• Oil plummets below $28 US crude oil fell to its lowest level since September 2003, on concerns over a global supply flood. The International Energy Agency (IEA) said the global oil supply was set to last and that oil markets could “drown in oversupply”. On top of that, the recent end of sanctions on Iran, simply added to worries of an already oversupplied market. What's more, the Chinese President trip on Tuesday to Saudi Arabia and later this week to Iran may put further downward pressure on oil prices, if these countries compete over oil sales share to their largest crude oil importer. Bearing this in mind, we could see oil prices heading even lower from their current level, and energy related currencies like CAD and NOK, to remain under selling interest.
• Overnight, New Zealand’s prices fell more than the market expected in the fourth quarter, adding pressure on the country’s central bank to ease further in the foreseeable future. Inflation fell 0.5% qoq in Q4 from +0.3% qoq in Q3, missing estimates of a 0.2% qoq decline. This leaves the annual rate hovering just above deflation at +0.1% yoy. Even though this may be not enough to prompt the RBNZ to cut rates at its next week meeting, with the inflation rate well below the Bank’s target range of 1%-3%, it definitely supports the case that interest rates will be cut this year. That said, as oil prices continue to decline and China slows down further, the weak New Zealand inflation expectations is set to keep the NZD under pressure.
• The highlight of the day will be the Bank of Canada monetary policy meeting. At their last meeting, Bank officials decided to keep the benchmark rate unchanged, but noted that cuts in resource-sector spending continued to weigh on business investment. These have led to significant job losses in energy-producing regions. Bearing in mind that oil prices have continued trading lower the last BoC 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 soared to 73%. We also expect the Bank to maintain a dovish stance, and reiterate that the economy’s adjustment to the decline in the terms of trade is being aided by a weaker CAD and monetary easing. Given the extent of expectations for an easing, risks around the meeting are likely asymmetrical, with any disappointment likely to generate a bigger market reaction than the anticipated cut.
• As for the indicators, Canada’s manufacturing sales are forecast to have rebounded in November, though the market reaction on CAD is likely to be muted as investors focus may remain primarily on the policy meeting.
• From the UK, we get the employment report for November. The unemployment rate is forecast to have remained unchanged, while average weekly earnings are expected to have slowed further. In the minutes of their latest meeting, the BoE stated that the moderation in wage growth comes as a result of fewer hours worked, lower consumer inflation and workforce shifts to lower paid roles. The potential deceleration in average weekly earnings could push market expectations of a BoE hike even further back and put GBP under renewed selling interest.
• The US CPI data for December are also coming out. Both the headline and the core CPI rates are expected to have accelerated from the previous month. The December employment report showed that while the nonfarm payrolls figure surged, wage gains remained flat. This suggested that inflationary pressure from wages may have remained subdued during the month. Another factor that may have put downward pressure on prices could be the strong dollar, with import prices falling 1.2% in December. Furthermore, given that the PPI rate for the same month declined as oil prices continued to fall, we see a high likelihood for the CPI to accelerate less than expected. This could cause the dollar to give back some of its recent gains. Besides the CPI data, housing starts for December are forecast to have increased somewhat, while the more forward-looking building permits are expected to have declined. However, as these indicators are released at the same time as the CPI data, they will most likely have a secondary effect on the greenback.
• We have only one speaker on Wednesday’s agenda: Bank of Canada Governor Stephen Poloz will hold a press conference following the interest rate decision.