Last Week’s FX and Economy Summary Jan 20, 2020

US-China trade deal signed

The US-China phase-one trade deal was signed on January 15th. President Trump stated that phase-two talks should start without delay, although the Chinese delegation was more cautious. There were also some doubts over the ability to implement and enforce the deal, but overall risk appetite held firm.

As confidence in the global economy improved, there was reduced demand for the Japanese yen with USD/JPY posting 8-month highs above the 110.00 level.

Relief over Chinese data

The latest Chinese industrial data for December was stronger than expected which increased hopes for a wider stabilisation in the economy even though 2019 GDP growth equalled a 29-year low.


The retail sales data was close to expectations with a solid December increase. The important Philadelphia Fed manufacturing survey strengthened for January, maintaining confidence in the outlook.

The CPI inflation rate was unchanged for December and comments from Federal Reserve officials continued to suggest that they would encourage a slightly higher inflation rate and would be very reluctant to increase interest rates even if inflation moved above 2.0% on a short-term basis.

Markets remained convinced that there would be no short-term change in interest rates, but evidence of solid business confidence helped support the dollar with EUR/USD dipping below 1.1100. 


Early in the week, another Bank of England member backed the case for lower interest rates. The latest inflation data was also lower than expected with the headline CPI rate declining to a 3-year low of 1.3% for December.

Increased speculation over a January interest rate cut triggered further Sterling selling.

There was a recovery later in the week with hopes for a stronger global outlook providing net support and fresh buying. Volatile trading remained a feature and Sterling lurched lower again late in the week to register a slight net weekly loss following a much weaker than expected retail sales release. 


Minutes from the ECB’s December meeting suggested that the bank was slightly more optimistic over the growth outlook and there were hopes that growth conditions were stabilising.

There were still strong expectations that the ECB would maintain a policy of very low-interest rates with the Euro still used as a global funding currency.

What is a funding currency?

In global currency trading, one currency is bought against another one. A popular strategy is to buy currencies with a high yield and sell or fund the deal through ones with a low yield. This process earns a net premium and is known as a carry trade.  

There is, therefore, interest in selling the Euro which has a zero yield, especially when global risk appetite is firm. Carry trades will tend to weaken the Euro, although there can be a rapid snap-back if fears intensify.


The important Bank of Canada survey indicated that business confidence was firm in the latest quarter with the Canadian dollar little changed for the week as a whole.

New Zealand business confidence increased for the fourth quarter, but the New Zealand dollar was unable to make any headway.


Tim Clayton

Tim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics.

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