Morning Commentary: We are the North

Foreign Exchange - Morning Commentary
We are the North
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Bank of Canada (BoC) will announce its most recent rate decision tomorrow morning.  Despite a run of mixed data, the BoC’s resilience against the dovish wave that has swept over many other central banks should continue. 

One of the key risks cited by the BoC was the uncertainty around global trade.  With USMCA recently passing the US Senate and the Phase 1 deal between the US and China officially signed, trade uncertainty has been materially reduced.  Given this, the negative effects of trade tensions are likely to be felt for a while and the risk remains for the US to escalate tensions with other trading partners, i.e. Europe.  Nevertheless, the most recent developments around trade have certainly been positive and the pullback in trade risks should allow for a rebound in investment, sentiment and, ultimately, exports. 

Moreover, comments from the BoC have downplayed some of the recent weak data points with the bank arguing that one-off factors make it difficult to assess any trends from Q4 data.  To this point, forward looking data points are starting to show signs of stabilization.  Critically, the labor market continues to perform and inflation remains on target.  As a final point, the BoC remains concerned about how low interest rates could be feeding into elevated household debt. 

Taking all these factors together, the expectation is that the BoC will remain on hold and reiterate that its current policy stance remains appropriate.  Moving forward, it is likely that the bank retains a mild easing bias, making incoming data increasingly important.  However with inflation on target, the labor market resilient, and household debt elevated, we believe the bar remains high for any near term BoC action. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The spread of the coronavirus in China has grabbed most of the headlines.  So far there have been ~291 confirmed cases with the disease killing 6 people.  Additionally, human to human transmission cases have been confirmed.  The timing of this outbreak comes just ahead of the Lunar New Year in which hundreds of millions of Chinese citizens are expected to travel, raising concerns not only on the human toll but also on consumer spending and travel. 
  • The US and France have announced a truce over their dispute relating to digital taxes; neither country will impose tariffs on each other. 
  • The Bank of Japan left all aspects of its policy stance unchanged (policy rates, asset purchases and yield target).  No action was expected from the BoJ this meeting as it has expressed a desire to monitor the impact of fiscal stimulus.    During Governor Kuroda’s press conference, he reiterated his commitment to ease further should the data justify it.  Should incoming data show signs of weakness, expect BoJ easing expectations to increase.    
  • The UK’s unemployment rate came in at 3.8%, meeting expectations.  Earnings also met expectations at 3.4%. 
  • In Germany, the ZEW Survey showed the EU’s largest economy got off to a strong start in 2020.  The current situation component and expectations component both beat market consensus, lending further support to hopes that the German economy could be turning a corner.       
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