News & analysis


Sterling rallied substantially yesterday after the Confederation of British Industry survey as business optimism dramatically improved. The proportion of manufacturers that expected business to improve was 23% higher than those that thought conditions had worsened in the three months up to January, marking the highest reading of the business optimism sub-index since 2014. While the Total Trends Orders sub-index remained negative at -22 vs -28 in December, the data point added to previous surveys which reported an improvement in business sentiment post-election. While the data point adds a bit of confusion for the Monetary Policy Committee, it also increases the importance of Friday’s flash PMI release before markets get ready for fresh policy guidance from the Bank of England at the end of the month. Swap markets ran with the data point and tempered expectations of a rate cut at the end of the month while sterling rallied 0.7% over the course of the day. The implied probability of a rate cut by the BoE at the end of the month now sits at 60%, but reached a 50/50 chance after yesterday’s CBI release.


The euro continued its two-way price moves yesterday and remained well within this week’s range, but saw a short drop after US President Donald Trump threatened to impose “very high” tariffs on car imports from the EU if the bloc does not agree to a trade deal. The front page of the Financial Times today centres around Davos and the fresh push by eurozone bank executives to warn regulators and politicians at the World Economic Forum about the perils of long-term negative interest rates. Previous concerns fell on deaf ears under Mario Draghi’s tenure, with the former central bank President telling banks to focus on fixing their business models instead of “being angry”. The news comes as the European Central Bank is set to provide fresh guidance on monetary policy today, while the newly appointed President Christine Lagarde kick starts the bank’s strategic policy review. This is the ECB’s first monetary policy review in 16 years and will take a two-part approach. One will focus on the bank’s performance since their last review in 2003, revisiting its framework, instruments and price targets, while the other looks at financial stability, climate change and communication. The review comes as inflation expectations recently hit rock bottom in the eurozone, but since the announcement of the policy review, the outlook in the currency bloc has increased somewhat.


The US dollar has traded mixed over the past 24 hours, making big inroads against its Canadian counterpart, but weakening against the Aussie dollar overnight. Federal House Price data showed a 0.2% rise in November, while Existing Home Sales rose to 5.54 million, better than most forecasts. 10-year treasury yields fell, as markets traded with a nervous tone in the face of the viral outbreak in China. Donald Trump made several ominous comments about trade with the European Union, saying that he had a loose timeline for forcing a trade deal with the EU and that auto tariffs were a threat if insufficient progress was made. Today’s data calendar includes weekly unemployment claims at 13:30 GMT, followed by the Conference Board’s leading index at 15:00, and crude oil inventories at 16:00.


The loonie sold off substantially during yesterday’s session as the Bank of Canada’s policy statement removed the word “appropriate” when describing current monetary conditions. Upon its release, market’s took this as a signal that rates will be changed in the coming meetings, especially as growth stagnated in Q4 2019 and may show tentative signs of picking up in the new year. While the bank’s fresh economic projections suggested the slowdown in Q4 growth was temporary, due to deteriorating external conditions impacting the Canadian economy more than expected according to Governor Poloz, the projections also highlighted a mild widening in the economy’s output gap. While the central bank’s mandate doesn’t include growth specifically, a widening of the output gap will undoubtedly put pressure on inflation in the months to come as constraints to business output weakens, hence the concern by the central bank over growth. Markets increased the probability of a rate cut by the BoC in its March meeting to 24%, however, the metrics of economic activity in the coming months will be pivotal in proving whether this pricing was correct.



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