Key Events This Week: January 18th – 23rd:
Tuesday: CNY China GDP EUR ZEW Survey
Wednesday: GBP ILO Unemployment CAD Bank of Canada Rate Decision
Thursday: EUR ECB Rate Decision
Friday: CAD Consumer Price Index
USD should continue to outperform over coming weeks for a variety of reasons. First, despite mixed data recently, the US remains a relative growth hot spot. Second, as markets anticipate further monetary easing in Europe and we have seen signs that EM central banks may take advantage of lower oil prices to ease policy, this makes the US’s monetary policy all the more notable. This week’s CPI release will be important.
The long anticipated ECB meeting comes next week, with both the markets and ourselves expecting QE. With QE largely priced in, there is a risk that the ECB disappoints. Markets will likely look to sell EUR on bounces from an ECB disappointment. Returns on European assets are unlikely to pick up, particularly if the ECB does not act. As investors move out of EUR, this would drive the currency lower.
The JPY has continued to see support on the back of falling risk appetite and a lack of further measures from the BOJ and Abe administration. Low oil prices are likely to push YoY core inflation to negative territory in early spring, but the BOJ is unlikely to take any further easing measures in the near future.
Markets expect the GBP decline to continue given the weak inflation outlook, political uncertainty and moving rate expectations. In addition, forward looking PMI services, a large part of the UK economy has also started to show signs of slowing. Economists now expect further downside for inflation, which could keep the currency under selling pressure, especially against a generally strong USD environment. GBP may gain support against EUR should the ECB not disappoint markets
AUD has received support over recent days from a combination of stronger domestic data and expectations for monetary easing in China. However, we remain bearish on the currency for a few reasons. First, falling commodity prices will have spillover effects to the financial sector, where much of the build up in leverage was based on commodity linked assets. Second, we are starting to see declines in non oil commodities, most notably the recent fall in copper.
As oil prices continue to be weak markets believe that USDCAD is now poised to head higher. While falling commodity prices are likely to put pressure on the CAD in the near term, over the longer term there are second round effect of lower oil prices to think about. There is a risk to banks and real estate, both of which have indirectly boomed as a result of oil over recent years.
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