“In the week ending on Jan 12, most Brazilian assets kept surfing the positive global tide,” Rabobank analysts note.

Key quotes

The BRL closed the week at 3.20/USD (+0.8%, strongest since late October), about in line with the average of key regional (and commodity producing) peers. The long end of the BRL yield also rallied, with premium still looking attractive for some tenors.

Last week saw economic releases from the tertiary sector confirming the baseline scenario of gradual economic recovery led by consumer spending. The inflation data showed a likely end to such a long patch food deflation, a key element (but surely not the only one) behind the subdued full-2017 reading of 2.9% (lowest since 1998). The recent CPI data boosted the chances that the rate-cutting cycle will end with a final 25-bp move (to 6.75%) in February.

In a relatively empty week in terms of economic data, and keeping activity on the spotlight, this week’s agenda features November IBC-Br (the BCB’s economic activity index) on Monday.

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Financials and energy lead gains on Friday.
Dow Jones adds 2% on the week, Nasdaq and S&P 500 up 1.75%.
Today’s data showed that the economic recovery remains healthy.

Major equity indexes in the U.S. started the day on a positive note and scaled new all-time highs as the earnings season kicked off with strong numbers from the financial sector and retail sales data showed that the economic activity preserved its momentum at the end of the year.

Moreover, a separate report showed that the annual core-CPI rose more than expected, ramping up the expectations of the Fed making at least three more rate hikes in 2018. Commenting on the inflation figures, “the economy is doing quite well right now … and well enough for the Fed to feel compelled to take steps to take the edge off before inflation truly becomes problematic,” Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan, told Reuters.

The S&P 500 Financials Sector (SPSY) gained nearly 1% on Friday after BlackRock reported better-than-expected earnings and rose 3%. Meanwhile, JPMorgan added more than 1% following a report that forecasted that the tax overhaul would boost the profits in 2018. percent.

The S&P 500 Energy Sector (SPNY) also rose around 1% on Friday as crude oil prices preserved weekly gains and Baker Hughes reported that the U.S. based oil drillers added ten more rigs this week.

At the end of the day, the financial-heavy Dow Jones Industrial Average was up 225.51 points, or 0.88%, at 25,800.24, the S&P 500 added 18.25 points, or 0.66%, at 2,785.81 and the Nasdaq Composite gained 47.27 points, or 0.66%, at 7,259.05.

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Trading action in crypto space stays choppy on Friday.
Bitcoin struggles to find direction.
Cardano adds nearly 20%.

The BTC/USD pair on Friday stayed relatively quiet and moved in a tight range around the $14K mark. In fact, most of the cryptocurrencies in the top ten in terms of market cap went into a consolidation phase ahead of the weekend as investors are waiting for fresh developments surrounding the government intervention in South Korean and Chinese exchanges.

“The ban in South Korea will impact the value of cryptocurrencies in the short term. In my opinion, the market is only now entering the “early adopter” phase. The rise in the value of cryptocurrencies in the last few months is the beginning of a global wave of awareness. As with China, South Korea’s ban is an incidental and temporary damper to growth. Overall, cryptocurrencies should continue to gain global popularity and support in the long term,” commented Lon Wong, President, NEM.io Foundation Ltd, as per transformgroup.io reports.

On the other hand, in a recently published article, Finder.com has predicted that Cardano would become the third largest cryptocurrency by the end of 2018 behind Bitcoin and Bitcoin Cash. According to the latest available data on coinmarketcap.com, Cardano was the fifth biggest crypto asset with a market cap of $22.5 billion while trading 19% higher at $0.86.

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Canadian Prime Minister Justin Trudeau recently crossed the news wires saying that he was optimistic that three NAFTA nations could agree on improvements to the treaty.

Key quotes (via Reuters)

Pressed about Trump’s most recent comments on NAFTA, says approach hasn’t changed: We will not just accept any deal.

Notes that more and more Americans are speaking out in favor of NAFTA; says prepared for anything, has contigency plans.

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DXY refreshes 3-year lows below 91.
USD/JPY records biggest weekly drop since April.
Inflation data fails to stop the USD’s bleeding.

After rising to a daily high at 111.70 during the early trading hours of the American session, the USD/JPY pair lost more than 70 pips and broke below the 11 mark to refresh its lowest level since late November at 110.91. As of writing, the pair was trading at 110.95, losing 30 pips, or 0.27%, on the day.

Earlier this week, the BoJ’s announcement of a reduction in bond-buying allowed the JPY to gather strength against the USD and other major currencies as well. In fact, despite the Euro Index’s strong performance this week, the EUR/JPY pair is looking to close the week lower. 

On the other hand, following the technical correction witnessed during the first half of the week, the US Dollar Index, once again, reversed course and broke below the critical 91 mark to renew its lowest level since January 2015 at 90.71. Despite a slightly higher-than-expected core-CPI reading from the U.S. on Friday, the DXY failed to make a meaningful recovery as investors remained focused on the euro, which rose to its strongest level against the buck in more than three years.

On a weekly basis, the pair is losing more than 200 pips, its largest loss since the first week of April. However, with technical indicators showing oversold conditions on various time frames and the odds of the Fed making at least three more rate hikes in 2018, the pair could have a difficult time pushing lower in the near-term.

