The quiet start to the week continued yesterday, with very little structural data allowing the moves seen in the Asian session to remain largely untouched in European and US trade.
USDCAD breached 1.10 for the first time since 2009 yesterday morning as investors continued their bullish USD habits while remaining fearful of a Bank of Canada rate cut later today. We have seen a lot of poor Canadian data – led by their horrific jobs report 10 days ago – which has heightened expectations that the BOC will move to loosen policy soon. Despite this, the market only sees a 5% chance of action at the meeting this afternoon at 3pm. CAD volatility will remain as a result of these expectations being managed by traders and central bankers alike. For the record, we expect no change from Poloz and other members of the BoC today.
The Bank of England is also in the firing line today with the publication of the latest minutes. This month’s Bank of England meeting was an exercise in matching expectations. The Bank of England has entered 2014 in a rather remarkable quandary; a central bank eager to continue to preach the gospel of lower rates, but unwilling to talk down an accelerating economic revival. Jobs growth will continue through Q1 with anecdotal data from recruitment agencies published earlier this month showing that people were placed into permanent roles in December at the 2nd fastest rate since 1997.
This month’s rate decision came with no attached statement and, once again, sterling movement will be about how unanimous the decision to maintain policy will be. The MPC is used to being split and it will only take a few more months of this strong jobs growth for votes on rates hikes to be seen. Sterling may benefit from any language changes in the minutes that emphasise the ongoing economic expansion has caused the Bank of England to upgrade internal forecasts.
Another possible joker in the pack would be any discussion from any Monetary Policy Committee members about a lowering of the unemployment threshold that the Bank’s forward guidance policy depends on away from 7% to 6.5%. There was a lot of chatter around this possibility around the time of the meeting and so we could easily see one of the more dovish members acknowledge those media reports. That would give sterling quite the kicking, ahead of next month’s decision and Quarterly Inflation Report.
Also out at 09.30 GMT is the latest run of unemployment data; another drop in the overall rate to 7.3% from 7.4% last month is definitely on the cards and we can only hope that we see an increase in wages to go with it. PMI data has suggested wage pressures are building of late, especially in service sector industries.
The Bank of Japan meeting once again left us without any surprises this morning. The Bank of Japan board will continue to expand its monetary base in line with its earlier adopted plan. As we said yesterday, we expect that issues later in the year – namely the 60% rise in the sales tax – will cause a rethink of the stimulus targets in Japan and weaken the JPY as a result.
The big mover overnight has been the AUD that has blasted higher on inflation data this morning. Much like the NZD 24hrs earlier, inflation in the country has surprised to the upside and limited the prospects of looser monetary policy in the short term. CPI is now running at 2.7% YoY vs 2.2% the previous month.
Euro has remained slightly off following German investor confidence missing expectations yesterday morning on increased caution over the country’s economic outlook. GBPEUR hit a new 1 year high yesterday afternoon following that and a positioning run for GBP before yesterday’s IMF release and today’s jobs data. The focus for the Eurozone this week will be tomorrow’s PMI numbers.
