Markets at the start of the week have seen USDs remain bid vs the majority of the G10 and EM complex. A Q4 GDP beat in CNH has had little feed through into FX to offset this either. We await London liquidity to determine whether current moves have legs, however, the picture will remain clouded with liquidity likely to stay constrained as the US is out for holidays.
Looking ahead this week, central banks remain in focus with a number of rate decisions due. COVID developments will also continue to be watched as markets monitor vaccine distribution progress, and lockdown announcements given rising case counts.
The USD has started the week on the front foot, gaining versus most currency pairs in the G10 and EM space. A Q4 GDP beat in China was not enough to inspire emerging market currencies either, with particularly underperformance seen in KRW, THB and MYR. Oil has also traded lower pressuring CAD in G10 space, with AUD and NZD also underperforming G10 counterparts. JPY bucks the trend with noise from BoJ potentially at play, although the currency may also be reflecting risk-off at the margin. However, as we saw last Monday, lower liquidity with today’s US holidays could be clouding the moves.
RBC Capital Markets
Week ahead: It is a busy week with Biden's inauguration (Wednesday), and a slew of central bank meetings: Bank Negara Malaysia (Wednesday), Bank of Canada (Wednesday), Bank of Japan (Thursday), Bank Indonesia (Thursday), ECB (Thursday), Norges Bank (Thursday) and South African Reserve Bank (Thursday). Yellen's confirmation hearings (Tuesday) should offer insights on the new administration's economic agenda, as will the news flow as Biden’s fiscal proposal wends its way through the corridors of Congress.
EUR: The ECB meeting (Thursday) should be a low-key affair after the policy announcements last month, and we expect no changes to policy this week. Meanwhile, forward-looking indicators from last month’s PMIs point to further improvement in the euro area services PMI (Friday). However, renewed lockdowns in December suggest that an improvement in the headline reading seems unlikely. We instead look for the services PMI to slip to 46.0, led by a downturn in the German reading. In contrast to the contactintensive services sector, the manufacturing sector has been holding up relatively well, and we forecast manufacturing PMI to remain firmly in expansionary territory at 55.0.
IDR/MYR: While the Bank Indonesia meeting (Thursday) is widely expected to see policy on hold, there is a split opinion on whether the Bank Negara meeting (Wednesday) will result in a rate cut. Given the recent lockdown in Malaysia, BN is likely to introduce a more dovish guidance. GBP: Price pressures on clothing retailers, along with lower food prices, should restrain December CPI inflation (Wednesday) to just 0.4% y/y. We expect this month’s ‘flash’ PMI surveys (Friday) to show a deterioration in both the manufacturing and services readings.
AUD/NZD: Australia's December employment report (Thursday) should reflect further gains, with high-frequency confidence/activity indicators generally continuing to show progress. The main cautionary factor is that our weekly payrolls-based indicator continues to give a slightly less ebullient signal, though this is currently updated only through November. Another release is due on Tuesday, which may see us tweak our expectations ahead of the monthly labour report. For now, though, we expect headline employment gains in the order of 35k and a steady unemployment rate of 6.8%. New Zealand's Q4 CPI (Friday) will also be on tap.
CAD: All three November sales releases will be out this week. RBC Economics sees no compelling reason to deviate from earlier StatsCan estimates for manufacturing (-0.4%) and wholesale trade (+1.0%) on Tuesday, along with retail sales (flat) on Friday. Our economists are forecasting a flat monthly reading for December headline CPI (Wednesday), which would leave the annual rate steady at 1.0%. The BoC’s core measures have held in quite well during the pandemic, averaging 1.7% in November. Lastly, no change is expected in the overnight rate, forward guidance or QE purchases at Wednesday’s BoC meeting. The BoC’s projection is very likely to be upgraded in the MPR, given the positive vaccine developments. Near-term forecasts should be mixed, with Q4 upgraded from +1.0% annualized (RBC at +4.5%), while Q1 could be negative (our latest forecast is flat). We do not think that a move lower in the effective lower bound (e.g. from 25bp to 10bp) will be required at the moment given the improved medium-term outlook. Despite the improved projection, we do not expect the BoC to move the forward guidance timeline from 2023 to late 2022.
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