The Morning Update

The USD rallies, oil prices firm, equity markets are down, and US yields rise on rate concerns. The USD rebounded to a one-month high, while equity markets retreated as investors digested the latest comments from central bank policymakers pushing back on wagers on aggressive interest rate cuts at the Davos Economic Forum. ECB Governing Council member Francois Villeroy de Galhau said it's too early to declare victory on inflation when he attended the Economic Forum. ECB Holzmann indicated on Monday that cuts in 2024 are not assured, given lingering inflation and geopolitical risks. Mohit Kumar, the chief European economist at Jefferies International, said, "The debate in the financial markets is focused on the timing of rate cuts. As we have argued in the last few notes, the market has gone ahead of itself in pricing in rate cuts." Elsewhere, oil prices advance as increasing Red Sea tensions offset the weak economic outlook. Today's earnings from Goldman Sachs Group, Morgan Stanley, the US NY Empire State Manufacturing Index, and the CAD BoC CPI are in focus.

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In other news. China's premier tells Davos that innovation shouldn't be used to restrict other nations. China's economy grew by an 'estimated' 5.2% in 2023, says Premier. Iran launches missile strikes against targets in Syria and Northern Iraq. Trump wins in Iowa with DeSantis a distant second-FT. UK PM Sunak faces major rebellion over Rwanda legislation. Yemen's Houthis threaten to hit US ships as more tankers steer clear. Venezuela's economy grew 5% in 2023 and will reach 8% in 2024 -Maduro.

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In currency markets. Euro weakens for a 4th, as the USD extends gains to a one-month high, while CNY hits its lowest levels in 4-weeks. Risk concerns pressure emerging currencies as markets rethink rate cut timing. CNY weakened by 0.3%, while Asian currencies dropped 0.4% on average vs USD. Trading currencies come under pressure, with JPY & CHF weakening 0.65%, NZD & MXN dropping 0.8%, and AUD, NOK & SEK tumbling by 1% vs. USD.

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In commodity markets. Oil prices firmed by 0.5%, Natural Gas prices tumbled by 8.5%, Gold prices slipped by 0.4%, Silver prices weakened by 0.7%, Copper prices strengthened by 0.8%, while Wheat prices were up by 0.2%, and Soybean prices gained by 0.6%.

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CAD extends its bearish momentum, testing a fresh 5-week low as the USD rallies amid increasing geopolitical tensions and increasing concerns that central banks will be keeping interest rates higher for longer. Domestically, Canada's home sales rose for the first time in five months with expectations of a rate easing. Elsewhere, the BoC survey highlighted continued weakness in the domestic economy, expecting interest rates to peak and demand to pick up later in the year. Today's focus will be on comments out of Davos, with the main focus will be on the BoC CPI, which is expected to increase to 3.4% from 3.1% in November.

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EURCAD holds steady as the USD rallies on weakening risk sentiment.

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EUR drops below 1.0900 amid a strengthening USD and mixed German ZEW. The USD rallied amid escalating tensions in the Red Sea, triggering souring risk sentiment, which saw a return to the safe-haven greenback. Domestically, the focus has been increasingly on ECB policymakers, whose comments remain hawkish, suggesting that it is too early to cut interest rates with geopolitical risk keeping inflation at inflated levels. German ZEW economic sentiment index climbed to 15.2 in January, while the Current Situation Index dropped to -77.3 from 77.1. Today we suspect the euro should find support on dips towards 1.0850 from EBC rate comments.

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GBPEUR eased after the UK wage growth slowed, increasing the prospect that BoE could ease interest rates.

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GBP weakens towards 1.2600 amid risk-aversion and a rallying USD. The pound weakened alongside its peers following the resurgence of the USD demand amid increasing geopolitical tensions triggering the shift to risk-off sentiment. The pound faced additional pressure after data showed that growth in UK wages slowed in the three months through November, increasing the sentiment that the BoC could cut domestic interest rates in 2024. In focus today, the US NY Empire State Manufacturing Index is not expected to have a major impact on markets unless it prints outside expectations. A break of 1.25880 opens up the potential for a retest of 1.2500 next.