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TRUMP: WHO ARE THE WINNERS AND LOSERS?

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The dollar rally has had a remarkable run this quarter spiking almost 10% so far since September and the € $ losing 8.5%, and of course how could i forget the great relief for Kuroda $-Y weakening 18% since September. Which therefore comes to show that the FED is not only the central bank of the USA but also that of the globe. The question is now how far will the dollar rally continue. From an interesting insight from daily FX in interview with Sarah Walker, the 10518 level seems to be a key interesting FIB level resistance which therefore you would then see a significant pullback in some of the dollar crosses and some respite at last for GOLD which has taken a massive battering due to dollar surging and a lack of uncertainty in the globe, for now of course. 

The issue therefore from 2017 onwards will inflation overshoot?, especially with Trumpnomics on the horizon with fiscal policy measures in "making America great again". This was a clear factor identified by Chair Yellen on Wednesday and therefore rates would need to rise faster, which is leading to traders betting heavily on more faster fed tightening. 

The issue also however is how eventually a strong dollar is going to affect exports, of which if this affects companies who rely heavily on exports outside the US could affect their earnings. However those companies such as those listed in the Russel 2000 could potentially do very well since a significant portion of them make their earnings within the US therefore this could be a great index performer. 

Below are list of charts currently on the move.

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Dollar hits 14-year high as US outlook strengthens Hawkish Fed sends spread between short-dated US and German debt to 16-year peak (Source FT).

 

The US dollar hit its highest levels in 14 years on Thursday as investors took their lead from a hawkish Federal Reserve in pricing in a stronger US economy under Donald Trump.

 

The rise in the dollar index pushed the euro to its lowest level in more than a decade and roiled emerging markets, which had been enjoying a strong recovery until Mr Trump’s election victory.

The US currency and global stock indices both rose in response to Wednesday’s signal that several Fed policymakers were ready to tighten more forcefully than the market had expected if the president-elect’s promised stimulus plan stokes US inflation and economic activity.

Europe’s single currency was among the hardest hit, briefly falling through the $1.04 level to trade at its lowest point since 2003, as the appeal of higher US Treasury yieldsboosted the allure of the dollar. Emerging market stocks suffered their greatest losses since the immediate aftermath of November’s US election, and half a dozen emerging market currencies dropped more than 1 per cent.

The growing divergence between benchmark interest rates across the developed world in favour of the global reserve currency has driven the dollar higher and weighed on commodities. The price of gold slumped to a 10-month low on Thursday, taking the precious metal’s losses from a July peak to 18 per cent.

 

“The market is getting the idea that the Fed is serious and accepting that we have this handover from monetary policy to fiscal policy,” said Nick Gartside.

“The signal that Janet Yellen sent was a little more hawkish than the market is used to,” added Dan Ivascyn, Pimco’s chief investment officer. “Investors are right in thinking there is more uncertainty around Fed policy.”

 

With the yield on two-year German paper at minus 0.8 per cent, the policy-sensitive US debt of equivalent maturity has neared 1.3 per cent. That pushed the gap between the two benchmarks out to 207 basis points, the widest since early 2000, bolstering the dollar across foreign exchange.

‘’Many will only see the Fed’s hand in this,’’ said Marc Chandler, strategist at Brown Brothers Harriman, who noted that year-end financing pressures would help keep the German two-year yield near record lows.

In turn, the euro has broken below its March 2015 low, when traders anticipated that the start of quantitative easing by the European Central Bank would pull the single currency towards parity versus the dollar.

“Parity doesn’t look ambitious now,” Mr Gartside said.

Japan’s yen weakened beyond ¥118, lifting the dollar index above 103, its highest reading since 2002. Emerging market currencies felt the force of the dollar’s rise, the Chinese renminbi falling to its lowest level in more than eight years, while the South Korean won, Polish zloty and South African rand all weakened.

In the wake of Mr Trump’s election victory, the dollar index has gained more than 5 per cent as investors anticipate firmer US growth from proposed fiscal stimulus measures. Those measures may ultimately spur higher inflation and a faster pace of tightening from the US central bank.

 

Mr Ivascyn warned investors that the incoming Trump administration had yet to weigh in on the rapidly appreciating dollar, which could raise the risk of a sharp reversal in the currency.

“The quicker the dollar strengthens, the more destabilising that is and that could be addressed with statements from policymakers that could create even more volatility,” he said.

While the Fed and markets await details of stimulus measures that will be passed by Congress at some point next year, the upward revision of the central bank’s dot plot — a summary of projections by individual policy officials — was the main message for currency and bond traders.

Fed funds futures showed that traders are now betting on a faster tightening by the US central bank, falling closer into alignment with the Fed’s own forecasts.

While many central banks around the world remain committed to monetary stimulus, the era of ultra-low bond yields is seen by many investors as nearing its end.

 

Developed market central banks are starting to believe that ultra-low interest rates over long periods of time “hold little utility for supporting growth in the real economy,” said Rick Rieder, chief investment officer of fixed income at BlackRock.

“There is something pretty powerful here,” he added. “You have a regime shift in the world.”

Selling of debt in the UK and eurozone was concentrated in the 10-year sector on Thursday. Germany’s 10-year Bund yield rose 6 basis points to 0.36 per cent, with France’s equivalent maturity bonds up 4bp and Italian yields gaining 3bp. The UK’s benchmark 10-year debt yield neared 1.5 per cent, up 10 basis points, a level they have not consistently held since May, before the Brexit vote sent them sliding.

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The Fed pulls the trigger on higher interest rates

This week’s increase in borrowing costs comes across as premature

 

By the time it came, the US Federal Reserve’s first interest rate rise in 2016 — only the second since the tightening cycle began last year — was no surprise. The ground had been carefully prepared by comments from officials.

 

But the fact that Wednesday’s move was expected does not mean it was wise. The Fed has been hunting around for evidence to raise rates for a while, in the belief that monetary policy is unnaturally loose and it should seize any credible excuse to tighten.

The problem with this approach is that it risks premature rises on the basis of overinterpreted data. On balance, that is what the Fed has done on this occasion.

