Iran Demands Oil Payments In Euros; EUR/USD Tumbles

• Iran demands oil payments in euros Iran seeks to recover billions of dollars it is owed by other countries in euros. Following the removal of sanctions earlier last month, the country will also charge in euros for its recently signed oil contracts. Europe has become one of Iran’s main trading partners lately, as Iranian oil companies have rushed to recover the market share they held in the continent prior to the imposition of sanctions. Given this relationship, switching the sales to EUR will lower the transaction costs between Iranian oil producers and European firms. It could also increase the demand for the common currency, as countries like India will now be required to buy euros in order to repay previous debt, or to finance new orders.

• US jobs report brings a Fed hike back into play The US employment report showed that NFP increased by 151k in January, down from a revised 262k in December. However, the overall report signaled good news for the Fed, as the unemployment rate fell and average hourly earnings accelerated on a monthly basis. What is more, the participation rate ticked up, which confirms Chair Yellen’s argument that an improving jobs market will attract back people who stopped looking for employment. The positive report could increase the probability for a Fed hike in coming months, something that investors began to seriously doubt following comments from Fed officials on the impact of the global turmoil on the US economy. The Fed has one more employment report to consider before it gathers to decide on interest rates in March. If the labor market continues to post significant gains, and Fed officials refrain from making any new dovish comments on the downside risks posed from the global economy, we could see expectations of more rate hikes this year coming forward.

• Today’s highlights: During the European trading session, Canada’s building permits for December are coming out, and the forecast is for a rise after a collapse in November. A rebound in building permits could support CAD a bit, at least at the release.

• As for the rest of the week, on Tuesday, we have a light calendar day with no major events or indicators.

• On Wednesday, all the lights will fall on Fed Chair Yellen who delivers her semi-annual testimony on monetary policy before Congress. She will repeat the testimony to the Senate the following day. We will listen carefully to any comments on what to expect from the Fed this year. We got an idea earlier last week when Fed officials Fischer and Dudley stated that the FOMC will consider the impact of international developments on the US economy before deciding on interest rates. Based on these comments, the market scaled back its expectations for a March action. Therefore, it would be interesting to see if Yellen adopts the same view. If so, this could wipe out any hopes left and could bring the greenback under renewed selling pressure.

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• In Norway, the CPI rate for January is expected to have hit the Norges Bank target of 2.5% yoy from 2.3% yoy previously.

• From the UK, we get the industrial output for December and expectations are for the figure to have fallen again, but at a slower pace than in the previous month. This will be an additional piece of information on how the British economy performed in Q4. In its calculation for the nation’s 1st estimate of Q4 GDP, the ONS reported that IP declined 0.2% mom in December, although the overall output had accelerated somewhat. A more-than-expected decline in Wednesday’s figure could raise some concerns for a downside revision in the 2nd estimate of GDP, which comes out on the 25th of the month.

• On Thursday, the Riksbank gathers to decide on its monetary policy meeting. On the 4th of January, the Bank held an extraordinary policy meeting where the Governor and Deputy Governor were granted powers to intervene in the currency market to safeguard the upturn of inflation from a possible rapid appreciation of the krona. However, the Deputy Governor expressed his opposition to the decision, supporting that currency interventions would require action over a long period to have clear impact on the exchange rate. We agree with him as something like that could hurt the Bank’s balance sheet and equity. After all, the krona is not strong enough to pound the alarm for currency intervention. This could happen if the currency appreciates too quickly. In the prospect of further action by the ECB in March, we believe that the Swedish central bank will try to offset any possible action from the ECB either by reducing the repo rate or extending its QE program.

• On Friday, we get the preliminary GDP data for Q4 from Germany and Eurozone as a whole. Both the figures are expected to show that the two economies grew at the same pace as in Q3. Since Germany, Europe’s growth engine, will release its GDP estimate ahead of Eurozone, investors will be monitoring it as a gauge for any possible surprise in the bloc’s print. Germany has already released a full-year estimate of its 2015 GDP, on which we suppose Friday’s forecast is based. As a result we don’t expect any surprise, at least in the German data. As for the Euro-area, the fall in global demand, warmer weather and the Paris terror attacks may have all weighed on economic growth. However, these could have been offset from falling unemployment, lower energy prices boosting real incomes, and a large increase in public spending as a result of the huge migrant influx. As a result, we don’t see the possibility for a surprise here either and we believe that the reaction on the euro would be limited.

• In the US, the main event will be retail sales for January. Both the headline and the core figures are expected to have risen after falling in December. In January, the labour market continued to tighten, energy prices fell further and cold weather across the country may have boosted the sales of clothing. As such, a rebound in retail sales seems very likely and could support the dollar at least for a while.