Morning Update – 01/03/2017 – by Arjun Lakhanpal

Morning all.. Wall St closed down 0.26% as they awaited the Trump statement to joint congress in what was a an interesting session for the dollar. The dollar rose on hawkish comments from Fed speakers and many now see the chances of a hike in March. Odds of a hike rose from 455 to about 75% and the dollar followed US yields higher. In Asia we saw the Nikkei rise an impressive 1.44% mainly due to a surge higher in USDJPY which has made a session high as London walks in at 113.66 having made a low yesterday of 111.70. US yields rallied further in Asia with the 10yr yield at 2.41% just off its highs. An uneventful but presidential speech cleared the way for USD to rally in response to a surprising appearance of the New York Fed’s Dudley adding to the chorus of influential Fed representatives talking up the prospects of a March rate hike. Hawkishness presented by Dudley is important in various aspects. First, he belongs to the inner circle of the Fed, along with Fischer and Yellen. Second, he has reinforced similar comments earlier made by Kaplan, Harker and Williams. Third, the comments were made when the market probability for a March hike traded already around 50%, hence March was already ‘live’ from the markets’ perspective. Now the probability has increased to 78% (Bloomberg), helping USD against low-yielding currencies such as EUR and JPY. BoJ’s Sato: BoJ may struggle to keep 10y yield tgt around zero if inflation accelerates to around 1% later this year; reiterates JGB buying conducted to beat deflation, not finance fiscal deficits; BoJ will adjust yield tgts if economy/px improve, will reflect mkt developments; natural to think BoJ JGB purchase amounts will gradually decrease but tapering some time away; personally thinks yield curve should be a little steeper. The dollar was higher across the board but USDJPY the out-performer..This morning we get Regional and national; CPI from Germany, French and UK manufacturing PMI and UK Mortgage approvals. Good luck..