If Donald Trump, as promised, executes a large fiscal expansion in the coming years, tighter monetary policy will most likely be needed. But at present, with inflation having undershot the target for so long and inflation expectations still low, there is no compelling reason to raise the cost of borrowing. This is all the more true when higher long-term rates and a stronger dollar — the market’s response to the anticipated Trump programme — are tightening the monetary conditions already.

As it has for years, the Fed pinned its expectation of future higher inflation on expansion in the real side of the economy, particularly the labour market. But while unemployment has continued to decline, evidence of a wage-price spiral remains thin. Inflation has consistently undershot forecasts — including the Fed’s — in recent years despite reasonable economic growth, suggesting that estimates of full capacity in the economy are unreliable guides for monetary policy.

A rebalancing of monetary policy based on a more expansionary fiscal policy would be welcome. But Mr Trump’s infrastructure spending plans remain opaque. Some of his comments suggest giving tax cuts to corporations without increasing investment. It is premature to be raising borrowing costs — or indeed signalling higher rates next year — on the basis of second-guessing what may happen.

The same applies to any effort to forestall influence Mr Trump may seek to exert on the Fed, not least because the direction of such pressure will be unclear. During the election campaign the Republican candidate strongly criticised Janet Yellen, the Fed chair, for keeping interest rates low.

Yet Mr Trump’s interests may change once he is in office and wants strong growth to boost his popularity. In the past Mr Trump has described himself as a “low interest rate guy,” and few property developers have an instinctive aversion to cheap money.

Fed policymakers would therefore be unwise to second-guess Mr Trump’s attitude towards fiscal policy, or towards the central bank itself, let alone the appointments he may make to fill forthcoming vacancies on the FOMC. The Fed has been fortunate since the early 1990s in having presidents who, by and large, respected its independence and refrained from sharp public criticism or from trying to pack it with ideological placepeople. That may cease to be the case. There is little the Fed can or should do about it now.

Now the Fed has pulled the trigger on rate, it needs to avoid giving the impression that it is only a matter of time before it expends more ammunition. It should not hesitate to change its forecast of three hikes next year.

Politically and economically, the US will enter a period of intense uncertainty next year. It needs a central bank prepared to react to events, not push ahead with a predetermined policy that may turn out to be inappropriate.

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Dominion of FX market remains intact despite year of change.

Greenback’s sharp appreciation since election poses real problems for other assets. (Source FT)

 A must read article!!!!!!!

 

Regime change is in the air. The US will change its political regime next month, in what could be the most significant shift in generations.

 

Meanwhile, another regime change may just have happened this week. As universally expected, the Federal Reserve announced only the second rise in its target rate since 2006. That was no surprise. But two things were different.

First, there was the messaging from Janet Yellen. Normally over-diplomatic, this time she sounded aggressive, sounding far more optimistic about the economy (which the market does not want to hear from a central banker as it portends rate rises), and making clear the Fed’s readiness to act to head off an overheating. She portended that three rate rises were in the pipeline for next year, more than had been expected.

Second, the market actually believed her. The sharp rise in bond yields that has followed, with the US 10-year Treasury now yielding more than 2.6 per cent for the first time in more than two years, shows this.

So does the fed funds futures market, where investors place bets on the future path of rates. On election eve, this market put the chance of three rate rises next year at less than 5 per cent. By Wednesday, before Ms Yellen spoke, this had risen to about 30. Now it stands just above 45 per cent.

This is a change, for years now, the Fed has been telling the market that rate rises lie ahead, and the market has bet against it. The market has won, year after year. Now, suddenly, there is a belief in an activist Fed.

It is the Fed’s job, to use an immortal analogy, to take away the punchbowl just as the party is getting started. There is nothing wrong in principle with Ms Yellen deciding to remind people that if a fiscal boost lies ahead under Mr Trump — as it almost certainly does — then the Fed will be ready to raise rates if inflation returns as a result.

It was only once Mr Trump arrived that people began to believe there was a party. And now, they must start to believe that the Fed will return to its old role of policing it and keeping order. We might well have a “good for Main Street, bad for Wall Street” phase, in which Mr Trump stimulates the economy, and the Fed puts a lid on asset prices by raising interest rates. This would be exactly what many had voted for.

If the Fed does decide to be more aggressive, who limits the Fed? At one level, it is the presidency and the legislature. Fed governors must be nominated and confirmed. Ms Yellen does not go until early 2018 but Mr Trump can fill several vacancies around her with people who think differently before then.

More radically, if Mr Trump wants to change the structure and mandate of the Fed, as many of his supporters wish, it is open to him to try. This would risk market disruption. It is hard, however, to see how this could affect the path of rates over the next year.

A more important limiting factor on the Fed is the dollar. A stronger dollar encourages imports and discourages exports, which is the exact opposite of the new president’s wishes. It automatically presses down on inflation. And it hurts share prices, as it diminishes the dollar value of overseas earnings and revenues. Most significantly of all, a strong dollar has a history of bringing crises in the emerging world in its wake.

Higher US rates attract funds to the US, which thereby push up the dollar. They particularly do this when two other big economies, the eurozone and Japan, still have central banks who are intervening in the market and keeping rates at or below zero.

This is good news for the eurozone and potentially great news for Japan, where the “Abenomics” plan to revive the economy requires a weak yen. If investors think the Trump-Yellen axis is serious about reflation and raising rates, they should buy Japanese stocks.

But the issues for countries that have significant dollar-denominated debt could be severe. Emerging markets are not as indebted as they were during the crises of 20 years ago but remain vulnerable to capital flight. Last year’s spasms of alarm over China’s currency were enough to force the Fed to desist from raising rates earlier. The dollar could yet force the Fed to desist.

 

As for China itself, its currency remains tied to the dollar, so the greenback’s sharp appreciation since the election poses real problems. It is devaluing against the dollar in tiny steps but may feel the need to go further. As this would be to repeat exactly the behaviour that Candidate Trump thundered against on the campaign trail many times, that could be a serious problem.

 

Back in 1985, the great US expansion under Ronald Reagan culminated in a dollar so strong that a group of central banks came together in an agreement to weaken it — the so-called Plaza Accord.

Barring a second Plaza-type agreement to cap the dollar, however, the most important takeaway from another dramatic week is that one regime has not yet changed. Despite global discontent with globalisation, everyone remains subject to the dominion of the foreign exchange market.

