• Oil extends declines on Iran sanctions fallout The UN nuclear agency declared on Saturday that Iran had fulfilled the conditions of its nuclear agreement. As such, Western sanctions on the country’s oil exports have now officially been lifted. Iran holds approximately 10% of confirmed global oil reserves. The deputy oil minister stated on Sunday that crude oil exports are ready to increase by half a million barrels per day, with plans to add another half a million over a few months. Some market participants even expect Iran to offer its oil at lower than market prices in order to gain back market share, at least initially. The global oil glut along with the weak demand coming from China’s and Eurozone’s slowdown, drive oil prices lower. As the market seems to be dominated by net shorts, we could see further near-term slides as investors may be hesitant to make an attempt to catch the falling knife. Thus, oil related currencies such as CAD and NOK could remain under selling pressure.
• Today’s highlights: During the European day, the Riksbank will release the minutes of its January 4th extraordinary policy meeting. At this meeting, the Bank’s Executive Board decided to give the Governor additional powers to be able to instantly intervene in the currency market in order to safeguard the rise in inflation from a possible appreciation of the krona. The Bank also signalled that it is still highly prepared to act by reducing the repo rate, extending the securities purchases or by lending money to companies via banks, in addition to FX market intervention. The Bank’s Deputy Governor, stated opposition to the decision as he does not consider currency intervention a suitable tool to make monetary policy more expansionary. Thus, the minutes of the meeting will give us additional insight as to the Deputy Governor’s scepticism and perhaps under what circumstances the Bank may intervene, as it stated that there is no target for the exchange rate.
• In the US, markets will remain closed in celebration of Martin Luther King Jr. day.
• As for the rest of the week, on Tuesday during the Asian day, China’s GDP growth for Q4 is expected to have slowed to +6.8% yoy from +6.9% yoy. While this is above the government’s new 6.5% growth target, recent soft manufacturing and trade data suggest that the economy is still slowing down. China also releases its industrial production, fixed asset investment and retail sales for December. The main focus could be on GDP growth, which could weaken AUD and NZD, at least at the release. During the European day, the main event will be the UK CPI rate for December. The headline figure is forecast to have accelerated somewhat, while the core rate is expected to have remained unchanged from the previous month. In the minutes of the latest BoE meeting, the MPC noted that the increase in inflation will be more gradual than previously expected, as a result of the renewed plunge in oil prices. As such, a slight acceleration in the inflation rate is in line with the BoE’s view of a ‘gradual’ increase in inflation and could relieve some selling pressure from GBP at the release. From Germany, the ZEW survey for January is coming out. Both the current situation index and the expectations index are expected to decline, which could put the common currency under renewed selling pressure.
• On Wednesday, the highlight will be the Bank of Canada monetary policy meeting. At their last meeting, Bank officials decided to keep the benchmark rate unchanged, but in their statement they noted that cuts in resource-sector spending continued to weigh on business investment. Furthermore, they noted that there have been significant job losses in energy-producing regions. Bearing in mind that oil prices have continued trading lower since the last meeting, and that Governor Poloz recently left the door open for further rate cuts, we expect the Bank to lower rates to support the softening economy in the foreseeable future, if not at this meeting. The implied market probability of a 25bps rate cut at this meeting currently lies close to 50%. We also expect the Bank to maintain a dovish stance, repeating that the economy’s adjustment to the decline in the terms of trade is being aided by a weaker CAD and monetary easing. This could increase selling interest on the Loonie. The UK employment report for November is forecast to show slowing wage growth, which could weaken GBP. The US CPI rate for December is expected to have accelerated.
• On Thursday, all eyes will be on the ECB policy meeting. In the previous meeting, the Governing Council reduced the deposit facility rate by 10bps and extended the QE program for at least 6 more months. In the meantime, the Bank expanded the assets it can purchase and decided to reinvest the proceeds from the bonds that mature. Some unnamed members of the Governing Council stated on Thursday that they are skeptical about further policy action in the near-term and that they need to monitor the effectiveness of the previous actions first. As a result, we don’t expect any change in policy at this meeting. Instead, we expect the Bank to remain on hold in order to assess whether the failure of the CPI to accelerate in December was a one-off or whether the previous measures are not exerting the desired effects.
• On Friday, from Europe, we get the preliminary manufacturing and service-sector PMI data for January from several European countries and the Eurozone as a whole. All the indices are forecast to decline or remain unchanged, which could weaken the common currency, at least temporarily. From Canada, the CPI data for December are forecast to show that both the headline and core rates have risen from the previous month and are now very close to the BoC target. In the UK, retail sales for December are expected to have fallen, which could weaken GBP at the release.