Currency View by OFX

Last week’s news

• The Greenback recovered some lost ground this week, following better than expected ISM non-manufacturing (December) and factory orders (November). But job data on Friday came in below the economists’ estimates for December although the unemployment level remained at a 50 year low of 3.5%. More concerningly, U.S. wage growth dropped below 3% for the first time since July 2018. Wage numbers suggest the labour market isn’t as tight as the unemployment rate shows. The USD still managed to close on positive but gained only 0.30% versus the more than 0.50% it was gaining before Friday data.
• The Canadian government released robust employment data at the same time as the U.S. released disappointing jobs data, which resulted in the Loonie erasing some of its losses. The Canadian economy saw an increase of 35.2K jobs in December (above 25K expected). But as in the US, wage growth came in at 3.8% versus the 4.2% expected. BoC Governor Stephen Poloz said that it, “…remains to be seen… how Canadian business will respond to preliminary U.S.-China trade pact. Understandably, companies are reluctant to make big investments in this setting.” BoC Stephen Poloz added that it’s too early to tell if recent improvements on the global trade front will lead to stronger trade and investment.
• Michel Barnier warned last week that Brussels will not be moved in its demand that Britain stays in line with the EU’s restriction on state aid and its regulatory standards in exchange for a far-reaching trade deal. The new Commission President, Ursula von der Leyen, has insisted on a ‘level playing field’ during a meeting with Boris Johnson, and that her priority is to protect the EU market from unfair competition. Any free trade agreement between Britain and the EU will be reflective of how much Britain stays aligned with EU rules.

Looking ahead

• The USD’s status as a safe haven has come under the spot light over the last few weeks. Typically, the USD jumps along with gold, when there are stretches of geopolitical nerves around the globe but after the assassination of Iranian military commander Soleimani last week, the currency barely budged. Instead, as the crisis between the U.S. and Iran began to cool down and it was apparent that immediate military action had been avoided, the USD climbed. This flip in traditional behaviour has left many market watchers puzzled and unable to treat the dollar as a haven or a risk asset. Analysts have stated the key culprit for the change is the US interest rate, which is higher than other developed nations.
• The Loonie, a petro currency, had initially increased on a spike in oil prices; nonetheless, the Loonie ended the last week on the back foot due to negative market participants’ expectations. The USD/CAD pair ended the last week rising 0.4% (weaker Loonie). Some likely drivers may include the BoC’s focus on whether persistent trade and manufacturing weakness will spill into consumer spending and housing, as well as not so positive economic releases on trade data, building permits (construction activity in Canada), and retail spending in the last few days. On the flip side, there might be upside potential of a U.S.-China trade deal and the looming ratification of the Canada-U.S.-Mexico trade agreement.
• The BoC and ECB will release their decisions on monetary policy next week, on the 22nd and on the 23rd, respectively. Market participants will find some clues for the Loonie this week from the BoC Business Outlook Futures Sales in Canada, which will be released later today by the BoC. Regarding key drivers for the U.S. dollar, Fed Bostic is going to discuss economic outlook and monetary policy later today, and Fed Williams and Fed George are going to speak tomorrow; the cherry on top of the cake will be the U.S. Federal Reserve Beige Book and Fed Harker’s discussion on economic outlook on Friday. Regarding the Euro, there are two European Central Bank speeches scheduled for tomorrow by Yves Mersch in Frankfurt and François Villeroy in Paris.

Key market events this week

• AUD Melbourne Institute Inflation (Dec) – Monday
• GBP Industrial and Manufacturing production – Monday
• USD Consumer Price Index YoY (Dec) – Tuesday
• GBP Consumer Price Index YoY (Dec) – Wednesday
• USD Retail Sales MoM (Dec) – Thursday
• CNY Gross Domestic Product YoY (Q4) – Friday
• EUR Consumer Price Index YoY (Dec) – Friday
• USD University of Michigan Sentiment (Jan) – Friday