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The big events that shook financial markets in 2016

Brexit, Trump and oil among the key contributors to a tumultuous year.

 

The new year rout

January proved brutal for investors. After just 10 trading days, global equity markets had lost more than $4tn of value, with sentiment hammered by fears about China’s economic slowdown and a depreciating currency. In turn, bond markets were whiplashed by the conflicting forces of central banks selling reserves to support their currencies and investors rushing for safety.

 

As FT Markets covered the anxiety at such an early stage of the year, we cautioned that: “The global impact is painful but manageable, and far from enough to plunge the world into a new recession. After a difficult first 10 trading days of the year, this is perhaps the most favourable outcome for investors: one in which the problems they see do not disappear but are at least contained.”

Our Big Read: Markets: high anxiety — showed how bourses suffered their worst ever start to a year, but investors were discounting the risk of a recession.

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Another key element of the new year weakness in markets was the slumping oil price. By the third week of January, Brent crude hit what proved to be a low for the year of $27.10 a barrel, escalating the selling of energy sector shares and bonds, particularly the junk-rated debt of US-based shale drillers. That prompted Saudi Arabia to describe $30 oil as irrational.

Then at the end of January, the Bank of Japan delivered another big shock to markets and banks, as it embraced a negative interest rate policy. The repercussions were immediate, as investors dumped the shares of banks, while Japan’s investors sought higher-yielding eurozone, UK and US debt. That helped drive down developed world market interest rates.

 

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The Brexit vote

Once the dust settled after the market’s new year swoon and opportunistic investors swooped to buy the dip, so the drums began beating ahead of the UK’s vote on whether to remain a member of the EU. The Brexit vote was a genuine shock for markets, given investors had been confident that the UK would stay in the EU.

Ahead of the referendum, FT Markets highlighted that a No vote would result in a much weaker pound and also trigger a pronounced drop in government bond yields, anticipating a revival of quantitative easing from the Bank of England.

Here is our summary of a historic trading day that began in Asia as the pound buckled. “Something very bad has happened”, is how one Tokyo-based currency trader described it as we detailed how markets scrambled to keep up with the Brexit shock.

 

At the halfway stage of the year, we highlighted five opportunities and risks for global investors. Among the risks we pointed to at the start of July were those of a weaker renminbi and a stronger dollar hitting global markets. Brazil and Japan also featured in the ranks of risks and opportunities.

What next for markets this year: profit or peril?

Already in the spotlight in July, and still animating markets in December, were Italy’s constitutional referendum and the bad loans plaguing the country’s banks. Italy voted No to the reforms earlier this month, triggering the resignation of Matteo Renzi as prime minister. And the country’s banking shares remain deeply under water for the year.

 

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The problem of ultra-low bond yields

Brexit and the BoE’s subsequent revival of QE was the final driver of the great bond rally that helped define 2016 in markets. By August, global benchmarks were at all-time lows, led by the 10-year gilt yielding a paltry 0.51 per cent, while Switzerland’s entire bond market briefly traded below zero.

 

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By August, the universe of negative yielding debt had swollen to $13.4tn.

The biggest casualty of some $14tn of global debt trading below zero per cent were the pension and insurance industries.

FT markets covered the issue in depth with a later summer series: Pensions: Low yields, high stress.

 

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Trumpflation swiftly overcomes market anxiety

After the shock of Brexit, investors approached the US election cycle with a degree of trepidation, but the smart money favoured Hillary Clinton. The shock of Donald Trump winning the electoral college vote for markets was shortlived — lasting a matter of hours — as investors rapidly embraced the idea of a Republican-controlled Congress being a game changer by implementing fiscal stimulus, tax cuts and rolling back on regulations for US business.

 

Soon the concept of Trumpflation took hold, whereby fiscal policy would super charge the economy and nurture inflation.

Suddenly the era of ultra low bond yields was in doubt, with the tally of negative-yielding debt slipping to less than $11tn this month.

Wall Street equities have motored further into record territory. And selling of bonds accelerated in the middle of the month after the Federal Reserve nudged borrowing costs higher and indicated a more aggressive pace of tightening next year.

Here’s FT Markets’ initial summary of the price action: Traders grapple with Brexit déjà vu as Trump triumphs.

 

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The return of Opec as deal boosts the oil price

Booming share markets after the US election also reflected hopes of an oil production deal that eventually came to pass in late November when Opec met in Vienna. A subsequent agreement between non-Opec producers to also cut supply in December helped deliver a significant boost to crude prices. The big motivation for the deal has been the economic pain inflicted by a falling oil price on the economies of producers, notably Saudi Arabia. As the country looks to line up an equity flotation of state-owned oil company Aramco by 2018, keeping the price firmly above $50 a barrel is a crucial aim.

Here we charted the ambition of Prince Mohammed bin Salman al-Saud for a life for the Kingdom beyond oil.

 

china’s debt pile and weakening renminbi

As the year comes to an end, we’re examining the pros and cons of a weakening renminbi and hearing concerns about China’s vast debt pile. The risk of a more active US Federal Reserve in 2017 raises the stakes for emerging markets and the their dollar-denominated debt.

Further US dollar strength will hamper China’s efforts to stabilise the renminbi and limit capital flight, with the risk that the country raises short-term borrowing costs.

The challenge facing policymakers and investors in China was outlined in early December and overshadows the start of 2017: US interest rate rises set to expose China’s frailties — the world’s most leveraged corporate sector adds to the country’s vulnerabilities.

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I also think that long Nikkei and short dollar Yen is also a great trade for 2017 as long as inflation (CPI PPI) maintain their current rise and therefore dollar bullishness. Therefore you can see why this is a favorable trade. If U.S. Treasury yields continue to rise and the dollar extends gains against the yen, the BOJ might begin tapering its aggressive monetary easing. But once the yen turns upward, the central bank could be forced to implement additional easing once again, just like it’s done for the past several years.

Daiju Aoki, an economist at UBS Group AG, echoed that view.

“We think it’s likely the central bank will start to taper (in 2017). This is because the pool of outstanding Japanese government bonds for the BOJ to purchase is rapidly declining,” Aoki said.

