It has been a relatively good start to the year for risk assets. Global equity indices are up around 3.7%, Bond indices are up a decent 2-3% and emerging market assets are in demand. This environment of money being put to work has weighed on the dollar, which is softer against most of the G10 currencies. This benign environment has been secured partially on the back of soft US price and activity data. Today sees the release of the December US CPI. Expectations are that the core will be rising at a relatively subdued 0.3% month-on-month pace and 5.7% year-on-year. This compares to 0.6/0.7% MoM readings last summer. A number in line with consensus probably allows the risk rally to continue. Any upside surprise in the number could see the USD spike, but we doubt it would completely spell the end for the better risk/softer dollar environment.
The US dollar continues to trade within this week’s range against the Canadian dollar (1.3355 – 1.3465). The pair held above 1.34 yesterday and so far, today. A soft US inflation print has been recently associated with strong equity market advances, and the Canadian dollar seems particularly sensitive. Look for the loonie to remain directionally sensitive to the US CPI print this morning. Observe the USD/CAD trends.
The euro showed some strength yesterday and had quite a strong rally against European currencies - especially the Swiss franc. Some tried to link that rally to a story that Germany would support fresh EU bond issuance to support state aid in Europe's fight against US green subsidies. We are still seeing eurozone equity outperformance, which must be providing the euro with some good support. EUR/USD direction of travel looks towards the 1.09 area. 1.0660/1.0700 might well contain any downside today.
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