FX Update: Sterling struggling on BoE signal. EM on a tear.

The Friday session in equity markets saw last week closing with a bit of a wobble, but markets are in an upbeat mood to start the week as China’s major indices ripped to new cycle highs and the CNY extended its recent strength, taking the EM complex with it once again. It is interesting to note that within the G10, the small currencies traditionally correlated positively correlated with risk appetite have taken a breather here, while the EM rally continues apace and CNY strength has now seen USDCNY punch down through 6.90 as of this writing. Within EM, one of the most notable movers over the last two sessions has been the Indonesian rupiah (IDR), where the central bank has signaled it won’t fight strength (likely eyeing CNY to a degree?) and the UAE has announced a $22.8 billion investment in an Indonesian sovereign wealth fund that will focus on infrastructure products, including the building the country’s new capital city.

To briefly recap, the US December jobs report on Friday was slightly disappointing on the nonfarm payrolls change number, perhaps looking even weaker due to a positive bias ahead of the number from the blowout ADP numbers earlier in the week. More disappointing was the Average Hourly Earnings print, at a meagre 0.1% month-on-month and a 17-month low 2.9% year-on-year level. US longer-dated treasuries remain bottled up in the range and aren’t confirming the runup in risky assets, a disconnect that is making us increasingly uncomfortable. We have already noted that USDJPY upside potential looks limited as long as US long yields remain capped – but we are watching how the pair trades relative to overall risk appetite and safe haven yields here – as well as whether the psychologically significant 110.00 level acts provides resistance.

As for the US-China trade deal likely to be signed on Wednesday in the US, it  is worth noting that the actual text of the deal has not been made available and may disappoint the market in its details, or even vagueness, once the text is to be made available after the signing (according to US Treasury Secretary Mnuchin). As well, while US President Trump is set to sign the deal, China’s President Xi won’t.

Chart: EURGBP
EURGBP is jumping out of the gates to start trading this week after the Bank of England’s Vlieghe indicated he would favor a rate cut if the UK data doesn’t improve. The market’s pricing of a BoE rate at the January 30 policy setting meeting have jumped from a virtual zero to nearly 50/50 odds. If we do see a rate cut and no improvement in the outlook for the eventual UK-EU post-Brexit trade deal, sterling weakness could drive further consolidation here, with the risk of an acceleration if 0.8600 is cleared – perhaps back to the 200-day moving average above 0.8750.