Currency View by OFX

Last week’s news

• The U.S. and China have signed an agreement to ‘pause’ the trade war that has weighed on the global economy for almost two years, however tariffs on hundreds of billions of dollars of Chinese imports are still in place. The 86-page text includes a pledge from Beijing to purchase at least $200bn in U.S. goods or services over the next two years as well as a commitment by China not to manipulate its currency. U.S. Trade Representative Robert Lighthizer told reporters ‘The agreement will work if China wants it to work. The people in China I’m dealing with want it to work’.
• The ECB struck a surprisingly optimistic tone in its first monetary meeting with Christine Lagarde at the helm as President, noting signs of economic stabilisation in the Eurozone and an uptick in investor sentiment. The ECB stated in its meeting minutes that ‘overall, business surveys since mid-September suggested a stabilisation in output growth at moderate rates’. Towards the end of 2019 there was concern from economists that the downturn in the industrial sector may also spill over to the services sector however the minutes suggested the ‘industrial production might bottom out before these spill overs become more generalised’.
• China’s economy last year grew at the lowest rate since 1990 while the country’s birth rate tumbled to a record low. GDP grew 6.1% in 2019, a strong figure relative to western standards but a disappointment for an economy used to double digit growth. Weak consumer spending, rising unemployment, problems in their financial system and external pressures, such as their trade war with the U.S, represent the main challenges. Data last week though saw China’s December industrial production coming in at 6.9% YoY versus an expected 5.9%. Retail sales also beat expectations.
• The U.S. dollar soared last week against majors rising 0.26% versus the Euro, 0.37% the Pound, and 0.12% versus the Loonie. Among the most important drivers were the Philadelphia Fed Business Outlook, which came in at 17 versus the 3.8 expected, robust retail sales results, lower than anticipated unemployment claims, improved U.S. December housing data, and the results of the final Michigan consumer sentiment index for December, which rose higher than expected to 99.3.

Looking ahead

• Traders have ramped up their expectations that the Bank of England will cut interest rates this month after data showed inflation fell to a more than three-year low in December. Market odds for a rate cut jumped to over 60% from a chance of 5% as recently as last week. Investors scrambled to reprice the likelihood of a rate cut following very dovish comments from policymakers and fresh signs of weakness in the UK economy.
• Data from the CFTC showed that market participants sold the USD, declining long positions of the US dollar by more than half compared with two weeks ago. At the same time, safe-haven currencies were also dumped with net sell positions in the Japanese Yen increasing strongly. The positioning of the Swiss Franc was neutral. Regarding the Loonie and the Pound, market participants remain more constructive, adding more positions (for the third consecutive week in the case of the Loonie).
• The Canadian dollar is expected to take a clear direction this Wednesday when inflation numbers and monetary policy from the BoC are released. There is a good amount of economic information due this week in Canada as well. Economic performance in Canada is starting to show a few signs of weakness, but market participants are not pricing in any response from the BoC in the short-term. Even the pricing in the futures markets for March shows that a movement in the Canadian rate is very unlikely.

Key market events this week

• Bank of Japan Interest Rate Decision – Tuesday
• HKD Consumer Price Index – Tuesday
• Euro-Zone ZEW Survey (Economic Sentiment) (Jan) – Tuesday
• CAD Consumer Price Index YoY (Dec) – Wednesday
• Bank of Canada Interest Rate Decision – Wednesday
• AUD Unemployment Rate and Change (Dec) – Thursday
• European Central Bank Interest Rate Decision – Thursday
• NZD Consumer Price Index YoY (Q4) – Thursday
• JPY Consumer Price Index YoY (Dec) – Thursday
• Eurozone Manufacturing PMI (Jan) – Friday