Dollar softer ahead of inflation, BoC and ECB
The defining moment of the week for the USD came as the first press conference of the President-elect Donald Trump unfolded. Few details on topics the market cared like infrastructure spending or fiscal stimulus were shared while the most combative aspects of his campaign were in full view. Inauguration on Friday, January 20 starts the countdown for the first 100 days of the Trump era that is expected to deliver bold action that could see the USD appreciate across the board. U.S. consumer prices will be released on Wednesday, January 18 at 8:30 am EST with a forecast of 0.3 percent rise month-over-month.
The Bank of Canada (BoC) will release its interest rate announcement and monetary policy report on Wednesday, January 18 at 10:00 am EST. Governor Stephen Poloz will host a press conference starting at 11:15 am EST. The BoC is expected to keep rates unchanged at 0.50 percent. The rate differential with the American interest rate widened after the Fed rate hike in December, but not enough to force an immediate reaction by the Canadian central bank.
The European Central Bank (ECB) will publish its minimum bid rate on Thursday, January 19 at 7:45 am EST. Central banks will be off to a slow start in 2017 as the ECB is also expected to keep interest rates and its QE program unchanged in the first meeting of the year.
The EUR/USD gained 0.995 percent in the last five days. The single currency is trading at 1.0632 after touching lows of 1.0454. The USD is on the retreat after the aftermath of Trump’s first press conference since July. The market was disappointed with the spectacle as there was nothing new with inauguration fast approaching.
The USD will have a slow start of the week with Monday being the Martin Luther King holiday closing U.S. markets. Trump and retail sales did not move the needle enough for investors and inflation is likely to only match expectations. The ECB on the other hand is not anticipated to make waves in January. European fundamentals improved in 2016, but not enough to get the ECB off the hook for building a strong growth trajectory. Political risk has risen in Europe as elections in Italy, France and Germany could put the end of the Union closer to a reality.
The USD/MXN gained 1.66 percent last week. The currency pair is trading at 21.59. The intervention of the Mexican central bank was short lived as the peso started sliding agains the USD. Even with a heavy dose of anti-trade rhetoric in his first press conference since winning the election, there was little to show how his government could implement some of the immigration barriers. The MXN will end the week on a negative note, but there was a clear recovery in the last two days of the week.
Goldman Sachs is confident that the Mexican currency will appreciate as more details emerge on Donald Trump’s policy changes. Uncertainty over the extend the president-elect wants to renegotiate NAFTA and his comments about the wall between Mexico and the U.S. have had a negative effect on the peso if the worst case scenarios become a reality. The markets are pricing in those scenarios, and if the real changes are less severe the peso would clearly be undervalued.
Oil prices fell 2.071 percent in the last five trading days. The price of West Texas is $52.20 after concerns remain on the true impact of the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement and the stagnant global demand for energy.
Chinese oil imports have risen to 8.6 million daily barrels, but if the economy fails to keep up with aggressive growth targets, China’s taste for energy will decline. U.S. weekly inventories showed a larger than expected crude buildup of 4.1 million barrels versus the forecast of 1.2 million.
Russia and other non-OPEC producers have released their production levels in compliance with the OPEC agreement but so far despite a weak USD the market is not convinced as U.S. shale producers are increasing production as they are not bound to any deal. The OPEC strategy of driving oil prices through over supply did not bankrupt the U.S. based operations, specially in a low rate environment where debt was cheaper to service. Saudi Arabia have used up some of their capital at the wrong time, as higher rates would have helped their agenda against the disruptive technology.
The week ending on January 20 will mark the beginning of the Trump presidency. After one of the longest campaigns in U.S. history and a shocking result as pollsters and media missed the signs of a Trump win. Markets look beyond politics and are awaiting a clear signal from Trump and his team on the specific policies that he intends to put in place in his first 100 days in office.
Market events to watch this week:
Monday, January 16
US Holiday Martin Luther King Day
Tuesday, January 17
4:30am GBP CPI y/y
Wednesday, January 18
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
8:30am USD CPI m/m
8:30am USD Core CPI m/m
10:00am CAD BOC Monetary Policy Report
11:15am CAD BOC Press Conference
7:30pm AUD Employment Change
Thursday, January 19
7:45am EUR Minimum Bid Rate
8:30am CAD Manufacturing Sales m/m
8:30am EUR ECB Press Conference
8:30am USD Building Permits
8:30am USD Philly Fed Manufacturing Index
8:30am USD USD Unemployment Claims
11:00am USD Crude Oil Inventories
9:00pm CNY GDP q/y
Friday, January 20
4:30am GBP Retail Sales m/m
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
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