USD/CAD at 6 week lows ahead of Wednesday’s Bank of Canada meeting
Tuesday 5 December, 2017
Daily Currency UpdateThere’s no stopping the Canadian Dollar at the moment. After Friday’s surge, it extended gains on Monday and this morning in Europe it has moved higher still. The move is all the more impressive as it comes against a backdrop of lower oil prices. NYMEX crude is now down $1.50 from Friday’s high and at $57.19 this morning is the lowest since last Thursday. USD/CAD finished in New York last night at 1.2690 but this morning has traded down to 1.2643; its lowest since October 23rd. There are no local economic events on today’s calendar but traders reacted positively to comments from Prime Minister Justin Trudeau that he and his counterparts in China have made good progress on a free trade deal. Looking forward, the Bank of Canada holds its 8th and final monetary policy meeting of the year on Wednesday. Compared to the economic situation at its last meeting in October, retail sales, the labor market, housing market, manufacturing activity, trade and oil prices have all improved somewhat though inflation has eased a bit lower. Before last week’s stunning employment numbers, markets were pricing around a 47% probability of a rate hike in January. This has now risen to a little over 50% and the Canadian Dollar opens in North America this morning at USD1.2647 and GBP/CAD1.6971.
Key MoversThe USD Dollar had a decent day on Monday as stock markets rallied early in the New York session and it proved surprisingly resilient as equity markets subsequently gave up their gains. Its index against a basket of major currencies traded in a range from 92.75 to 93.06 and though it closed near the bottom of this range, it has picked up during the European morning to open in North America round 92.82. Away from Trump and taxes, the main economic news today is the release of the ISM non-manufacturing index. This has signaled 94 consecutive months of expansion in activity and it can confidently be predicted the run will extend to at least 95. October’s reading of 60.1 was the highest since August 2005 and whilst some modest pullback to around 59.0 is expected today, this would still be a very high reading historically. One of the more closely watched indicators of the US economy is a model developed by the Atlanta Fed. This takes incoming high-frequency US economic data and updates in real-time its forecast of the current quarter’s GDP number. As today brings not just the ISM survey, but also the merchandise trade deficit for October, they’ll be publishing a new forecast of Q4 GDP this evening. Currently it stands at an annualized pace of 3.5%; providing ample justification for the Fed to be raising interest rates at next week’s FOMC meeting.
The euro ended Monday within 10 pips of where it began at USD1.1865 though down against the Canadian Dollar at 1.5048. It traded a little lower in the Asian session with a low of USD1.1848 before rebounding during the European morning. Figures out today confirmed the eurozone service sector registered quicker output growth in November, with the final PMI matching the flash estimate of 56.2. The final Eurozone composite index was also confirmed at 57.5 with the Press release noting breathlessly, “The rate of euro area economic expansion moved up a gear in November. Output growth accelerated to the fastest in over six-and-a-half years, while rates of increase for all of the main survey indicators covering demand, employment and inflation also hit multi-year highs… Growth was again led by a resurgent manufacturing sector. Manufacturing production rose at the quickest pace in almost seven years in November and the headline index from the manufacturing survey – the Manufacturing PMI – posted a level bettered only once in its 20-year history.”The simple problem for the EUR at present is that whilst the economic news is almost without exception positive, it is well known and already ‘in the price’. It takes a stunning set of incoming data to produce a genuine shock. EUR/USD opens in North America this morning at a very familiar 1.1865 with EUR/CAD around 25 pips lower at 1.5010.
The volatility in the British Pound shows no sign of abating. It jumped then plunged on Monday on news that UK Prime Minister Theresa May was unable to offer an agreement on the Irish border issue to European Commission President Jean-Claude Juncker. Her Press Conference in Brussels was short, tense and defensive as it became very clear the Ulster Unionist Party had vetoed the agreement between London and Dublin. As the DUP dug its heels, demanding that UK and Northern Ireland must leave the EU on the same basis and Northern Ireland cannot stay de facto in the single market and customs union, the pound has slipped further in London trade this morning. It reached lows of USD1.3383 and CAD1.6940, not helped by a weaker than expected services PMI which fell from 55.6 to 53.8 in November. Mrs. May’s assertion in Brussels that, “on a couple of issues some differences do remain which require further negotiation and consultation” looks a huge understatement though the general consensus in currency markets (rightly or wrongly) seems to be that some kind of deal will be reached before the end of the week. If this proves wrong, and the UK Government’s is simply unable to deliver a Brexit deal acceptable to all sides, then the GBP could fall quite sharply. It opens in North America today at USD1.3413 and CAD1.6950.
In our Sydney commentary overnight, we said about the RBA Board meeting that, “Re-reading the November 7th Statement, it is not obvious which paragraphs need much of a tweak either way”. Putting today’s Statement side-by-side with it, you’d need a magnifying glass to discern much of a difference. “Recent data suggest that the Australian economy grew at around its trend rate over the year to the September quarter. The central forecast is for GDP growth to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved further, with the forward-looking indicators being more positive than they have been for some time… Employment growth has been strong over 2017 and the unemployment rate has declined. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead.” The use of the word “further” when talking about investment is one subtle change but whilst the RBA went on to note that, “some employers are finding it more difficult to hire workers with the necessary skills”, they qualified this in the very next sentence by saying, “However, wage growth remains low.” With retail sales showing a +0.5% m/m increase in October against forecasts of a more modest +0.3% rise, the Australian Dollar has done well overnight and has even outperformed the Canadian Dollar. It opens in North America this morning at 0.7645 with AUD/CAD at 0.9660.
The New Zealand Dollar ended Monday as the worst performer of all the major currencies we track here. The AUD/NZD cross rose half a cent, while NZD/USD and NZD/CAD both fell half a cent. Overnight it has recovered somewhat, after RBNZ Acting Governor Grant Spencer’s speech on “Low inflation and its implications for monetary policy”; the text of which was released at 1.15pm local time today. He told the Institute of Directors in Auckland a series of factors "may be reducing the leverage monetary policy has over inflation" and said the bank's flexible inflation targeting approach is becoming more flexible and relatively more weight is being attached to "output, employment, and financial stability." The Governor painted different scenarios where both rate cuts and rate hikes might be necessary, but said the central bank is now "assuming greater persistence in low global inflation" and that is contributing to its current flat interest rate track. The RBNZ’s latest forecasts show it doesn't expect to raise rates until mid-2019 at the earliest. The NZD rose from USD0.6860 to a high of 0.6907 overnight and opens in North America at 0.6900. NZD/CAD, meantime, opens around 20 pips higher at 0.8715.
- USD/CAD: 1.2600 - 1.2680 ▼
- EUR/USD: 0.6650 - 0.6690 ▼
- GBP/USD: 0.5860 - 0.5920 ▼
- CAD/AUD: 1.0320 - 1.0385 ▼
- NZD/USD: 1.1425 - 1.1510 ▼