The BOJ already owns around 40 percent of Japan’s outstanding government bonds, or more than ¥1 quadrillion ($8.50 trillion), and is buying ¥80 trillion of them per year.

At the December meeting, BOJ Policy Board member Takahide Kiuchi said the yield curve control policy “would entail a risk that the bank might need to further increase the pace of its Japanese government bond purchases.”

Some analysts emphasized the importance of the BOJ raising the key bond yield target, which is often dubbed a “rate hike,” pointing out that sharp rises in import costs, triggered by a rebound in crude oil prices and the yen’s plunge, could eat into corporate profits and hurt consumers’ purchasing power.

“To warn against an excessive depreciation of the yen, the BOJ would be urged to carry out a rate hike,” said Junichi Makino, a BOJ watcher at SMBC Nikko Securities Inc.

Such concerns, however, will disappear if the Trump rally peters out.

“If the kamikaze stops blowing, inflation would cool down,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

BOJ policymakers have voiced fears about the risk, citing the uncertainty over the U.S. economy, which is to be handled by Trump, who has no political experience.

“The U.S. economic measures exert great influence not only within the country but also on the global economy and global financial markets, therefore, the new administration’s policy directions and their influence warrant close attention,” BOJ Deputy Gov. Kikuo Iwata said in early December.

Market turmoil could prompt many investors to sell riskier assets, including stocks and crude oil futures, and buy safe-haven assets such as government debt and the yen.

A stronger yen usually weighs on Japan’s export-oriented economy by making Japanese products more expensive abroad and reduces the value of overseas revenues in yen term.

Iwata said the BOJ “will take additional easing measures without hesitation” if necessary.

As a step to make financial market conditions more accommodative to stimulate the economy, Kuroda has indicated the central bank may deepen a key negative interest rate or cut the target level of the 10-year government bond yield.

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EM currencies: winners and losers in 2016 (Source FT)

With only five trading days left in the year, the race is on for the title of this year’s best and worst performing major emerging-market currencies.

 

On the winning side, a late surge by the Russian rouble this month in the wake of Opec’s deal with members and non-members to limit crude output has put the currency neck-and-neck with the Brazilian real.

The rouble is currently up 20.2 per cent this year against the dollar, compared to the real’s 21.3 per cent gain. The real had been up by as much as 23 per cent as recently as October amid hopes that the worst is over for Brazil’s economy despite still being mired in a deep crisis. The rally has also been supported by gains in global commodity prices and high expectations for new president Michel Temer and his reform agenda, as well as rebounding risk appetite among yield-seeking investors.

But the real lost some of its swagger this quarter. It’s down 0.2 per cent in the quarter to date after Mr Temer become embroiled in scandals. Expectations of a US interest rate hike have also dulled investors’ appetite for real-denominated assets.

By contrast, the rouble – which is also benefitting from hopes that US president-elect Donald Trump will be friendlier with Moscow, leading to a potential easing of some sanctions – has risen 2.6 per cent this quarter, making it the loner EM gainer against the dollar.

Among the losers, the Argentine peso, the Mexican peso and the Turkish lira are in a tight three-horse race for the bottom of the EM currency barrel.

The Turkish lira is on track for its worst year since 2008 as close to 20 terror attacks, one failed military coup and the prospect of tightening US monetary policy roiled a country that was until recently a favourite among emerging markets investors.

The currency spent a good part of the second half of the year tumbling from one record low to another, ending down 17 per cent so far this year. It shed 15 per cent of its value in the current quarter alone, putting it just behind the Mexican peso’s 16.9 per cent drop.

The lira’s slump is eclipsed only by the Argentine peso, which has fallen 17.3 per cent this year.

In the case of Argentina, the currency’s steep losses underscore the challenges Mauricio Macri – who took over as president last December – faces in turning around an economy left on its knees after years of mismanagement under the previous administration.

The peso devalued sharply late last year after Mr Macri lifted currency controls and allowed the peso to float shortly after taking office. While the peso rallied during the first half of the year amid efforts to introduce free-market reforms and a historic settlement with holdout creditors that paved the way for Argentina’s return to the global bond market in April, sentiment has since soured.

It hit an all-time low of 16.11 against the dollar earlier this month amid frustration over an economy stuck in recession and rising inflation, which is forecast to end the year around 40 per cent.

Looking ahead to 2017, the Mexican peso will be the EM currency to watch as Mr Trump unveils his policies. As one of the most liquid and widely traded EM currencies, the peso became a proxy for Mr Trump’s odds of winning the US elections. His surprise victory sent the currency tumbling more than 13 per cent on the day.

The currency hit a record low of 21.38 per dollar on November 11. While it has since come off that level to trade at 20.71 on Friday, it remains wobbly and vulnerable and shows no signs yet of recovering to below 20 despite Mexico’s central bank raising interest rates this month to 5.75 per cent, its fifth increase this year.

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Graphic content – December; the countries most exposed to a rise in protectionism.

 

President-elect Trump has suggested withdrawing from the North American Free Trade Agreement (NAFTA) and ending negotiations over the Trans-Pacific Partnership (TPP), albeit there is considerable uncertainty over what he will, or even can, do.

If one of the main consequences of the election of Donald Trump is US protectionism, it’s worth considering who stands to lose the most. We have considered countries’ exports to the US as a percentage of their GDP, in the belief that countries that trade most with the US would almost certainly be hurt the most.

 

As the gravity model of trade would imply, countries that are largest and closest to the US are most reliant on trade with it. Mexican exports to the US are considerable, and the role of NAFTA for increasing trade after 1994 is notable.

The Canadian economy comes second, but looks less reliant on exports to the US compared to 15 years ago. In fact, Canadian exports to the US now represent around 19 per cent of Canadian GDP, but its net exports to the US represent only 3.2 per cent of Canadian GDP.

 

Ireland, which exports predominantly healthcare and chemical products to the US, in addition to being highly exposed to potential US tax changes, also looks to be at risk.

Conversely, most of the market concern regarding US protectionism seems focused on China. While China is the biggest exporter to the US in total trade terms, the reality is that China’s economy in the past decade has transformed from one that was export reliant to one that is now largely led by domestic investment. Chinese exports to the US now account for only 4.4 per cent of Chinese GDP, versus almost 11.5 per cent in 2005.

