Credit Agricole FX Daily.
“Persistent Risk Aversion And Other Scares”
Key quotes from the report:
“Market uncertainty persists despite the latest improvement in the Chinese services PMI for January. The weakness of risk-correlated assets is consistent with the renewed sell-off in oil and could point at pervasive concern about slowing global demand and growth. Some clients have further highlighted that the central banks of oil exporters are now forced to liquidate their FX reserve holdings and are partly to blame for the sell-off in the global asset markets. One risk-correlated and commodity currency that proved to be more resilient overnight was NZD.
Three factors seemed to be playing a role. To start with, the NZ employment numbers came in better than expected with unemployment tumbling to a multi-year low. Second, Governor Wheeler signalled that the RBNZ will look through the latest bout of disinflation driven by low commodity prices and thus need not cut rates any-time soon. Third, NZD remained resilient despite weaker dairy prices suggesting that some negatives are clearly in the price. The above being said, it is premature to call for an end of the NZD under-performance.
Indeed, global commodity prices remain under pressure and the longer-term disinflation trend in the New Zealand economy still means that the next RBNZ move is more likely to be a cut, not a hike. In addition, the apparent tightness in the labour markets could be attributed to a drop in the labour force participation rate as well as the continuing strength in construction in Canterbury. Neither of the factors is expected to be sustained and this could point at renewed pick up in the economic slack before long.”
“GBP has been consolidating of late in response to reports that the UK and the EU have made further steps towards reaching a deal to avoid Brexit. Today’s services PMI is expected to stay little changed from the month before and as such need not be a major market mover. That said, the print could offer more evidence of the resilience of the UK’s domestic demand driven recovery. In turn, this could corroborate the view that the BoE IR will struggle to exceed the already rather dovish market expectations come Thursday. All that could point at more GBP resilience in the near term.”
See our BOE Preview ahead of the rate decision, meeting minutes & inflation report tomorrow.