From CACIB insights :
Asia overnight :
In Asian hours risk sentiment was stable, with most regional stock market indices trading higher at the time of writing. Both better than expected Chinese trade data and the RBA’s statement of monetary policy suggesting a more upbeat long-term growth outlook have been supporting the AUD. When it comes to the statement the central bank explained that inflation shows signs of having stabilised and will increase over time while wage growth will not slow any further. In addition 2019 GDP forecasts were increased.
European morning: Inflation, production and speakers :
In European hours the main focus will be on Norway CPI for the month of January, December UK production data and speeches by ECB’s Weidmann and Mersch. When it comes to Norway, we see limited risk of incoming data derailing central bank monetary policy expectations to the detriment of the NOK. This is especially true as at 2.9% YoY (prev. 3.5%) consensus expectations already are for slowing price developments. Most importantly the economy has been improving of late, a trend we expect to stay intact for longer. Accordingly the longer term outlook for improving price developments remains constructive and is likely to make a case of the central bank considering a more hawkish monetary policy stance later on. Accordingly we stick to the view that the NOK is facing a further and gradual appreciation.
In the UK, production is expected to have improved. However, given it is December data we expect only limited currency impact. The main focus should be on next week’s labour, retail sales and inflation data. We basically stick to the view that a combination of both strongly capped central bank rate expectations and intact uncertainty as when it comes to Brexit will keep any GBP upside limited from the current levels. When it comes to speeches, the main focus should be on ECB Governing Council member Weidmann, especially as he surprised at the start of the week with more dovish than usual comments by defending the ECB’s dovish monetary policy stance. Nevertheless, as ECB rate expectations are likely to remain broadly stable, it will remain about politics as related to France and Italy and global risk sentiment to drive the single currency. As of now we stay short EUR/USD as a trade recommendation.
USD: is the ‘Trump trade’ coming back?
On Friday the main focus is on the US-Japan trade summit. President Trump did not wait long to deliver on some of his campaign promises, withdrawing from the TPP trade agreement and accusing Japan, among others, of devaluing its currency to gain a trade advantage. However, we believe the summit will be an opportunity to display his much vaunted deal-making capabilities and as such the tone is likely to be more constructive. According to the various press reports, Japan’s PM Abe will come to Washington bearing gifts of Japanese investment in the US and job creation, which may create an opportunity for the US President to signal another successful outcome to the US electorate. We expect the impact on USD/JPY to be positive but moderate since price action over the past couple of days suggests that investors have already started positioning for renewed yen weakness. While not our base case, a more tense tone to the negotiations could have more sizeable negative implications for the JPY and risk sentiment. Ultimately we believe that President Trump’s protectionist pressure will be primarily focused on China and Mexico via the threat of a currency manipulator label for the former and NAFTA re-negotiation for the latter.
From a broader perspective markets have been sensing a gradual return of ‘Trump trade’ with recent discussions of fiscal stimulus and taxes by US policymakers. On Thursday US equities and the USD got a lift as during a meeting with airline executives the President promised a “phenomenal” tax plan to be announced within two to three weeks. A re-focus on the economic issues should be timely as we suspect US measures of consumer and investor confidence are likely to start moderating from their post-election euphoria. On Friday, our economists expect the Michigan Consumer sentiment survey to edge down about 1 point to 97.5. Inflation expectations (at 2.6% in January) will be a key area to monitor from the Fed’s perspective.
CAD: pullback in employment likely
In Canada the January employment report will be in focus. The 6M average trend in Canadian job creation stands at 28K which we believe exaggerates the underlying strength of the economic rebound. Market consensus understandably expects a contraction of 10K in January but an even weaker result should not come as a surprise. Either way the numbers should have little impact on the Bank of Canada’s stance as the bar for either a rate cut or a rate hike remains very high in our view. While CAD’s unstable relationship with domestic data is understandable in a static domestic monetary policy context, its decoupling from US rates and oil is more puzzling. We believe that from current levels a rise back to 1.34 is more likely than a sustained break below 1.30.
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