It appears as if the dark clouds surrounding financial markets to begin the year are starting to dissipate, or at the very least have halted amassing additional volume midway through January. After falling below $29 yesterday in thin trading, front-month WTI is finding somewhat of a bid tone that has the black gold trying to fight its way back to trade with a 3-handle, while equity futures in the US are pointing to positive open once the bell rings and trading resumes after yesterday’s bank holiday in observance of Martin Luther King day. While the green shade to the tape for equities is less robust than the strength of the sell-off we saw to close out last week when the S&P was slammed lower by over 2%, today’s price action is illustrative of what could be considered a relief rally.
The main event from the overnight session was the release of Chinese GDP data, along with Industrial Production, Retail Sales, and Fixed Asset Investment numbers. On balance the data deluge out of China wasn’t awe inspiring, with Industrial Production, Retail Sales, and Fixed Asset Investment all coming in shy of the median analyst estimate, and dropping from the pace witnessed in November. That being said, GDP for the fourth quarter on an annualized basis came in bang on estimates at 6.8%, slightly lower than the 6.9% registered in the third quarter and missing the all-important 7% government growth target. While the overnight release didn’t deviate materially from expectations, the data set was of the ‘goldilocks’ variety, in that the numbers were neither ‘too hot’ to suggest the government will refrain from further monetary policy accommodation to engineer a soft landing for the economy, and at the same time were not ‘too cold’ to illustrate the Chinese economy is in free-fall and the worries to begin the year that were associated with the depreciative yuan fixes may be slightly overblown. Subsequently, the goldilocks porridge-like consistency of economic data out of China has spurred somewhat of a relief rally for investors, with the Shanghai Composite posting a gain of 3.25%, and commodity-linked currencies such as the CAD and AUD gaining strength against the big dollar. The loonie has mounted a nice comeback during the overnight session, yet the real challenge will be if it can sustain these gains throughout the trading day, and buck the trend of higher USDCAD closes witnessed in January. For those companies that are naturally short USD, make sure to speak with your dealing teams in regards to strategizing around cash requirements ahead of tomorrow’s Bank of Canada announcement, as the rallies in the loonie have recently been short-term in nature and fairly limited.
Almost as rough of a start to the New Year as the loonie, the pound has lost just over 3% against the American buck so far this year, yet it is rallying this morning after slightly better than expected inflation data. Expectations from economists had been for the headline reading of CPI to remain stable at 0.1% on a year-over-year basis, so the print of 0.2% for the month of December is a welcome surprise for the domestic currency that has come under pressure as expectations for a normalization of interest rates in the UK fades due to lower oil prices dragging down consumer prices. Mark Carney is due to speak later today and telegraph his thoughts on what the changing dynamics of the energy sector mean for the British economy, so if his tone is relatively upbeat in the fact that lower oil prices should only provide a temporary drag on inflation and wages, and that on the whole a decrease in energy prices should be a net positive for the UK economy, we could see some further short covering in GBPUSD.
Further reading:
Get the most predictable currency pairs list
GBP/USD: Trading the British Average Earnings Index
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