If the US does resort to protectionism, it is very unlikely to be alone. Protectionism globally is most damaging to the GDP of countries whose economies are the most open, and probably more damaging to those economies that export more than they import. Large export-reliant economies that would therefore be most hurt by a rise in global protectionism include Germany, Saudi Arabia and South Korea. Meanwhile, large economies that would be much less affected include Brazil, Japan and the US.

 

 

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USD CAD 

The forecast average rate from 17 global banks is 1.3717. That forecast rises to 1.3855 by the fourth quarter of 2017.
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Former Federal Reserve chair Alan Greenspan famously said that the efficiency of FX markets forecasting exchange rates for major currencies is as accurate as forecasting the outcome of the flip of a coin.
 
 
With that in mind, these are the key issues for USDCAD traders in 2017...
 
 
Domestic factors
 
A key negative undermining the Canadian dollar is that the Bank of Canada is dovish. That isn’t even a perception, it is a reality ever since October when Bank of Canada governor Stephen Poloz started that month's press conference by stating that “rate cuts were discussed.” 
 
The December 22 inflation report didn't help. It was weaker than expected and didn’t do anything to dispel rate cut concerns. The risk is still low for lower rates, but they won’t be going higher in 2017, either.
 
At the press conference following the release of the Financial Stability Review on December 15, Poloz noted that Canada has considerable spare capacity and is expected to stay that way until the middle of 2018. He then pointed out that the US didn’t have any.
 
 
CAD/US interest rate differentials are widening in favour of the US. The Federal Open Market Committee added an extra rate increase into the dot-plot forecast at its December meeting.
 
Most analysts describe Canadian economic growth as tepid due to sluggish business investment and weak export performance. The large Current Account deficit ($18.3 billion in Q3) is another negative.
 
 
Oil prices may consolidate their recent gains within a $49-$55/barrel range. The International Energy Agency has forecast that the global oil surplus will shift to a deficit in the first half of 2017, which should boost prices. However, US shale producers are expected to ramp up production (North American rig counts are back at last year’s levels) which may limit gains. 
 
Range-trading oil prices may not provide much benefit for the Canadian dollar.
 
 
US factors
 
The pace of US interest rate increases is a major wild card. The US dollar rallied sharply when the December FOMC dot-plot forecast three rate increases in 2017 instead of the two that were predicted in September. Donald Trump’s infrastructure spending and tax cut plans could boost inflation growth, which would force the Fed to raise interest rates sooner and higher than forecast 
 
 
Trump is advocating a “made in USA” policy which could have a detrimental impact on Canadian exports. Mr. Trump is not a fan of NAFTA. The perception that the NAFTA agreement could be marginalised is another negative hanging over the Canadian dollar.
 
Geopolitical issues
 
The EU has already announced that quantitative easing will be extended until the end of 2017 which will continue to provide support to the US dollar. That support may be further reinforced if the UK/EU Brexit negotiations become acrimonious.  
 
 
Donald Trump has openly accused China of currency manipulation and unfair trading practices while goading them with overtures to Taiwan. That could get ugly and have a negative impact on global growth. That scenario is not a healthy one for the Canadian dollar due to Canada’s reliance on exports.
 
 
Canadian dollar positives
 
At this stage in the game, there aren’t a whole lot of nice things to say about the Canadian dollar. However, if WTI oil prices can get back to $60/b, USDCAD would struggle to climb above 1.3600. At the same time, other than the Trump uncertainty, it is fair to say that the bulk of the extant Canadian dollar negatives are reflected in the current price.
 
If anything, that should limit the top-side in the near term. 
 
 
USDCAD technical outlook
 
The USDCAD technicals are bullish with the uptrend from May intact while prices are above 1.3080, The break above 1.3310 (38.2% retracement level of 2016 range) keeps the focus on the 61.8% retracement level of 1.3838. Resistance at 1.3575 has held and is a pivot point. 
 
While prices are below this level, the downside is vulnerable. Conversely, above this level puts the 61.8% level in play. 
 
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Watch out Dow Bulls some of the big heavy waits on the index could have some significant profit taking, most likely once congress passes the new tax laws. 

UBS: Here Are the Most Crowded Stocks in the World Right Now.

https://www.bloomberg.com/news/articles/2016-12-27/ubs-here-are-the-most-crowded-stocks-in-the-world-right-now?cmpid=socialflow-facebook-markets&utm_content=markets&utm_campaign=socialflow-organic&utm_source=facebook&utm_medium=social

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Dollar sags vs yen on lower U.S. yields, ebb in risk appetite. (Reuters)

 

The dollar sagged against the yen on Thursday, weighed down by U.S. yields slipping to two-week lows and an ebb in risk appetite that favoured the safe-haven Japanese currency.

The dollar was down 0.4 percent at 116.800 yen JPY=, having come down from a high of 117.815 touched overnight.

Treasury yields fell in the wake of weaker-than-expected U.S. pending home sales data and a robust debt auction. [uS/]

 

The greenback also felt pressure from the safe-haven yen, which provided a home for funds retreating from the region's riskier assets.

The euro was given breathing space as the dollar weakened against its Japanese peer. The common currency was up 0.2 percent at $1.0437 EUR= after falling to as low as $1.0372 the previous day.

"The dollar looks like it has run its course against the yen for now. But against the euro, the dollar still has room to gain as the pair is now trying to catch up to the widening between U.S. and German yields," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

The spread between the 10-year U.S. Treasury US10YT=RR and German bund DE10YT=RR yields is the widest on record stretching back to 1990.

The spread has been increasing recently on the divergence between European and U.S. central bank policy and outlooks for growth and inflation.

The common currency already hit a near 14-year low of $1.0352 last week and analysts expect it to eventually reach parity with the dollar next year. The euro has fallen 3.8 percent this year.

The dollar index was down 0.2 percent at 103.080 .DXY, but still in reach of a 14-year high of 103.650 struck last week. The index has gained 4.4 percent this year, the bulk of the rise taking place after the U.S. elections early in November.

The index has climbed on expectations that Donald Trump's incoming administration will boost U.S. growth through fiscal stimulus, which could be accompanied by monetary tightening and higher yields.

