News & analysis


The loonie took a beating yesterday, after crude oil prices fell amid reports that Chinese demand for crude may fall by as much as 20% due to Coronavirus. After an improvement in risk appetite overnight, the loonie has rallied slightly along with crude prices. Backlogs in inventories in China mean that refineries are suspected to reduce demand for the crude oil, forcing OPEC and Russia into an emergency meeting that could start as early as this weekend. China is the world’s largest importer of crude, shipping in a total of 14 million barrels a day. This is equivalent to the combined oil imports of Germany, France, Italy, U.K, Japan and South Korea. Some oil analysts are dubbing this the worst demand shock since the global financial crisis and the most sudden since September 11.


The dollar has traded with a mixed tone this morning, strengthening against JPY and CHF but weakening to NOK, AUD, and many EM currencies such as the South African rand and South Korean won. This pattern is broadly consistent with an improvement in risk appetite, triggered by reports of substantial easing measures from Chinese authorities in response to the economic effects of Coronavirus. US politics was wracked by a fresh controversy yesterday as technical issues seriously delayed the announcement of the winner of the Democratic Party’s Iowa caucus, which is an important event that sets the tone of the rest of the race to become the Party’s white house nominee. Yesterday’s data included better than expected purchasing managers indices for the manufacturing sector, with the ISM manufacturing PMI in particular showing a large pickup in new orders. Factory orders from the Census Bureau will be released today at 15:00 GMT, accompanied in the afternoon by economic sentiment figures from TIPP.


The past 24 hours have had a distinct feel of Groundhog Day, as sterling has fallen about 2% on the latest Brexit developments. Michel Barnier and Boris Johnson set out the EU and UK’s opening negotiating positions on future trade relations, and unsurprisingly there were wide gaps between the two parties’ visions. Barnier set out an offer for a broad free trade agreement that included provisions for services, but was conditional on “level playing field” provisions that were enforceable, and stable fishing quotas. Boris in turn set out a vision for the United Kingdom to strike free trade deals globally, including with the EU, but said that the UK would not be accepting EU rules, suggesting a rejection of the EU’s conditional offer for a broad free trade deal. The UK’s argument seems to be that previous free trade deals, such as that struck with Canada, did not require such provisions. Time will tell how negotiations proceed. More importantly, we will also learn this year how businesses and consumers respond to the new clarity on the range of possible outcomes, which have now collapsed to somewhere between a “Canada” agreement that covers goods trade, and an “Australia” arrangement, which could more precisely be called a “no deal” Brexit. The construction purchasing managers index will be released today at 09:30 GMT.


The euro stayed steady yesterday and overnight as fresh comments about the European Central Bank’s inflation target were made by Bundesbank President Jens Weidmann last night. Weidmann indicated to be open to tweaking the target following years of not hitting the target of below but close to 2%, and said it is “unarguable” this issue should be discussed. ECB’s Executive Board Member Philip Lane has stated it is a “real issue”, supporting the idea that the ECB will study their inflation measuring methods. Today, eurozone producer prices and Italian consumer prices are announced at 10:00 GMT, and on Wednesday, several large eurozone countries will release purchasing managers indices.

FX Elsewhere

The Chinese renminbi gained some strength overnight as Chinese stocks stabilized after the largest recorded market loss following the virus outbreak and boosted sentiment. The People’s Bank of China reportedly injected hundreds of billions of yuan into interbank markets via open market operations aimed at shoring up risk appetite and ensuring interbank lending remains intact. The PBOC’s combination of liquidity injection and a new daily fix rate for USDCNY implies the authorities’ interest to support the renminbi.



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