The Bank of Canada is widely expected to raise rates this week as earnings season on Wall Street looks likely to drive global equity markets.

Wall Street Earnings

Banks unofficially kicked things off last week and now earnings season on Wall Street gets into full stride. Financials make most of the running with Citigroup, Morgan Stanley, Bank of America, Goldman Sachs and Bank of New York Mellon all set to report quarterly earnings. Of those Goldman is the only Dow Jones component, although American Express and UnitedHealth Group are also set to release earnings. You can read our US earnings preview here.

Bank of Canada

With the latest labour market figures showing Canada’s unemployment rate at its lowest in 40 years, the country’s central bank is expected to raise rates this week.

Jobless numbers reveal slack in the labour market has diminished significantly even after the Bank of Canada begun raising rates last summer. The jobless rate declined to 5.7% in December, the lowest level since figures began in 1976. Meanwhile the BoC’s own quarterly business survey paints a picture of increasingly tight conditions for businesses.

This has left all six of Canada’s big commercial banks calling for a rate hike when policymakers meet on January 17th. Following two increases last year, there is now a firm chance that it will raise rates to 1.25% from the current 1%. This would take it back a level last seen in 2009 and will be seen as part of a global shift out of ultra-loose monetary policy as growth picks up across the world.

While the BoC has been worried about how changes to Nafta could dent business optimism and investment, it does not appear to be having an effect on confidence. Higher oil prices, which hit three-year highs last week, support the bullish case for CAD.

Firmer oil prices and expectations of tighter monetary policy has sent USDCAD to its best levels since last autumn when markets expected the central bank to follow through with more hikes. But the greenback is finding firm support at the 1.24 level and with a rate hike already expected it may take further hawkishness to drive more gains for CAD.

And a hike is not a done deal. Governor Stephen Poloz is wary about raising interest rates given Canada’s ‘high levels of debt’. Moreover, although growth last year was the best in six years, inflation remains stubbornly low.

UK Inflation, Retail Sales

UK macro data will be in focus for forex traders again with monthly CPI inflation and retail sales numbers on tap. Consumer price inflation has held steady at 3% for the last three months and while economists agree it is likely to slide back over the course of 2018, most anticipate that the CPI number will remain at this elevated level when the data is released on Tuesday. It is not expected that the inflation print will have much impact on expectations for interest rates, with forecasts for policymakers to hold off any further hikes until later in the year given the economic uncertainty for the UK in the middle of Brexit negotiations.

Following a mixed bag of results from retailers last week, monthly retail sales data on Friday will help illustrate just how resilient consumer spending has been.

GBPUSD rallied in the middle of last week amid a broad-based dollar selloff and remains in a year-long uptrend for the time being.

Crude Oil Inventories

Crude prices have risen to three-year highs as the extension of the OPEC production curbs and falling inventories conspire to drive up futures.

The US Energy Information Administration (EIA) raised its 2018 growth forecast for global oil demand by 100,000 barrels per day (b/d) last week, while API data showed a greater-than-expected decline in inventories that fuelled further buying.

However with higher prices expected to bring more US production on-stream it is unclear how long the rally in crude prices – which have risen around 13% since December – will last.

The IEA itself expects US shale output to accelerate faster than previously thought. It sees US production at 10.3m b/d in 2018, close to 1m more than 2017. Just a month ago it anticipated growth of 780,000 b/d this year. The agency expects production to reach 11m b/d by 2019.

China Growth Figures

After roiling debt and equity markets last week by signalling a move out of buying US Treasuries, China is the big focus again on the macro front with GDP numbers for the final quarter of 2017 due to be released on Thursday. World Bank figures released last week signal a slightly faster pace of economic expansion that previously expected.

Source: ETX Capital

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Last Updated: January 15th, 2018