The Morning Update

The USD firms, oil prices strengthen, equity markets steady, and US yields are mixed in cautious markets. The USD gathers strength after a bearish start to 2025, finding support from upbeat economic data and the prospect that the Fed will keep rates on hold in the first half of 2025. US futures edge higher after Tuesday's tech-driven sell-off. In Asia, equities had their biggest one-day drop in more than two weeks. China's benchmark index tested its lowest level since September as investors remain concerned about US tariffs. Global investors are growing increasingly concerned about President-elect Trump's promise to increase tariffs when he becomes the US president in less than two weeks. The incoming administration has pledged as much as 10% tariffs on global imports, 60% on Chinese goods, plus a 25% surcharge on Canadian & Mexican products. Elsewhere, oil prices tested $75 a barrel for the first time in almost three months, Bitcoin eased below $96k, while Gold prices are flat. In focus today, US ADP Employment Change, US Initial Jobless Claims, and the FOMC minutes will help drive direction to currency markets.

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In other news. EU will defend borders, says the French minister in response to Trump's Greenland threats. Tens of thousands flee wildfires tear through the Los Angeles area. South Korea's Yoon faces new arrest attempt in fortified compound. Trump says he would use "economic force' to join Canada with the US. Urgency mounts in search for survivors of powerful Tibet earthquake. German industrial orders & retail sales dropped in November. Iran pushes China to let it sell $1.7 billion worth of stranded oil. Meta shelves fact-checking in policy reversal ahead of Trump administration. Greenland leader to meet Danish king amid Trump bid to take over territory.

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In currency markets. China's CNY hits a fresh 16-month low on Trump tariff fears, while the USD firms as strong US data is expected to see the Fed keep rates on hold in H1/25, and the Indian Rupee hits a lifetime low against the USD. CNY slips 0.1%, while Asian currencies weaken by 0.3% on average against the USD. Trading currencies come under fresh pressure, with JPY down 0.1%, CHF & MXN easing by 0.2%, NOK falling 0.3%, AUD, SEK & NZD weakening by 0.4%, and ZAR tumbling by 0.85% against the USD.

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In commodity markets. Oil, Silver & Soybean prices firmed by 0.2%. Natural Gas prices rallied 4.6%. Gold & Copper prices are flat, and Wheat prices weakened by 0.5%.

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CAD holds steady ahead of the key US jobs data, while the continuing threat of US tariffs and the resignation of PM Trudeau further complicates the outlook. US President-elect Trump Tuesday continues to threaten significant tariffs and said he would be willing to use 'economic force." not military, to join Canada and the US together. The loonie remains vulnerable to further weakness; ING's Pesole said that a full-fledged trade war necessitating additional Canadian rate cuts could push the CAD to 1.5000. Intraday, the US jobs report and the Fed minutes will be the primary driver for the loonie today.

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EURCAD fell in early trading as weakening German Industrial orders and strengthening oil prices supported the loonie.

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EUR comes under fresh selling pressure, slipping below 1.0300 on US rate concerns and continuing US tariff threats. Euro slipped as stronger than expected US data increasingly points to the Fed holding rates until at least the 2nd half of 2025, with the ECB expected to maintain its easing policy in Q1/25. Domestically, EU PPI beat expectations, while German Factory orders and German Retail Sales y/y beat expectations. Today's focus will be on the ADP Employment Change, which is expected at 140k, and US Fed Minutes is expected to have a less dovish tone. Our bias remains bearish for the euro and sees the potential of a retest of 1.0200 ahead of President-elect Trump's inauguration.

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GBPEUR weakens following the stronger-than-expected y/y retail sales report.

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GBP tests fresh 2025 lows against the strengthening USD. The pound came under selling pressure, testing a fresh 2025 low of 1.2325 amid increasing risk-off market sentiment and elevated US treasury yields on hawkish Fed expectations. Investor's sentiment for the GBP remains weak amid a flurry of weak domestic economic data and doubts about the Labour government's fiscal strategy. Adding further pressure is the expectation of diverging interest rates between the BoE & Fed in 2025. Intraday, the US Jobs & Fed minutes will be the primary driver for the pound.