KBC Sunset Market Commentary 21/01/2025 via Trader Talent

Daily Market Overview

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Markets

•          All eyes are on the US dollar today. Yesterday’s sigh of relief by currencies ex-USD already went in reverse. President Trump didn’t go full-on tariff mode on day 1 in office and stopped short of announcing any. But mere hours later he very much kept the possibility afloat of levies on Canada and Mexico as soon as February 1. The USD bounced back in early Asian dealings and held on throughout the day. The trade-weighted index rose from 108 to 108.4 while EUR/USD’s adventure north of 1.04 looks to be a very short one (1.038). The Canadian Loonie and Mexican peso for obvious reasons underperformed. USD/CAD hovers near the recent highs of 1.445. USD/MXN is similarly circulating in the 20.75 area, the highest levels since mid-2022. Cyclical currencies have a tough time too. Lingering trade tensions combined with weaker commodity prices (eg. Brent below $80/barrel) pressure the likes of AUD & NZD with both reversing (part of) yesterday’s gains. The NOK suffers from lower oil prices and perhaps as well from the risk of losing the EU partially as a major customer. Trump suggested yesterday the EU could escape from tariffs if it buys more American energy. The NOK decline in any case may complicate the central bank’s upcoming monetary easing plans, with a first rate reduction up until now expected in March. The Japanese yen is the only currency able to fend off USD strength. Trump-related market volatility remains confined (so far, we should add) and that cleared the last obstacle for the Bank of Japan to raise rates a third time this Friday. Sterling loses out against both USD and EUR. The labour market report was close to expectations and as such not enough to offset last week’s set of disappointing data. Friday’s PMIs are the final chance for the pound to prevent a break above the EUR/GBP 0.845 resistance. GBP/USD sticks near 1.22. Global yields ease a few bps. It’s been a bond-friendly trading session with amongst others record bids for UK’s £8.5bn Jan2040 syndicated tap (books above £119bn) and a €134bn record demand for France’s May2042 €10bn syndicated deal. US Treasuries outperform in a first response to president Trump’s slew of executive orders yesterday. Net daily changes vary between -3 bps (2-yr) and -6.5 bps (10-yr). UK gilt yields drop 3-4 bps across the curve. German rates decline up to 2 bps. Several ECB members hit the wires before they no longer can from Thursday on. Villeroy (France) was no longer worried about inflation and expects more cuts going forward. He favours going at a steady 25 bps at every meeting so that they hit 2% by summer. This level is what Villeroy considers to be neutral. He doesn’t see the need to go below that at this stage. Slovakia’s Kazimir issued similar comments. He added that the January 30 rate cut is a done deal.
 

News & Views

•           December inflation data published by statistics Canada today were close to expectations. Headline inflation declined 0.4% compared to November causing the Y/Y measure to ease further from 1.9% to 1.8%. The monthly decline for an important part was driven by a temporary brake in the sales tax on goods such as food from restaurants and alcoholic beverages. The break applies from December 14 to February 15. Prices ex food and energy decline 0.1% M/M with the Y/Y index printing at 2.1%. Prices of clothing and footwear declined 3.0% M/M to be 4.5% lower on the same month last year. Among the factors keeping upward pressure on the global price level, shelter price inflation was 0.3%, but this only caused the Y/Y measure to decline from 4.6% to 4.5%. The core inflation measures that are closely monitored by the Bank of Canada when assessing its monetary policy slow further within the BOC inflation target band of 1%-3% to 2.4% for the core median measure and 2.5% for the trimmed mean measure. The Bank of Canada will hold its next policy meeting on January 29. At that meeting it will have new economic forecasts at its disposal. At its December meeting, the BoC for the second consecutive meeting cut its policy rate by 50 bps to 3.25%. The BoC indicated then that the ’Governing Council has reduced the policy rate substantially since June. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time’. This suggest that the BoC might slow the pace of easing to 25 bps steps. The Canadian dollar recently suffered from the risk of tariffs potentially to be implement by the new US government. At USD/CAD 1.445, the loonie is trading within reach of the weakest levels against the US dollar since the start of the corona crisis early 2020.            
 

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