Jan 20 • Morning Roll Call • 1574 Views • Comments Off on MORNING ROLL CALL

Dollar weakens versus certain peers, USA equites slide, whilst Europe’s central bank believes inflation is not on the risebetween-the-lines1

Two major political figures, one the (potential) incoming USA treasury secretary and the ECB’s president, dominated the fundamental news landscape on Thursday. Mario Draghi of the ECB, suggested that inflation was not necessarily on target, therefore the assumption made by investors and analysts is that further monetary stimulus had not been ruled out. As a consequence the euro experienced a modest sell off, shortly after his press conference. He stated there are “no convincing signs yet of an upward trend in underlying inflation” during his first appearance of the year, despite consumer prices rising quickly in Germany, the region’s largest economy.

This rapid German rise had created speculation that Draghi would reduce the ECB’s bond buying programme. The central bank also left its benchmark base rate unchanged at zero. The euro fell initially below $1.06 during Draghi’s speech, in which he also described the euro zone recovery as “dampened by the sluggish pace of structural reform” and said a “very substantial degree” of monetary policy stimulus was still needed.

USA Treasury Secretary nominee Steven Mnuchin appeared before the Senate Finance Committee in Washington for what’s termed a “confirmation hearing”. In relation to the dollar’s future strength and the direction of the USA economy, this hearing ranked extremely high for currency investors.

“The dollar’s long term strength, over long periods of time is important. The U.S. currency has been the most attractive currency to be in for very, very long periods of time. I think that it’s important and I think you see that now more than ever, the dollar is currently very, very strong, and what you see is people from all over the world wanting to invest in the U.S. currency. When the president-elect made a comment on the U.S. currency, it wasn’t meant to be a long-term comment. It was meant to be that perhaps in the short term the strength in the currency, as a result of free markets and people wanting to invest here, may have had some negative impacts on our ability in trade. I will enforce trade policies that keep our currency strong on the world exchanges and create and protect American jobs.”

With the exception of Italy’s MIB, which rose by 0.69%, the main European equities fell on Thursday; the UK’s FTSE 100 closed down 0.54%, Germany’s DAX down 0.02%, France’s CAC down 0.25%. The S&P 500 Index fell 0.4% to 2,263 in New York, the lowest level seen in two weeks, USA bank shares fell by 0.6%. The Dow Jones Industrial Average has now erased all of its 2017 gains.

EUR/USD surrendered its 0.3% advance versus the dollar as Draghi began speaking, to then rally and was little changed on the day at $1.06623, towards the end of Thursday. The Dollar Spot Index extended its gains on Thursday. The currency index has appreciated by circa 5% since Trump won the election, on hope that he will boost economic growth, through fiscal stimulus and tax cuts for middle class Americans.

USD/JPY rose to a one week high to 115.29, its highest since Jan 13th, before slipping towards the end of Thursday to reach 114.82. USD/CAD rose by 0.4% versus the Canadian dollar to C$1.332

West Texas Intermediate crude added 0.6%, after a USA government report revealed crude stockpiles (at the biggest storage facility) fell by the most since October. Gold futures slid by 0.7% to $1,204.20 an ounce in New York.

Economic calendar events for January 20th 2017, all times quoted are London times

09:30, currency effected GBP. Retail Sales (YoY) (DEC). The anticipation is that the UK’s retail sales will have risen to 7.5% annually, from 6.6% previously. This publication forms part of a series of UK retail data which will be published at 9:30. It will be scrutinised carefully for signs that the Brexit referendum decision has effected the UK consumers’ appetite for spending.

13:30, currency effected CAD. Consumer Price Index (YoY) (DEC). Inflation in Canada is expected to have risen sharply to 1.7%, from 1.2% in November. Investors will be awaiting this data release as it comes after the bank of Canada’s Poloz stated yesterday that they’re not ruling out a potential stimulus cut off the current base rate of 0.5%.

14:00, currency effected USD. United States Presidential Inauguration. Although listed as a “high impact” news event, it’s (historically) tricky to predict how markets will react to the Trump inauguration, given that it’s a speech to accept the presidency and not a policy directive. Will confidence be high, as investors drive the dollar and domestic equity markets up, or will certain realities begin to come into sharp focus?

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