With commodity bloc rates markets increasingly priced for tightening later in 2017/early in 2018, these currencies remain vulnerable to any pullback in global growth optimism or a significant correction in commodity prices. Overnight, Australia November retail sales data was softer than expected and ahead today Canada reports December housing starts and November building permits. In China PPI came out stronger than expected (5.5% y/y vs 4.6% expected, see here for more details). As it is a significant driver of global CPI, it should keep focus on the reflationary environment. The Bank of Canada’s Business Outlook Survey showed a surge in expectations on investment, sales, and hiring to their highest level since before the 2014 oil collapse. The data follows a strong jobs report from last Friday and has seen rate markets further reduce pricing for near-term easing risk.
USD: near-term pullback could continue
Today, the US calendar will be quiet, with the NFIB small business sentiment survey and the JOLTS job openings reports the only releases of note. We expect the NFIB small business optimism index to continue to be buoyant, and we forecast a rise of 2.6 index points to 101.0. The USD is losing ground, retracing some of its post-employment report gains vs the EUR and JPY. There was not obvious catalyst for the reversal, although the USD retreat did coincide with a weaker risk sentiment: a pullback in US yields, a 0.3% drop in the S&P 500 and a slide in front-month crude prices to new lows for the year. We remain quite constructive on the USD as we move into 2017, but, with US nominal and real yields well-off their December highs now and the market already long USD according to our metrics, we see some scope for a near-term pullback vs the core currencies, particularly if equity markets give back some ground.