Crude Rally Pops Loonie Higher

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Market Drivers Jan 21, 2016

USD/JPy above 118 on better risk flows
EZ, UK data misses
Nikkei 5.88% Eurostoxx 2.88%
Oil $31/bbl
Gold $1096/oz

Europe and Asia:
EUR EZ PMI 52.3 vs. 53
GBP UK Retail Sales -1.0% vs. -0.1% eyed
North America:
CAD Retail Sales 8:30
USD Existing Home Sales

It’s been a choppy night of trade in the currency market on the last trading day of the week with USD/JPY getting a lift from positive riks flows while euro and cable ignored the weaker than anticipated economic data and loonie remained best bid of all as oil crossed above the $30/bbl mark.

Bourses in Asia had a much better day with Nikkei popping 5.88% while Shanghai managed to eke out a 1% gain providing support for USD/JPY which popped above the 118 mark and remained there for most of the night. It’s tough to say if the worst of the selling in China is over, but the calming of markets in the world’s second largest economy is having a similar soothing effect on the yen and the pair appears to have carved out a near term bottom around the 116.00 figure.

Meanwhile in Europe the eco data was softer as EZ flash PMI came in at 52.3 for manufacturing and 53.6 for services. The indices remain above the key 50 boom/bust level but are now off their peaks having missed the mark for second month in a row. The slowdown in China and Middle East is clearly starting to impact European producers, but so far the impact has not been severe, still it’s very much the reason for why Draghi jawboned yesterday as European monetary authorities try to keep the exchange rate below the 1.1000 level. Euro was generally contained for most of Asian and European trade staying in a narrow 1.0825-1.0875 range and markets are likely to wait for next week’s FOMC statement before moving it out if its long term 1.08-1.10 range.

In UK the Retail Sales number missed badly printing at -1.0% versus -0.1% eyed. Cable dipped initially on the news but popped right back as the public borrowing numbers came in far better than forecast. PSNB printed at 6.9B versus 10.1B eyed as increased income tax, VAT revenues and national insurance payments all helped to trim the gap. Both numbers are likely subject to seasonal factors so cable shrugged off both data sets and remained above the 1.4250 mark for the time being.

The sharp rise in oil, which traded within reach of the $31/bbl mark helped keep loonie bid all night long and the pair was the strongest of the night with USD/CAD dropping to 1.4175 by late morning London trade. The market will get a glimpse at CAD Retail Sales and CPI data today which could push loonie back down given the softness in Canadian economy, but oil will likely drive trade for rest of the day, If the short covering squeeze in crude continues USD/CAD could see 1.4100 as the day proceeds.

Boris Schlossberg
Managing Director

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