Oil Prices Drop, Canadian Dollar Weaker

The dollar has traded softer for the most part, mostly against the commodity currencies, losing over 0.5% in the cases against the Australian and New Zealand dollars, and 0.3% to the Canadian dollar. The dynamic has been concomitant with a 0.7% gain in oil prices, with the gains on the week of crude now tallying over 2%. EUR-USD has settled around 1.1770-80, near net unchanged on the day. An early bout of dollar selling saw the pair set a high at 1.1792 before a sub-forecast German ZEW business confidence survey, along with talk of selling interest above 1.1800, served to correct the move. USD-JPY has plied with a 20 pip range so far today, between 113.37 and 113.57, settling toward the lower part of this range, which roughly marks the midway point of yesterday’s range. Cable more than reversed gains seen following more perkier than expected UK inflation data, with Cable tumbling to a 1.3310 low from a post-data high at 1.3380, subsequently steadying around 1.3330.

[EUR, USD]
EUR-USD has settled off highs, with a sub-forecast ZEW business confidence survey out of Germany stimulating some supply of euros. EUR-JPY has also drifted lower. EUR-USD has settled around 1.1770-80, near net unchanged on the day. An early bout of dollar selling saw the pair set a high at 1.1792, while the German data and talk of selling interest above 1.1800 served to correct the move. Directional bias will be limited into of some key data and central bank policy decisions this week, which include the Fed, ECB, BoE and SNB. Friday’s U.S. jobs report for November kept the Fed on course to hike this week, which is fully baked into market expectations. With Fed funds futures pricing in about 60% odds for a follow-up rate hike in March, markets will be sensitive to the Fed’s updated economic projections and forward guidance tomorrow. With the labour market tightening, we expect the Fed will affirm that another hike is in the works as soon as March, which in turn should given the dollar a fresh underpinning. The ECB’s decision, on Thursday, may produce a commitment to set an end date for QE, though we think the Fed’s guidance will “out hawk” the ECB’s, leaving EUR-USD vulnerable to the downside. EUR-USD has resistance at 1.1814-15 and again at a.1845-50. Support comes in at 1.1767-70.

[USD, JPY]
USD-JPY has plied with a 20 pip range so far today, between 113.37 and 113.57, settling toward the lower part of this range, which roughly marks the midway point of yesterday’s range. We see the pairing as remaining is in an up phase within what has been a broadly sideways chop around, roughly, 108.0 to 115.00, for eight months now. More of the same looks likely. Resistance comes in at 113.73-75, and support comes in at 113.10 and 112.70.

[GBP, USD]
Sterling more than reversed gains seen following more perkier than expected UK inflation data, with Cable tumbling to a 1.3310 low from a post-data high at 1.3380, subsequently steadying around 1.3330, and EUR-GBP working up to levels around 0.8840-45, up from the post-data low at 0.8806. There are various explanatory reasons for the ebb back in the pound. One is that while headline CPI rose to 3.1%, the highest rate since March 2012 (obliging the BoE governor to issue an explanatory letter, being over 1 percentage point above target), core CPI remain steady at 2.7%. Another is that PPI input costs spiked more than expected to 7.3% y/y, driven by oil prices gains, which will eat into business profits, fitting narratives that recent gains in manufacturing activity (which has been largely fostered by the weaker post-Brexit pound) is being offset by tightening margins. Yet another is a relatively sluggish reading of the ONS house price indicator. Brexit-related uncertainty still prevails, too, despite last week’s breakthrough on divorce terms, as we’re still non-the-wiser as to what Brexit will look like — whether a hard exit or a soft exit. We take a bearish view of Cable. Support is at 1.3300-10, and resistance at 1.3351-52.

[USD, CHF]
EUR-CHF has seen volatile price action over the last couple of weeks, having turned lower after several attempts above 1.1700. There have been multiple failures to sustain gains above 1.1700 over the last month, and market participants will be wary of supply above this level. We still remain bullish over the medium term, however. Assuming the Eurozone has conquered existential political threats, and assuming the SNB remains anchored to ultra-accommodative monetary policy, which looks likely to be the case for the foreseeable (the central banks meets on policy this Thursday), we anticipate EUR-CHF will make an eventual return to 1.2000. Support is at 1.1650.

[USD, CAD]
USD-CAD has ebbed to the lower 1.128s after logging a five-session peak of 1.2880 on Friday. The gains reversed nearly all of the sharp losses that were seen on Dec-1 following above-forecast GDP and employment data out of Canada. The BoC’s cautious guidance following its policy meeting last Wednesday, when it left its policy rate at 1.0%, as had been widely anticipated, has been weighing on the Canadian buck. In particular, the BoC noted that slack remains in the labour market, despite recent rises in overall employment. We advise following USD-CAD’s nascent uptrend for now. Support is at 1.2785.