scotiabank_logo-svgThe USD continues to trade lethargically and is narrowly mixed against its G-10 counter-parts on the session so far. The NOK is a notable under-performer on the session, reflecting weaker than expected CPI (-0.5% m/m in Dec).


EM FX remains in focus, with the TRY trading at a record low earlier, before recovering on central bank changes to reserves requirements and noting that it was ‘closely monitoring’ markets. The MXN is giving back more of its intervention-driven gains today while the CNH also softened as HIBOR rates eased. Note that China reported a 2.1% y/y gain in CPI in Dec (slightly lower than expected) and a significantly higher than expected rise in PPI (top chart, +5.5% y/y, versus +4.6% expected).

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European stocks are mixed, as are developed market bonds; USTreasury bonds are under-performing slightly, giving the USD a very modest yield advantage. Lumpy option expiries this week (EURUSD) and the President-elect’s looming press conference (Wednesday) may be curtailing trade (and keeping the likes of the MXN on the defensive) while investors might be starting to wonder if the impact of the election on US financial markets is starting to tire as US equity markets struggle to advance more obviously. We think it is still early days for President-elect Trump.

The US Small Business Optimism Index for December was released earlier this morning and showed a huge 7.4 gain in the month, the largest single month rise since the 1980s, as businesses turned significantly more constructive on the outlook for the economy and sales prospects. This is clearly down to Trump’s win and reflects expectations that the election will give rise to “animal spirits” emerging in the economy, fueled by tax cuts, fiscal spending and deregulation under the new administration. We think optimism on the outlook and expectations of stronger US GDP growth will be reflected in the USD’s performance in the coming months and remain constructive on the USD broadly due to our forecasts for relatively stronger growth and relatively tighter monetary policy in the US. S.O.

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