Currency View by OFX

Last week’s news

• The minutes from Mario Draghi’s final monetary policy meeting were published and they show him calling for unity on its main aim of boosting inflation, even as some policymakers pleaded for a ‘wait and see’ approach. While there was a ‘broad agreement’ at October’s meeting that monetary policy needed to be highly accommodative for an extended period, some members are starting to raise concerns about the side effects of ECB policies. And this seems to be the new debate within the ECB and the world, how effective low interest rates really are and what is the role of Fiscal Policy on supporting growth.
• The UK Labour party released their Manifesto last week, sparking fear across corporate Britain. They have stepped up its taxation plans from £48.6bn to £82.9bn a year- the vast majority falling on big businesses and high earners- to fund spending on social care, the NHS and scrapping college tuition fees. Borrowing also increased and is intended to fund new council homes and a ‘green industrial revolution’.
• Hong Kong’s district elections closed peacefully with the pro-democracy candidates poised to win majority of seats for district council. This is after a record number of people casted their votes yesterday, with more than 2.94 million, or roughly 71% of the financial hub electorate being offered the first opportunity to vote after months of violent protests.
• A gain on Friday wasn’t enough to keep U.S stocks from snapping their run of weekly advances. The S&P 500 Index fell 0.3% in the five days, halting a six-week streak that was the longest in two years. The Dow Jones and Nasdaq Composite Index gave up their runs with the latter ending a seven-week advance.
• The Organisation for Economic Cooperation and Development (OECD) has urged governments to take ‘urgent’ actions to improve the medium-term prospects for their economies. The comments come in the light of global uncertainty, slowing trade, social unrest but record highs in equity markets. The OECD said that stimulus efforts, along with greater international co-operation on trade and taxation, could boost the growth performance of the G20 group of major economies by more than 1% over 3 years. The OECD forecast global growth to be 2.9% this year, the weakest projection since the 2008 financial crisis.

Looking ahead

• Markets are likely to continue exhibiting low conviction amid rising US-China deal uncertainties. Two-way risks on US-China headlines and a lack of new signals from global data and monetary policies could keep markets trading in a narrow range for the short term. The US market seems to be on a “wait and see” mode, after two weeks of public hearings on Donald Trump Impeachment saga plus Trump himself refusing to confirm if he’ll sign a bill, passed by the Congress, on backing Hong Kong democracy protesters.
• One-month risk reversals in USDCAD posted the largest net gain since August as traders are now turning more bearish on the Canadian dollar after modestly dovish comments coming from Bank of Canada’s Senior Deputy Governor Carolyn Wilkins last Monday. Implied probability for a rate cut on the January 22 BoC meeting climbed from 43% to 54% at the start of the week, and then felt below 40% on Friday. With the Loonie volatility near historically low levels, traders may be tempted to opt for cheap protection against unknown risks surrounding future Monetary policy.
• Speeches by RBA Governor Lowe and Deputy Governor Debelle (Tuesday) will be the highlight of the week for the Australian Dollar. Debelle will speak on “Employment and Wages,” while Governor Lowe’s will touch on ‘Unconventional monetary policy’. With RBA’s cash rate (0.75%) already close to the board’s estimate of a lower bound, the market will be expecting hints on what path the Governor has planned from here. Given that Governor Lowe has repeatedly reduced market expectations of the RBA taking an unconventional path, it will be interesting to see what options he is thinking off and what’s his call on Fiscal Policy.

Key market events this week

• RBA Governor Lowe Speech in Sydney – Tuesday
• US Advance Goods Trade Balance (Oct) – Tuesday
• US Consumer Confidence Index (Nov) – Tuesday
• US Durable Goods Orders (Oct) – Wednesday
• US Gross Domestic Product Annualised QoQ (Q3) – Wednesday
• US Personal Consumer Expenditure Core YoY (Oct) – Wednesday
• CHF Gross Domestic Product YoY (Q3) – Thursday
• German Consumer Price Index YoY (Nov) – Thursday
• NZ Government 4-Month Financial Statement – Thursday
• Eurozone Consumer Price Index Core YoY (Nov) – Friday