Against the yen, the dollar was en route for a loss of nearly 3 percent in 2016, although it has rallied more than 10 percent since Trump's election victory.

"While the market collectively may not be focusing on the story, dollar strength could become a domestic political issue in 2017 should it persist," wrote strategists at BNY Mellon.

"Should the dollar make substantial gains from here, particularly against the yen, it will be interesting to see how president-elect Trump responds given his previous comment."

Trump earlier in the year had criticised Japan, along with China and Mexico, saying Tokyo has deliberately lowered the yen's value against the dollar. (This particular phrase is funny, as Kuroda had failed to depreciate the YEN until the FED stepped in, Trump just seems to blame everyone and antagonize everyone, i think markets are going to be in for one **** of a ride with Trump at the wheel, the real test is going to see if congress approves his mass fiscal stimulus measures and add to the debt burden, he is going to find as Obama did that it is very difficult to get anything changed or passed through congress. 

 

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An interesting article below, slightly bias but a notable argument :

Trump’s Economic Plan is a Betrayal of the People Who Voted for Him.

Trump’s economic plan has sent stocks ripping higher for six weeks straight. But what’s going to happen to stock prices when Congress gives Trump’s plan a big thumbs down? Has anyone thought about that yet?

And what about the Fed? Does anyone seriously think that Fed chairman Janet Yellen is going to sit on her hands while Trump launches a $1 trillion fiscal stimulus package that triggers a sudden burst of growth followed by a sharp uptick in inflation?

 

No, Yellen’s not going to sit on her hands. She’s going to raise rates to prevent the economy from overheating which is going to throw cold water on Trump’s pro-growth government-spending plan.

So why has the Dow Jones Industrial Average (DJIA) climbed more than 1,600 points and gained nearly 10% (“the biggest post-election rally on record”) when Trump’s plan is either going to be derailed by the Fed’s higher interest rates or blocked by the obstructionist Congress? It doesn’t make any sense, does it? And if the plan doesn’t survive in its current form, then stocks are going to retrace all the gains they’ve made in the last month and a half. That’s roughly 1,700 points erased in the blink of an eye.

Bottom line: Trump’s Santa Rally could turn into a stock market bloodbath unless he’s able to deliver on his promises, which doesn’t look very likely. Check this out from Bloomberg:

“President-elect Donald Trump’s race to enact the biggest tax cuts since the 1980s went under a caution flag Monday as Senate Majority Leader Mitch McConnell warned he considers current levels of U.S. debt “dangerous” and said he wants any tax overhaul to avoid adding to the deficit.

“I think this level of national debt is dangerous and unacceptable,” McConnell said, adding he hopes Congress doesn’t lose sight of that when it acts next year. “My preference on tax reform is that it be revenue neutral,” he said…

The Committee for a Responsible Federal Budget, a nonpartisan think tank, has projected that Trump’s plans would increase the debt by $5.3 trillion over a decade, with deficits already over $600 billion a year and rising on autopilot…

What I hope we will clearly avoid, and I’m confident we will, is a trillion-dollar stimulus,” he said. “Take you back to 2009. We borrowed $1 trillion and nobody could find that it did much of anything. So we need to do this carefully and correctly and the issue of how to pay for it needs to be dealt with responsibly.”… (McConnell, Warning of ‘Dangerous’ Debt, Wants Tax Cut Offsets, Bloomberg)

It doesn’t sound like McConnell is a big fan of Trump’s economic plan, does it? So why has the Dow risen to within 26 points of the 20,000-mark if that’s the case?? Do investors think that Trump can simply issue an executive order and force Congress to do what he wants?

Good luck with that. The deficit-crazed Republicans are just as committed to austerity as ever, mainly because slashing government spending coupled with low interest rates is a tried-and-true method of transferring obscene amounts of money to the 1 percenters. Why would they tinker with a mechanism that works perfectly already?

They won’t, at least not to the extent that it’ll have any meaningful impact on the living standards of millions of working people across America. Congress is going to prevent that at all cost. And so will the Fed. Just listen to what Yellen had to say to a journalist from the Washington Post last week following the FOMC meeting. She was asked point-blank whether she thought the economy needed more fiscal stimulus or not. Her answer:

“Well … I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. So with a 4.6 percent unemployment, and a solid labor market, there may be some additional slack in labor markets, but I would judge that the degree of slack has diminished, So I would say at this point that fiscal policy is not obviously needed to help us get back to full employment … But nevertheless, let me be careful that I am not trying to provide advice to the new administration or to Congress as to what is the appropriate stance of policy.”

Nice, eh? Yellen threatens Trump with three more rate hikes in 2017, torpedoes his $1 trillion infrastructure plan with a wave of the hand, and then has the audacity to deny that she’s dictating policy.

Of course she’s dictating policy. What else would you call it?

Yellen is saying as clearly as possible, that if Trump launches his fiscal spending plan, the Fed’s going to slap him down by raising rates. If that’s not a threat, then what is??

(BTW, the NY Times Neil Irwin commented on this very issue just days ago when he said, “any stimulative fiscal policy from the Trump administration could well face an equal and opposite tightening of monetary policy by a Fed that raises interest rates.” In other words, the Fed holds all the cards.)

But in Yellen’s defense, we should add that Trump’s infrastructure scheme wasn’t going to work anyway. The whole thing is another shabby giveaway to private-equity investors. It’s NOT a serious effort to rebuild America’s crumbling infrastructure or provide good-paying jobs to qualified construction workers.

According to economist Alan S. Blinder, “Trump’s plan would provide “an 82% tax credit to attract private-equity investors into the infrastructure business.” … (So) ” A $3 billion public-private “partnership”… could be financed like this: $2.5 billion in municipal bonds, $410 million in tax credits from the federal government, and $90 million in private equity. This means $90 million in private money winds up controlling a $3 billion asset. Mr. Trump likes leverage, but isn’t 33-to-1 a little ridiculous?”

Great. In other words, the public takes all the risk, while privately-owned businesses nab all the profits. When have we heard that before?

