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Investment Bank

Investment Bank

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Seeing is not always believing 

Aziz Sunderji, Zoso Davies, Juan Prada

  • USD weakness and CNY strength were the major themes in a quiet session. The CNY rose after the Bundesbank said that it would add China’s currency to its reserves. Otherwise moves were subdued across equities and fixed income, with the US closed for Martin Luther King day. The other notable price action was in commodities, with Brent closing above $70 for the first time since 2014.
  • The USD bounce proved short-lived, with the path of ECB policy re-priced following the release of December’s minutes with the BoJ also expected to join the normalisation trend later this year. We forecast further appreciation in EURUSD in the medium term, with upside risks to our Q1 forecasts as markets frontload tightening expectations.
  • The weak dollar and strong oil is a headwind for emerging Asia. We estimate that for every USD10/bbl rise in the price of Brent, the region’s external surplus would narrow by USD50bn on average. While Thailand and Taiwan are the most sensitive countries in EM Asia to higher oil costs, we believe India and the Philippines are most vulnerable given their widening current account deficits.
  • Today’s data is focused on inflation in the euro area (Germany, Italy, Ireland), the UK, and Poland. In the UK we are broadly in line with the consensus, forecasting headline inflation of 3.0% y/y and 2.5%y/y for headline and core inflation, respectively.
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