Technical outlook

The pair could encounter the first technical support at 110.80 (Nov. 27 low) ahead of 110 (psychological level) and 109.55 (Sep. 14 low). On the upside, resistances could be seen at 111.75 (200-DMA), 112.75 (100-DMA) and 113.20 (Jan. 9 high).

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Analysts from Wells Fargo,  expect the Bank of Canada to continue with its own tightening campaign by increasing its target rate 25 bps, to 1.25% on Wednesday. 

Key Quotes: 

“North America came out of the gates early in this latest global tightening cycle with the U.S. Federal Reserve, the Bank of Canada and the Bank of Mexico leading the way in terms of higher interest rates. While one of the reasons has to do with the geographic proximity to the United States of both Canada and Mexico, other reasons are fundamentally domestic.”

“In this sense, we expect the Bank of Canada to continue with its own tightening campaign by increasing its target rate 25 bps, to 1.25 percent on Wednesday. The recent employment report and the uptick in CPI inflation lifted the odds of an increase. This follows a 25 bps increase in July and another one in September of last year.”

“Going forward, we expect the Bank of Canada to continue to follow the events south of the border and decide on further moves according to its policy needs.”
 

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According to analysts from Danske Bank, next week looks like a fairly quiet week on the news front in the US. They see that industrial production and more Fed speeches should not give a big change to the outlook. 

Key Quotes: 

“In the US, industrial production for December (due to be released on Wednesday) is the main market mover of the week. The current trend in industrial production is decent and based on ISM Manufacturing Production there is room for an uptick in growth of industrial production. Both Markit and ISM PMIs point towards decent growth, although ISM seems to indicate stronger growth than we currently expect. Note that all series are very volatile and one should not put too much weight on a single observation.”

“The coming week also brings several speeches by FOMC members and we will pay particular attention to any further comments about the likelihood of another hike as early as March and a possible shift to price level targeting.”

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According to analysts from Wells Fargo, measures of business confidence have been overstating the strength of the Eurozone economy in 2017, but the disconnect between the “soft” and the “hard” data may be starting to narrow as industrial production in the Eurozone grew strongly in November.

Key Quotes: 

“A curiosity of the current economic expansion in the Eurozone has been the disconnect between “soft” and “hard” economic data. For example, the Ifo index of German business sentiment, which historically had a high degree of correlation with growth in German industrial production (IP), has soared to record highs in recent months. Yet, growth in IP has remained disappointing, at least in a historic context. Perhaps that disconnect is starting to narrow. Data released this week showed that German IP jumped 3.4 percent in November relative to the previous month. On a year-ago basis, IP was up 5.6 percent in November, the strongest growth rate in six years.”

“German statistical authorities also announced that preliminary estimates show that real GDP grew 2.2 percent in 2017. If confirmed by the more complete data that are scheduled for release next month, 2017 will have been the strongest year for German GDP growth since 2011.”

“Data released this week by other countries in the euro area were generally strong as well. IP in the overall Eurozone grew 1.0 percent in November, which followed the 0.4 percent rise in October. Retail spending in the euro area was up 1.5 percent in November relative to the previous month. The monthly data give us more confidence that our estimate for real GDP growth in the fourth quarter (0.6 percent sequentially, 2.5 percent year over year) is realistic.”

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According to analysts from Danske Bank, markets have priced in too aggressively the potential changes mentioned in the ECB minutes. 

Key Quotes: 

“Due to the strong economic data, the return of the reflation theme and a couple of hawkish comments from the ECB, we have seen a repricing of the front end of the EUR curve since December. Markets now price in the first 10bp ECB hike in early 2019 and are pricing in that the deposit rate will reach zero by the end of 2019. This is more aggressive than our own ECB forecast and we strongly doubt the ECB will be able to hike according to expectations.”

“We expect the first ECB hike in Q2 19. Although the QE programme officially runs until September, the ECB has communicated that it does not want to make a sudden stop and we believe we are likely to see some sort of tapering in Q4 18. As the ECB forward guidance says rates will stay at present levels ‘well past’ the QE horizon, it simply seems to us too early for the ECB to hike in Q1 19.

“We continue to expect a modestly steeper EUR yield curve for the 2Y10Y in 2018. The ECB maintains a tight grip on the short end of the curve. However, this is not the case for the 10Y segment of the curve, which we expect US yields and a smaller QE programme to push higher.”

“We do not buy into the ‘reflation’ story and hence still deem it too early for EUR/USD to make the next level shift higher. For this to happen in Q1 would require a cyclical outperformance of the eurozone versus the US and/or upside wage/inflation surprises with neither being our base case.”

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Quoting a senior administration official, “U.S. president Trump to waive nuclear sanctions against Iran in the last such waiver he will issue,” Reuters recently reported.

Key quotes

Trump wants follow on Iran nuclear deal with tougher requirements and will consider staying in agreement if it can be strengthed in negotiations with Europeans.

U.S. imposes new sanctions on Iranians, entities over treatment of protesters and human rights abuses.

Trump has been in talks with European partners on a supplemental, follow-on Iran deal.

Trump wants amendment to Iran nuclear agreement review act passed by Congress.

Trump wants amendment to tighten inspection requirement, allow U.S. sanctions to snap back into place at any time if iran fails to comply.

Trump wants Iran deal strengthened with follow-on agreement in 120 days or US will withdraw.

Trump also wants amendment to U.S. Iran law to say U.S. views Iran’s long-range missile program as inseparable from its nuclear program.

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