And there’s more too:

“Infrastructure projects selected in the traditional way, by governments, are chosen based on public benefits, the community’s ability to pay—and sometimes crass political favoritism…

Under the Trump plan, project selection would be left to profit-seeking investors, using the same criteria they use to decide which hotels to build, for example.”… (Trump’s Infrastructure Mistake, Alan S Blinder, Wall Street Journal)

Princeton professors Alan S. Blinder and Alan B. Krueger write that the president-elect wants to draw in private money—but do investors swoon to fix leaky school roofs?

See? This isn’t about rebuilding America or putting people back to work or even getting more money circulating in the economy. This is just another ripoff by a flim-flam man who wants to use his power as president to enrich his crony buddies. Trump might be a hero to millions of working people who think he’s got their interests at heart, but the facts just don’t match the rhetoric. His infrastructure plan is just another elitist swindle aimed at enriching the few at the expense of the many.

According to Blinder there are much better alternatives to this private equity hocus pocus, like “Build American Bonds (BABs), a special breed of municipal bonds … which can use them for routine maintenance and other projects that lack a revenue stream … for the great bulk of infrastructure needs, BABs would be a far superior solution. If the Trump administration is serious about making our public infrastructure great again, it should worry less about finding ways to make the rich richer.” (WSJ)

Then again, if Trump’s real objective is to boost employment and increase growth, there are much easier ways to go about it, like suspending the payroll tax on everyone making under $75,000 per year or adding a few hundred dollars per month to Social Security payouts or expanding the food stamps program to include more applicants. None of these ideas will help to rebuild America’s dilapidated bridges or pothole-strewn roads, but they do put more money into circulation pronto which increases demand, activity, hiring, capital investment and growth. More growth means upward pressure on stagnant wages, rising standards of living, strengthening of the middle class, and the beginnings of a virtuous circle. Trump’s infrastructure plan will achieve none of these. It won’t even push stock prices higher. It’s a dead-loss for everyone except the PE mandarins.

But there parts of Trump’s economic plan that could push stocks much higher, in fact, they could take today’s moderately-inflated stock market bubble and turn it into the most gargantuan asset-price balloon of all time. We’re talking about Trump’s tax cuts. The president elect wants to reduce the corporate tax rate from 35 percent to 15 percent and, at the same time, initiate a “repatriation holiday”, which will allow tax-dodging US corporations to bring “more than a trillion dollars in corporate cash parked overseas” back to the US paying a measly 10 percent tax on the total. Trump thinks the surge of capital reentering the US will boost employment, productivity and growth, but the experts disagree. They know it’s another giveaway to Wall Street. Get a load of this from Bloomberg:

“Deutsche Bank: “If a repatriation holiday is introduced at a ~5 percent rate, as opposed to the generally proposed 5-14 percent rates, 10 percent even by Trump, then we think ~$500 billion will be repatriated in 2017. These funds will go to a combination of dividends, buybacks, onshore debt reduction, Mergers and Acquisitions and capex…”

JPMorgan Chase and Co.: “Cash repatriation alone could boost shareholder payouts by ~$350 billion … we estimate that buybacks from repatriation alone could add ~$1.30 to S and P 500 earnings per share, assuming that 60 percent of potential payouts come in the form of buybacks.”…

JPMorgan Chase and Co.: “We estimate that Trump’s corporate tax plan, which incorporates a 15 percent statutory federal tax rate, would add roughly $15 to S and P 500 earnings.”
(Wall Street’s 2017 Forecasts Are Doomed If Trump Doesn’t Follow Through On Campaign Promises, Bloomberg)

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Dollar will find buyers hard to find in 2017

Uncertainty over Trump likely to offset benefit to dollar of higher rates (Source FT)

With the US Federal Reserve raising interest rates, and President Mario Draghi of the European Central Bank seemingly unable to escape his addiction to quantitative easing policy, many investors are questioning who wants to buy the euro. The answer is simple. The whole world is eager to buy the euro. The problem in 2017 is more likely to be finding anyone who wants to buy the US dollar.

 

The Middle East is a good example of a region of avid euro buyers. Even with the recent rally in the oil price, most Middle Eastern countries are expected to run sizeable fiscal deficits. The IMF expects Saudi Arabia to run a fiscal deficit of almost 10 per cent of GDP next year. To fund their budget deficits, the Gulf countries are selling central bank reserves and pools of assets held by their sovereign wealth funds.

Imagine Saudi Arabia sells US Treasuries, and uses the dollars it receives to pay its civil servants. Then imagine that a Saudi Arabian civil servant takes their pay and uses the money to buy a BMW car in euros. What is happening? Saudi Arabia is selling dollars and buying euros. It does not matter that there is an asset on one side of the transaction and a BMW on the other side of the transaction — the foreign exchange market implication is the same whether it is Bunds or BMWs that are bought.

If the Middle East buys assets, they like their assets to be made in America (central banks buy roughly twice as many US assets as other assets). If the Middle East buys products and services, they like their products and services to be made in Europe (the Middle East buys twice as much from Europe as from the US). Thus if the Middle East is selling assets to buy goods, it sells dollars to buy euros.

Of course this does not just apply to the Middle East. The world is eager to buy euros because the world wants European products (in preference to US products). The relative current account balances of the Euro area and the US alone tell us that. China, another economy inclined to divest itself of US assets of late, buys more euro area imports than US imports. The same is true of the APEC Asian economies as a bloc. Africa’s preference for Euro area products in comparison to American is overwhelming. Only Latin America exhibits any relative desire to buy “made in America”. The rest of the world clamours for euros to obtain goods and services from their preferred supplier.

So why is the euro not stronger with all this enthusiastic buying of BMWs and other euro area goods?

In 2016 the US basically pleaded with the rest of the world to lend it money. US interest rates are above those of the euro area (euro area interest rates are negative). US bond yields are above those of the euro area (many euro area bond yields are negative). US equities have outperformed those of the euro area (by about 15 per cent, and euro area equity performance is negative this year). The US basically did everything that it could to persuade investors to buy dollars — and at the end of all of that effort the euro still trades within 4 per cent of where it traded against the dollar at the start of the year.

The challenge for the US is that it needs foreigners to buy dollars every day to stop the dollar from falling. In the first nine months of 2016, foreigners had to purchase $2.7bn every day. That is more than the daily GDP of the Netherlands. Any day that foreigners were not inclined to buy $2.7bn, the dollar would weaken. This is important — if foreigners decide that they want to “wait and see” what Donald Trump’s policies are like before committing to buying more dollars, then the dollar will fall. “Wait and see” is not good enough for the US.

