News & analysis


Risk appetite may have improved since yesterday’s PBOC intervention stabilised Chinese equity markets, but the loonie has not yet managed to mount a convincing rally, instead rising slightly over the course of yesterday before falling back overnight. This morning has seen a renewed attempt at a rally, as the major crude oil indices have also picked up slightly after reaching fresh lows for the year overnight. The key question for crude oil is now how bad the impact of the coronavirus outbreak will be on global demand, and how substantial OPEC’s supply response will be. Major news outlets are reporting on internal debates between members of the cartel and Russia, with initial cuts of around 500,000 the starting point of the discussion. Canada’s trade balance will be released at 13:30 GMT, followed at 17:30 by a speech from the Bank of Canada’s Carolyn Wilkins.


On the whole,  the US dollar has been on the back foot against AUD, SEK and NOK since yesterday’s tentative risk rally began, but advancing against CHF and JPY. These dynamics mostly remained intact overnight with haven flows unwinding as Chinese officials continue to pump ample liquidity into the banking system. The first two days of the week saw a net $550bn injected into the banking system by repo auctions, in turn cutting the effective rate at which state-owned and private banks can borrow from the PBOC. The Chinese central bank skipped any further injections this morning, however, many expect further monetary easing in the coming month in the form of reserve requirement cuts and a reduction in their one-year loan prime rate. Authorities are arguably waiting for the dust to settle in order to gauge the true damage the virus has done to the economy before embarking on fiscal stimulus, in order to not undo the progress made towards rebalancing the economy towards consumption as opposed to government investment. The current measures have allowed US equities to recoup losses seen after the outbreak and have prompted some of the greenback’s strength to unravel. The US 10-year treasury yield has increased 8.5 basis points since Monday, highlighting the easing risk appetite. Overnight, the Iowa caucus released around 71% of the votes with Pete Buttigeg leading, closely followed by Bernie Saunders. Joe Biden, on the other hand, suffered his first significant campaign blow as he currently sits in fourth as the results seep in. Iowa only appoints around 1% of delegates to vote for the Democratic leader but it has significantly set the tone for the race, notably giving Obama a platform to compete against Clinton in 2008. In Washington, President Trump is set to be acquitted later today by the Senate. On the data calendar, the ISM non-manufacturing index is released at 15:00 GMT, some 15 minutes after the final readings of the Markit measures.


Sterling began yesterday with an extension of its selloff from Monday, reaching fresh lows in the morning, but then stabilised and managed to end the day marginally higher against the dollar and euro. After Monday’s opening gambits from Barnier and Boris, there were no further significant developments in negotiations about UK-EU trade arrangements. Updated construction purchasing managers index data was released for January, and showed a marked improvement in the overall picture compared to December. Although total output remained in contraction, the size of the decline was far less severe. An updated release of January’s figures for the equivalent services PMI will be released today at 09:30 GMT.


The euro spent much of the day asleep yesterday until broad dollar strength slightly dragging the pair down, though this was short-lived. This morning, mixed purchasing managers indexes data from Germany, France and Italy seemed to slightly enhance volatility but did not support the euro in gaining back strength. Overall eurozone Services and Composite PMIs slightly improved but did not make much of an impression on the single currency as the manufacturing reading, which has a major concern in the currency bloc, remains deep in contractionary territory. European Central Bank President Christine Lagarde will speak later today at the Grand Prix de l’économie in Paris.

FX Elsewhere

The Australian dollar has extended its gains from yesterday overnight, after a major speech from Philip Lowe. The Reserve Bank of Australia Governor acknowledged the possibility of further rate cuts, but  expressed hopes that the central bank would be able to avoid them, and repeated his assessment that the economy was seeing a “gentle turning point” for the better. The labour market was highlighted as the key variable for deciding if further easing would be necessary, while the effects of coronavirus on the Chinese economy were a key downside risk.



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