• Three central banks announce their policy today
  • ECB policy announcement tomorrow
  • US economy is standing tall, supporting the dollar
  • China growth at its lowest in 24 years

The US dollar has gained broadly overnight in anticipation of a continued easy-money policy stance by three major central banks today.

The Bank of Japan is expected to announce early this morning that it will keep buying government bonds in the hope of increasing the money supply by 80 trillion yen (or $677 billion) to combat falling prices. A few hours later on the other side of the globe, the Bank of England is anticipated to keep the current short term interest rate at its record low level of 0.5 percent amid falling exports and record low inflation rates. Across the pond, the Bank of Canada is forecast to make no changes to its key interest rate, which now stands at 1 percent, and raise a concern about the negative structural effects of falling energy prices.

In contrast, all signs suggest that the Federal Reserve will begin raising the short term rate in the middle of this year despite a slowing global economy and falling prices overseas. Note that about 85 percent of the US economy is driven by domestic production and consumption so the US is relatively insulated from the spillover effects.
It is no surprise that the US 10-year treasury interest rate is now the highest among developed economies and forecasted to outperform this year. Higher rates will attract more capital inflow from overseas particularly when other central banks are continuing to print more money by buying bonds. As a consequence, the dollar is expected to test new recent highs in the coming days and weeks.

EUR-USD continues to linger under 1.1600. There seems to be a large lot of sell-EUR orders above the 1.1600 level, thus capping the euro gain. A downside risk for the currency remains significant ahead of the European Central Bank policy announcement on Thursday.

GBP-USD is trading above 1.5140 ahead of the release of the December labor market data this morning. Analysts are expecting to see both the claimant count rate and unemployment fall to new cycle lows, to 5.9% from 6.0% in the case of the latter. An improving labor market condition will provide a firm support for the pound this week.

USD-CAD rose to a new 5-year low yesterday and may go higher today when the Bank of Canada reports that the growth outlook is looking increasingly bleak amid falling energy prices. A tumble in manufacturing shipments data released today further added to evidence of slowdown.

AUD-USD failed to go higher after the releases of a Chinese growth data that beat expectations. The Chinese economy expanded by 7.3 percent in the 4th quarter compared to 7.2 percent expected. That said for the entire year, the economy grew 7.4 percent which was the worst in 24 years. Therefore, it will be a challenge for Australia to export themselves out of the current slump.

Have a great day.