Forex Major Currencies Outlook (Jan 24 – Jan 28)

USD 

Building permits in December came in at 1.873m vs 1.71m as expected and 1.717m in November for almost a 10% monthly rise! Housing starts came in at 1.702m vs 1.678m the previous month adding to the strength of the housing sector. The yield on 10y treasuries touched the 1.9% level during the week, the first time it went that high since 2019. Calls are being made for 2% in the short-term and 2.25% by the end of the year. Market probability of a March hike now stands at 88.2% 

This week we will have preliminary Q4 GDP reading, Fed’s preferred inflation metric PCE and FOMC meeting. There is a possibility that FOMC members decide to end QE program and thus prepare ground for a March hike. 

Important news for USD: 

Wednesday:

• Fed Interest Rate Decision

Thursday:

• GDP

Friday:

• PCE 

EUR 

The first data of the year is ZEW survey which showed German current conditions fall to -10.2 from -7.4 at the end of 2021. Uncertainty around the current German economy is mounting, however the outlook component jumped to 51.7 from 29.9 back in December. The jump indicates that investors are seeing brighter conditions for the economy in H2. Similar situation is with the Eurozone expectations reading which came in at 49.4, up from 26.8 the previous month. German PPI reading rose 5% m/m, thus making it the biggest rise since the end of World War II. In response to the mounting price pressures yield on 10y German bonds reached 0% for the first time since 2019. 

Final inflation data for Eurozone in the month of December was unchanged from preliminary reading with headline at 5% y/y and core at 2.6% y/y. ECB meeting minutes revealed increased importance of wage growth in forming a monetary policy. ECB President Lagarde stated that ECB is not forced to follow Fed. 

This week we will have preliminary PMI data for January. 

Important news for EUR: 

Monday:

• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France) 

GBP 

Employment report for the month of December showed claimant count change drop by -43.3k. ILO unemployment rate slid to 4,1% from 4.2% in November. Wages continued to slide as well penning this as a mixed report. Labor market getting tighter, the fall in the unemployment rate increases chances of a February hike, however wage pressures slowly subsiding and falling below inflation numbers indicating that BOE will not raise interest rates at the pace that markets are pricing in. 

Inflation data for December showed headline number climbing to 5.4% y/y from 5.1% y/y in November with core coming in at 4.2% y/y vs 4% y/y the previous month. Another data point speaking in favor of February rate hike. Retail sales dropped -3.7% m/m and -0.9% y/y with ex-fuel category dropping -3.6% m/m and -3% y/y. All of the readings were in healthy positive territory the previous month although they were revised down. The reading indicates devastating effect of inflation on consumer spending combined with impact of Omicron and post-Christmas shopping. BOE will stay on a hiking track to fight inflation. 

The swap market is pricing in around 90% chance of a hike at the February meeting with four rate hikes expected this year. If BOE decides to hike rates in February it would lift the base rate to 0.50%, which is the threshold necessary for allowing a reduction of the balance sheet. 

This week we will have preliminary PMI data for January. 

Important news for GBP: 

Monday:

• Markit Manufacturing PMI
• Markit Services PMI
• Markit Composite PMI 

AUD 

December employment report showed employment change at 68.4k vs 30k as expected. The unemployment rate dropped to 4.2% from 4.6% the previous month for the lowest reading since 2008. Participation rate stayed the same at 66.1% which enhances the impressiveness of the drop in the unemployment rate. Full-time jobs contributed with 41.5k with part-time jobs adding additional 23.3k. Some banks suggest that with such a tight labor market RBA may act and hike rates in August of 2022, however Governor Lowe explicitly stated numerous times that they wish to see wage growth above 3% before acting on rate hikes. 

Q4 GDP came in at 1.6% q/q and 4% y/y, thus beating the expectations of 1.1% q/q and 3.6% y/y. This puts overall 2021 GDP at 8.1%. The reading is elevated due to the low base in 2020 which saw GDP rise only 2.2%. Industrial production in December came in at 4.3% y/y for the third consecutive month of faster rises putting the reading for the entire 2021 at 9.6% y/y. The biggest contributors were industries for “new energy” cars and industrial robots while on the service side it was activities in telecommunications. Retail sales grew measly 1.7% y/y in December, dragged down by the slumping car sales. In 2021 retail sales grew impressive 12.5% y/y. 

PBOC has cut its MLF (Medium-Term Lending Facility) by 10bp from 2.95% to 2.85%. Additionally, they cunt 7-days reverse repo rate, also by 10bp. Later during the week further cuts have been made. 1-year LPR (Loan Prime Rate) was cut by 10bp from 3.8% to 3.7% while 5-year LPR was cut by 5bp from 4.65% to 4.6%. All of the moves are intended to stimulate the lending and thus the economy. Lowering of rates cannot force banks to increase lending as they still see risks looming in the credit market so PBOC may be forced to ease more in the future. 

This week we will have a Q4 inflation data. 

Important news for AUD: 

Tuesday:

• CPI 

NZD 

Second GDT auction in January brought a 4.6% rise in dairy prices. Whole milk prices rose 5.6% followed by butter prices with 5% rise. The reading will additionally improve New Zealand’s terms of trade. 

This week we will have a Q4 inflation data. 

Important news for NZD: 

Wednesday:

• CPI 

CAD 

December CPI reading showed headline number ticking up to 4.8% y/y for the highest reading since 1991! The biggest contributors were “homeowners” home and mortgage insurance with 9.3% rise, passenger vehicles with 7.2% and food with 5.2% price rise. All three core measures increased as well with median and trimmed now at or above 3% while common is at 2.1% y/y. The report will increase chances of the rate hike at the incoming meeting. 

This week we will have a BOC meeting. Markets are now pricing over 85% chance of a rate hike and with BOC quarterly business survey reaching record high level in Q4 the hike is crossing to almost certain. 

Important news for CAD: 

Wednesday:

• BOC Interest Rate Decision 

JPY 

Core machinery orders, a leading indicator of capital spending, 6-9 months in the future, surged 3.4% m/m and 11.6% y/y in November vs 1.5% m/m and 6.1% y/y as expected. The reading shows a positive sign that private firms are spending which in turn should lead to faster recovery for the economy. 

BOJ has left the interest rate unchanged at -0.10% as well as targeted yield on 10y JGB at around 0% as was widely expected. They see risks for price outlook broadly balanced and for economic activity skewed to the downside. Inflation projections for 2022 and 2023 have been revised up to 1.1%. GDP for 2022 has also been revised up to 3.8% from 2.9% previously. BOJ governor Kuroda reiterated stance that the bank will no hesitate to ease further, adding that weak yen is not a bad thing for the economy. He also added: “We're expecting long and short-term policy rates to remain at the current levels or fall even lower...Raising rates is unthinkable." 

Prime Minister Kishida announced new restrictions for 13 prefectures, including Tokyo and its surrounding area. Restrictions will start on January 21 and will last all the way through February 13. The area under restrictions is responsible for almost 50% of GDP. There is also a possibility that even greater part of the country will be put under restrictive measures thus making even bigger blow to the economy. 

CHF 

SNB total sight deposits for the week ending January 14 came in at CHF724.5bn vs CHF724.6bn the previous week. Virtually no change in the reading as investors have pushed EURCHF above the 1.05 level.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}