Weak UK retail pushing investors into GBP shorts
(Peter Rosenstreich, head of market strategy)
The optimist can-do post-Brexit feeling took a hit today as UK retail sales unexpectedly contracted by -2.0% from a revised 0.2%. This weak read will undoubtedly be exploited by pro-EU/single market proponents as a clear sign that a “hard” exit will come with a cost. Yet the broader economic data has yet to support this theory. In communicating her Brexit strategy, UK PM Theresa May notably advanced a confident message, which gave the GBP a bullish tone. Today's sharp fall in GBP should be temporary and we see this as an opportunity to reload GBPUSD longs. Watch out for German equity markets to get a positive temporary bounce as the weak economic data should entice the UK back to the negotiating table. As we have suggested in the past, we anticipate the final result will be more “soft” then “hard” and as the debate simmers against a backdrop of overhyped comments or data, there will be an opportunity to pick up sterling at a discount.
T-day: The Donald takes power
(Arnaud Masset, market analyst)
Here we go, the day that market participants have been anticipating for two months. Donald Trump will officially become the 45th President of the United States. Unfortunately, we do not expect the President-elect to provide any clarity on his policies, especially those concerning his fiscal stimulus and tax cut plans, which are the most anticipated. Therefore, should Trump’s inauguration speech be in the same vein as last week’s press conference, investors will express their disappointment. The sell-off in the dollar may accelerate as expectations for a spending boost fade.
On another note, Janet Yellen addressed a speech at Stanford Institute for Economic Policy last night. The Fed Chairwoman appeared more dovish than expected and asserted that the Fed was not lagging behind in tightening its monetary policy, therefore implying that the Fed has not been slow-playing the market by only lifting rates twice in the last 13 months. While she emphasised that it would be risky to allow the economy to shoot up, it did not feel as though she was in a hurry to lift interest rates. After all, the result of the US elections has significantly obfuscated the US economic outlook, making it difficult for the Fed to give clear forward guidance.
In the FX market this morning, participants stayed on the back foot as most currency pairs traded sideways. Even the Mexican peso, which has been the best short play in recent weeks, edged up 0.40% against the greenback. The euro rose 0.15%, the CAD was up 0.17% while the yen rose 0.13%. In short, be ready for some erratic moves and emotional reactions this afternoon as The Donald grabs the microphone and delivers his first speech as US President.
Watching CAD inflation
(Peter Rosenstreich, head of market strategy)
CAD was hit hard by the rally in US interest rate yields this week, as 2 year-yields climbed 5bp to 1.24%. USDCAD's recovery bounce extended past 1.3295 resistance suggesting further extension to 1.3457. CAD bulls have indicated that China's stronger than anticipated growth rate (Q4 GDP coming in at 6.8%) should be supportive of commodity-linked currencies. The Broad index of commodity prices CRB has reached a one-year high. However, we are seeing scant signs of recovery in Canada's primary export, oil, which continues to lack demand. Crude global oversupply remains the dominant driver despite OPEC expressed satisfaction on the adherence to recently agreed production cuts. Without a meaningful recovery in oil prices, CAD will fail to find demand momentum. Of course there is the Trump issue which could further oversupply the crude markets with energy policy adjustments. This week, the Bank of Canada suggested that interest rate cuts were a possibility should inflation downside appear. This dovish outlook will temporarily shift trader attention away from Washington DC to Ontario for the Canadian inflation report today. Headline CPI is expected to come in at 1.7% from 1.2% grinding toward the BoC 2% inflation target. Canada has struggled to generate sustained growth as GDP contracted by 0.3% in October (led by 2% in fall in manufacturing) after four months of expansion. Downside disappointment in economic data has increased the probability of a weak inflation read today. However, the rate market remains under-positioned for a rate cut by nearly pricing in a full rate hike by year-end. We remain constructive on USDCAD with expectations for an extension of bullish bounce.
Draghi concerned by inflation
(Yann Quelenn, market analyst)
Unsurprisingly, the European Central Bank announced that it would hold its rates unchanged. At the following press conference, ECB President Mario Draghi announced that no major changes have happened since the last meeting in December. The status quo continues. He underlined the fact that inflation remains subdued and that the latest increase is mostly due to higher energy prices. Inflationary pressures should remain weak this year.
Current monetary policy remains clearly accommodative until December when the QE programme is set to end. As we know, the asset-purchase program amount will be lowered to €60 billion a month. In our view, the aim of this reduction is to address the possible scarcity of bonds in the medium/long run. We nevertheless believe that the ECB could eventually decide to re-increase the amount of asset purchases if needed.
What surprises us is that the ECB board seems to believes that the current monetary policy course has been so far successful. It would appear that success for European policymakers is subdued growth and inflation as well as low interest rates, which underpin asset bubbles, despite the billions of euro being pumped into the economy. With uncertainty at an all-time high, Mario Draghi attempted to provide financial markets with a reassuring message, while keeping a dovish tone. The EURUSD barely reacted yesterday. Pressures will remain on the single currency for some time to come.