The question is not who wants to buy euros — the whole world wants to buy euros because the whole world wants to buy euro area products. The US had to offer considerable financial incentives to persuade foreigners to buy dollars.

It seems unlikely that the incremental incentive of a couple of US interest rate increases will suffice to combat the incremental uncertainties of an unconventional new administration. The question for 2017 is — in the new abnormal of the United States, who can be persuaded to buy dollars?

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Below is an interesting chart of DXY. As you can see from the chart below we are staying above the ascending trend line and been rejecting the break >3 times. With a list of key US data out next week including NFP the dollar is set without doubt for a volatile session providing great trading opportunities. In the event that we do have very strong US data, a good level to place your eyes on will be the the 104 to 10536 level. 1st the 104 level is a key resistance from 2002, but even if we break this level we have the 105 to contend with and this is a key fib level. The present trend on the 4 hourly is well defined and the minor W4 has not entered the W1 territory. But also notice that we have trendline resistance cross the horizontal resistance at 104. 

 

With Gold since it has an inverse correlation, as long as good US economic data is maintained and dollar bulls stay in control, Gold rallies are an opportunity to short. From a technical standpoint, despite some stating that gold is in a 1-5 wave, the price action clearly does not favor this if anything it suggests an ABC with B being the present wave. On the 1 hourly it also evidently appears that this is a retracement has long has it rejects the previous ascending support line.  

18 molesworth road FLAT 1 BEDROOM.png18 molesworth road FLAT 1 BEDROOM.png

18 molesworth road FLAT 1 BATHROOM.png

18 molesworth road FLAT 1 BATHROOM.png

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Nine events that will shape the world in 2017 (1-2 been excluded as focused on syrian conflict not particularly relevant from a market perspective)

From Trump taking the oath to European elections — a guide for the next 12 months

 

After a year of political earthquakes, 2017 is unlikely to be an easy ride. Here is a guide to what to watch for across the globe in the coming year, ranging from Donald Trump’s assumption of power to Britain’s slow exit from the EU and the possible end of Isis’s self-styled caliphate in the Middle East.

 

January: Trump’s inauguration

Judging by his behaviour, the 45th US president will be in a hurry to make his mark. Mr Trump has promised to act quickly to pull the US out of the Trans-Pacific Partnership, revise and replace Obamacare, scrap the previous administration’s clean energy policy, and much more.

The new president’s language in his inaugural address and his actions in his first few days in office will set the tone for his administration, even if Mr Trump remains his unpredictable, freewheeling self.

One other ceremonial occasion will be especially keenly watched, Mr Trump’s first summit with Russian President Vladimir Putin, who US intelligence agencies suspect sought to aid the Republican’s unexpected electoral victory.

March: UK activates Article 50

Nine months after the referendum that effectively scrapped half a century of British foreign and economic policy, the UK government is set to pull the trigger on the formal two-year exit process by the end of March.

At present the direction of travel is not fully clear, but Theresa May’s government has promised to set out a plan before triggering the EU’s Article 50 divorce procedure. Even though that blueprint may not be detailed, the UK will also have to draw up a comprehensive negotiating strategy. Mrs May will seek to avoid shocking the markets, while encouraging inward investment and keeping the Conservative party’s Brexiters on side. It could be difficult to pull off all three.

 

After Brexit, the election of Donald Trump and the referendum No vote that ended Matteo Renzi’s tenure as Italian prime minister comes the high-stakes election of 2017. France’s political establishment will be seeking to resist the rise of Marine Le Pen, the National Front’s presidential candidate.

Although she could win the initial round of voting, Ms Le Pen is widely expected to be beaten into second place in the run-off as moderate voters rally against her. The favourite is François Fillon of the conservative Republicans.

But there are divisions among the mainstream parties and Ms Le Pen has tapped a rich seam of support among working-class voters. Moreover, the electoral shocks of 2016 show that no vote can be taken for granted. Should she somehow prevail, the EU would face potentially its biggest crisis to date, eclipsing even Brexit.

Throughout the year: Fed rate rises

 

US interest rates, along with the price of oil, are economic facts that can shake the world. For many people and places the key question of 2017 is how much higher they can go.

The US Federal Reserve, which in December raised benchmark rates for only the second time since the financial crisis, expects to do so three more times in 2017. Markets are not convinced that tightening will go so far. But in fact rates could rise still further.

By her own confession, Janet Yellen, Fed chair, has not yet factored in a possible Trump effect, which could push rates still higher if the president-elect wins congressional backing for the vast fiscal stimulus he seeks.

Bondholders and currencies such as the Mexican peso and Turkish lira have already taken a battering in the wake of Mr Trump’s election. They could be further tested if his policies in office increase the cost of money across the world.

 

Autumn: China’s Communist party congress

Not for centuries has China been as powerful on the world stage as it is today. Not since Mao Zedong has the country had a leader as powerful as Xi Jinping.

Mr Xi will be looking to consolidate that power at the 19th party congress. He is almost certain to carry on as the ruling communist party’s general secretary until 2022, but the real question is what other appointments will be made, and whether they will extend his influence by elevating his allies.

If the congress brushes aside existing age and term limits, it may be a signal that Mr Xi himself will seek to run the party past his own tentative 2022 retirement date; a further break with the past for this most ambitious Chinese leader.

Meanwhile, China will have to navigate other major challenges, including the slowest growing economy for a quarter of a century and a possible rise in tensions with Mr Trump.

September-October: Germany’s election

 

Angela Merkel is now long established as the most important leader in Europe, if not the free world. But in 2017, as she seeks a fourth term in office, she faces a steep electoral challenge.

The maths of building a stable coalition is likely to be enormously complicated by the established parties’ problems. Popular frustration with Ms Merkel’s liberal line on immigration has combined with the long-term decline of her current coalition partner, the Social Democrats, and the uncertain prospects of her traditional allies, the Free Democrats.

The anti-euro, anti-immigrant Alternative for Germany will be trying to take advantage. Ms Merkel will be seeking to ensure that her vital international role is not undermined by weakness at home.

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