The Morning Update

The USD firms, oil prices are up, equity markets are down, and US yields rise ahead of crucial US Jobs data. The USD strengthened for a sixth day, while equity markets are down, fueled by speculation that the Federal Reserve may delay interest-rate cuts on a resilient US labor market. Investors are waiting for the US Nonfarm payroll report, which is expected to show employers added 170k positions in December. While 170k is a slower hiring pace than 199k in November, it still reflects economic strength, reducing speculation to a 65% chance that the Fed will cut rates at its March meeting. Alongside the US Nonfarm Payroll report, investors will also focus on the US average home earnings, the ISM services PMI, US factory orders, and a speech from Fed President Barkin to help provide intraday direction to currency markets.

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In other news. Maersk avoids the Red Sea for the foreseeable future. Troubled China shadow bank Zhongzhi files for bankruptcy. Eurozone inflation rose to 2.9% in December, raising questions on ECB rate cuts. Defense minister Gallant calls for no Israeli civilian presence in Gaza after the war. China escalates EU trade spat with a probe into French brandy imports. The US says Russia is using North Korean ballistic missiles. Tesla trumps BYD in China with sales efficiency and real-time strategy. Equity markets look set to snap a 9-week winning streak on the Fed interest rate rethink.

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In currency markets. The USD retested 3-week highs ahead of US jobs data, while the Euro slid despite higher domestic inflation data. China's state banks act to stem the CNY weakness. Commodity currencies extend losses on the prospect the Fed will keep rates higher for longer. CNY is up 0.1%, while Asian currencies slip 0.15% on average vs USD. Trading currencies are under pressure, with MXN slipping 0.1%, CHF easing 0.3%, JPY, NOK, AUD & NZD down 0.4%, ZAR weakening 0.5%, and SEK tumbling 0.6% vs USD.

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In commodity markets. Oil prices firmed by 0.7%, Natural Gas prices tumbled by 1.7%, Gold, Soybean, and Silver prices slipped by 0.25%, Copper prices weakened by 0.75%, and Wheat prices gained by 0.6%.

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CAD continues to trend lower on the combination of a firming USD and increasing concerns over the domestic economy after Canada's service sector contracted for a 7th straight month, heightening recession fears for 2024. Alongside the US jobs data, investors will be focused on the CAD unemployment rate, which is expected to increase to 5.9%, the net change in employment slipping to 13.5k from 24.9k in November, and the Ivey Purchasing Managers index for clues on the state of the economy.

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EURCAD slips in early trading ahead of a flurry of US and CAD data releases.

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EUR retests weekly lows at 1.0900 ahead of the US NFP report. Euro loses Thursday gains after the eurozone annual inflation report rose to 2.9% y/y but came in below the market expectations of 3%. A Nonfarm Payroll reading above 200k could cause investors to rethink the probability of a Fed policy pivot in March and would help boost US yields and the USD. Domestically, with eurozone inflation ticking higher to 2.9%, up from 2.4% in November, the ECB is expected to maintain a static interest rate policy in Q1/24. Intraday, the NFP will be today's primary driver for the currency market.

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GBPEUR inches higher, testing a fresh January high after the eurozone inflation report printed below expectations.

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GBP struggles to gain positive traction, slipping towards 1.2650 ahead of the US Nonfarm Payrolls report. The pound gave back Thursday's gains after the UK services PMI showed positive growth in December, as investors shifted their focus to the crucial NFP report. Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets, said sterling found some comfort as early BoE rate cut expectations continue to be pared. Intraday, the US data will be the primary drive to the pound's direction today.