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    European Session – Loonie jumps after BoC keeps rates on hold; dollar pares gains on weak inflation

    European equity markets opened sharply lower on Wednesday as oil continued to spiral downwards. London’s FTSE100 and the Frankfurt Dax fell by around 3% when trading opened but rebounded slightly as oil prices started to stabilize.

    US crude futures moved away from a new 12-year low set earlier in the day to rise to $28.90 a barrel in afternoon European trade.

    The euro had climbed as high as 1.0975 dollars in early European session on increased risk-off sentiment but later fell back to around 1.0907 dollars as the dollar fought back.

    The pound got a small lift from broadly positive unemployment figures. The unemployment rate fell to 5.1% in November – the lowest since 2005- and was better than forecasts that it would stay unchanged at 5.2%. It was accompanied by a healthy increase in employment, which took the employment rate to a record 74.0%. However, wage pressures remain subdued despite the tight labor market. Average weekly earnings eased to 2.0% year-on-year in the three months to November from 2.4% previously, falling short of estimates of 2.1%. Excluding bonuses, average earnings rose by 1.9% year-on-year.

    Sterling found some support from the data and managed to reclaim the 1.42 handle to rise to 1.4203 dollars. The euro retreated to 0.7680 pounds in late European session, down from an earlier fresh one-year high of 0.7755.

    The dollar briefly fell below 116 yen for the first time since August 2015 before recovering to around 116.55 yen in late European trading. However, weaker-than-expected inflation data for the US brought the dollar’s rebound to a halt. Annual inflation in the US edged up to 0.7% in December from 0.5% the prior month but was below forecasts of 0.8%. On a month-on-month basis, prices unexpectedly fell by 0.1%, which may be a sign of further weakness to come as energy prices continue to decline. Core inflation rose to 2.1% year-on-year, in line with estimates.

    In other data for the US, housing starts and building permits both declined in December. Housing starts were 2.5% lower over the month, slightly worse than expected. But building permits fell less than forecast and were down 3.9% compared to November.

    Gold prices rallied by over 1% on Wednesday as falling equities and oil prices drove investors to safe havens. The precious metal was trading around $1100 an ounce in late European session.

    The Bank of Canada disappointed the markets by keeping rates unchanged at 0.50% at its policy meeting today. Analysts were split as to whether the Bank would deliver a 25bps cut as pressure had mounted in recent weeks following the sharp falls in oil prices. But the central bank decided to stay on hold on expectations that the economy is benefiting from the weaker Canadian dollar and on the possibility of higher fiscal spending in the next federal budget.

    The loonie surged by almost 1% to 1.4488 against its US counterpart after the announcement before easing to 1.4510. Earlier in the day, the US dollar had climbed to another 13-year high of 1.4689 versus the loonie.

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