losses yesterday as strong factory orders helped to drive a recovery. However, over the past weeks the corrective outlook for the dollar has been building and it will be interesting to see if this is anything more than a rally within the corrective pressure. The trade weighted dollar index completed a top below 100.65 and the move has merely unwound back to that neckline which is now an area of resistance. The yields on US Treasuries have been consolidating and are now longer advancing for now as the market is clearly pondering just how far the dollar has come in such a short space of time. The euro gave back some of the ground that it made following the Italian referendum, however it is beginning to consolidate today as traders look towards the uncertainty of the ECB monetary policy meeting on Thursday. This is a meeting where we expect the ECB to extend the easing program by at least 6 months, but could also begin to signal a potential tapering of these asset purchases too, and so volatility is likely to be elevated.

EURO HOLDS ITS GAINS AS TRADERS BEGIN TO LOOK TO THE ECB

The euro has had a wild ride in the past day or so as the market turned from trepidation to a state of relief over the Italian referendum. Matteo Renzi lost the referendum and subsequently tendered his resignation however it seems that the prospect of an early election has receded and this has calmed the nerves for markets. The euro unwound by close to 300 pips at one stage before drifting off overnight. With the euro holding on to its recovery gains, markets will now begin to look ahead to the ECB meeting on Thursday with an expectation of a QE extension of maybe 6 months but could the ECB also allude to potential future tapering of asset purchases?  With the euro recovering and Treasury yields consolidating in the past few days, the trade weighted dollar has made a downside break below the support at 100.6 which completed a small top pattern and implies around a 1.5% corrective move now. Equity markets have reacted positively to the Italian referendum with Wall Street positive into the close (S&P 500 +0.6 at 2205) and the Nikkei up +0.5%. European markets are looking mildly positive in early moves.

GBP/USD Weekly Forecast: Brexit Stance Hopes Will Continue To Underpin Sterling

Overall, there is scope for some further unwinding of expectations surrounding a ‘hard’ Brexit and also some further unwinding of short Sterling positions. This combination is likely to give Sterling a firm underlying bias, especially with the dollar vulnerable to a correction, although momentum will tend to fade on any approach to the 1.3000 area. Sterling gained strong support over the week with the highest level against the dollar for close to two months and just before the flash crash with a move above 1.2700. Sterling also strengthened to 12-week highs against the Euro.

The UK currency gained support after comments from Eurogroup head Dijsselbloem that the EU might be able to find a way for the UK to maintain single-market access following an EU exit. There were also comments from UK Brexit minister Davies that the UK could, in theory, continue to make payments into the EU to maintain single market access while the International Trade Minister Hands also hinted late on Friday that the UK could remain in the EU Customs Union.

The Liberal Democrat win in the Richmond by-election will also increase pressure on the government to adopt a softer tone and Sterling continued to gain support from short covering.

The Brexit process will continue to be watched very closely in the short term as the political manoeuvring continues. The remarks both on and off the record from key government ministers will continue to have an important impact on sentiment. The government is also due to submit its appeal to the Supreme Court following the High Court ruling in November that the government needed to seek parliamentary approval before triggering Article 50 to launch the formal EU exit negotiations. The government is looking to over-turn the ruling and submissions will be important, although the Court is not scheduled to make a ruling until early in 2017.

Sterling has gained support over the past two weeks from hopes that the government will not be forced into a ‘hard’ Brexit and will be able to negotiate some form of access to the single market. If these hopes are sustained, Sterling will tend to maintain a more positive tone while any evidence of a reversion to a more hard-line stance would tend to put the currency back under pressure.

As far as data releases are concerned, the PMI services-sector data will be released after mixed readings for the manufacturing and construction sectors. The latest industrial production data is scheduled for release on Wednesday along with the latest NIESR GDP estimate. On the retail side, the BRC retail sales data on Tuesday and shop-price data Wednesday will be watched closely with the inflation data particularly important given expectations that Sterling weakness will increase prices sharply over the next few months. The latest trade data is also due on Friday. The data impact is likely to be relatively neutral with the Bank of England firmly on hold in the short term.

Bank of England Governor Carney is due to deliver a speech on Monday, although it is unclear whether there will be a release of any text. Trends in the dollar will continue to be watched closely and will inevitably have a big impact on GBP/USD. The underlying tone is liable to be one of consolidation ahead of the FOMC meeting the following week, but there is the risk of some further net consolidation in the US currency after very strong US gains since the Presidential election.

There is unlikely to be any substantive Fed rhetoric with the December rate increase still a done deal following the latest employment report and the Fed will enter the pre-meeting quiet period from Tuesday. The US ISM non-manufacturing data will be released on Monday with the University of Michigan consumer confidence data on Friday.

The latest COT data recorded a small increase in net short non-commercial positions to just over 78,000 in the latest week from under 75,000 the previous week, the first increase for three weeks, and there will be a further threat of short covering which will tend to boost the UK currency.

MARKETS CONSOLIDATING DESPITE HISTORIC OPEC DEAL

Market sentiment still look to be in something of a consolidation mode today amidst a mix of factors including oil China and concern over the Italian referendum is leaving traders in a state of caution. On the positive side, OPEC members agreed to an historic production cut which will lead to the cartel reducing supply from the current around the 33.8 million barrels per day to 32.5m barrels per day. Furthermore, Russia (not a member of OPEC) has agreed to cutting its own production by 300,000 barrels per day. The price of oil has soared on the news and is up around 10% since the rumours of a deal started circulating yesterday. Another positive for sentiment is the China Manufacturing PMI  which beat estimates on both the official and unofficial Caixin data, remaining above 50 and at the highest level on the official data (51.7) since July 2014. However there is increasing concern over the capitalisation of Italian banks ahead of the Italian referendum on Sunday. If the referendum returns a “no” vote to Prime Minister Renzi’s proposed constitutional reforms then the prospect of economic reform becomes much harder, something that the banks badly need to drive growth again.