The Morning Update

The USD firms, oil prices slip, equity markets are down, and US yields ease in a cautious start to the week. Currency markets are steady, while equity markets slip as investors get set for a raft of speeches by central bank policymakers at the World Economic Forum in Davos this week. Recent polls suggest the ECB will likely lower interest rates four times in 2024. Still, ECB chief economist Lane damped expectations after an interview published at the weekend, saying cutting rates too early would be "self-defeating." Intraday, we anticipate markets will be subdued with US markets off for Martin Luther King Jr. Day. This week will focus on the World Economic Forum in Davos, Iowa Republican caucuses, Tuesday Japan PPI, German CPI, ZEW, UK Employment, US Emplire Manufacturing, and Goldman Sachs Group & Morgan Stanley to report earnings. Wednesday, China GDP, Eurozone & UK CPI, US Retail Sales. Thursday US Housing & Initial Jobless Claims. Friday, Japan CPI, US Existing Home Sales, and US Congress face a deadline to pass spending agreements before part of the federal government shuts down.

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In other news. Taiwan's ruling party, Lai, wins the presidential election. Iceland volcano eruption spills lava into town, setting houses on fire. The German economy dodges recession despite contracting in 2023 due to persistent inflation, high energy prices, and weak foreign demand. The US shoots down a Houthi missile fired at an American warship in the Red Sea. The US congressional leaders unveil stopgap bill to avert a shutdown. Reparation bonds could unlock $300 bln for Ukraine from frozen Russian central bank reserves. China's military and government acquired Nvidia chips despite the US ban.

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In currency markets. CNY slides after PBOC surprised markets by keeping its medium-term policy rate steady. The USD firms as geopolitical concerns increase in the Middle East. Commodity currencies ease as inflation fears increase with the increasing tensions in the Red Sea. CNY slips 0.1%, while currencies weaken 0.2% on average vs USD. Trading currencies are under pressure, with CHF & MXN easing 0.15%, AUD, MXN, SEK & NOK down 0.35%, JPY weakening 0.5%, and NZD tumbling 0.8% vs USD.

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In commodity markets. Oil prices slide by 0.8%, Natural Gas prices tumbled by 5%, Gold prices are up by 0.3%, Silver and Copper prices firmed by 0.45%, while Wheat & Soybean prices are flat.

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CAD continues under bearish momentum, testing fresh 4-week lows as commodity prices come under selling pressure and increasing risk-off sentiment supports the USD. Domestically, Friday saw Canadian trade balances ease after four months of gains; goods exports decreased 0.6% in November, while goods imported grew, with the largest driver being energy products at 11.6%. Intraday, we expect markets to be subdued with the absence of the US with MLK Day and the lack of CAD economic releases.

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EURCAD holds steady near January highs as investors appear sidelined with the US holiday.

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EUR holds below weekly lows below 1.0950 amid light trading. In the absence of top-tier economic data and the MLK Day holiday in the US, the euro is trading in a tight trading range. Domestically, the German economy avoids recession despite real GDP growth contracted by 0.3% in 2023. "Overall economic development faltered in Germany in 2023 in an environment that continues to be marked by multiple crises", said Ruth Brand, the president of the statistics office in Berlin. Intraday, with the US holiday and caution ahead of the Davos Economic Forum, we anticipate the Euro to remain on the sidelines.

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GBPEUR edges slightly higher in quiet trading after Germany's weak growth GDP results.

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GBP bounces off intraday lows but remains capped at 1.2750 amid a firmer USD as risk sentiment eases amid increasing Red Sea tensions. Domestically, Friday's UK GDP grew by 0.3% m/m in November, which helped support the pound on dips to 1.2700. The pound remains vulnerable to further weakness amid a firming USD amid increasing geopolitical tensions and mounting UK recession fears. We anticipate the pound will hold within its current trading range amid holiday-thinned market conditions.