CAD sidelined ahead of Wednesday’s Bank of Canada meeting
Daily Currency UpdateHaving gone from being the strongest currency in the first week of the New Year 2018 to the weakest in the second week, the Canadian Dollar has been very steady over the first few sessions of this third week. Indeed, for the last 24 hours USD/CAD has traded sideways in a 40 pip range from just 1.2407 to 1.2547.
In a Reuters poll on Monday, just eight of 31 analysts surveyed said they expect the BoC to hold rates steady on Wednesday as it waits for inflation to pick up and to see how the next round of NAFTA negotiations later this month proceed. The median forecast in the Reuters poll is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75 percent by the end of 2018. Analysts predict another hike in the first quarter of 2019. Economic growth is expected to average 2.2 percent this year, slightly higher than the 2.1 percent forecast in the previous poll in October. Expectations for 2019 were unchanged at 1.8 percent.
Over the past 25 years, Canada’s main policy rate has been on average around 25bp higher than the US rate. At the moment it’s 0.375 percentage points below, so there could be some catching up to do. The Bank of Canada estimates its so-called neutral rate - which allows the economy to run neither too hot nor too cold - at about 3%. The Federal Reserve sees its neutral rate at 2.75%, according to the median estimate in their most recent projections in December.
As the long wait to Wednesday’s meeting continues, the Canadian Dollar opens in North America this morning at USD1.2435 and GBP/CAD1.7110.
Key MoversOn Friday, the USD broke below last year’s September 7th low of 91.00; taking the index down to its lowest level in more than 3 years at 90.50. Having opened in London around 90.45, the Dollar’s index yesterday tumbled to 89.98; the lowest since December 19th 2014. Overnight it has steadied a little and is clinging to an index level of 90 as the EUR and GBP ease back somewhat after their sharp rallies since last Thursday.
Later this week we’ll see manufacturing and industrial production data on Wednesday, and a number of regional reports such as the Empire State survey today and the Philly Fed survey on Thursday. Sandwiched between these is the latest Federal Reserve Beige Book on Wednesday afternoon New York time. For sure, there was nothing in last week’s numbers – core CPI greater than expected and a stronger than consensus retail sales report – that would have knocked the Fed off its tightening bias or suggested that growth expectations needed to be revised lower. The market-derived probability for a 25bp hike at the March FOMC meeting has gone up from 67% a week ago to 73% now and there’s a tiny chance (2%) of a surprise hike at the January 31st meeting.
Cash equity markets were closed yesterday for the Martin Luther King holiday but futures on the S+P 500 index rose around 7 points whilst DJIA futures advanced 150 points or 0.6%. On January 4th, the Dow Jones Industrial Average jumped past 25,000 for the first time ever and by the close of business that day it had made the fastest run ever to a fresh 1000-point milestone. The jump from 24,000 to 25,000 took 23 trading days. The move in the futures market to 26,070 has taken 8 days. We wonder how many baseball caps the often-pictured veteran stock trader has had sewn!
The US Dollar index opens in North America this Wednesday morning at 90.30.
This time last week, EUR was at a 2018 low of USD1.1918. It has subsequently been up to a high of 1.2285 yesterday and even after a half-cent pullback over the past 24 hours, it is still up more than 2 ½ cents from last Tuesday.
In an interview with the Börsen-Zeitung in Germany, ECB Governing Council member Ardo Hansson said that that many eurozone countries are badly prepared for interest rate hikes in the euro area. The head of the central bank of Estonia made it very clear that the European Central Bank (ECB) is in the process of normalizing its ultra-loose monetary policy and could not take account of individual countries. Hansson said the bond-buying program should be ended after September 2018 if there were no nasty surprises: "If growth and inflation are more or less in line with the projections, it would certainly be conceivable and appropriate to end the purchases after September. Why not?... The last step to zero is not a big deal anymore. You do not have to do a lot of fine-tuning. I think we can go to zero in one step without any problems.” As for the euro, the appreciation of the single currency “is not a threat to the inflation outlook up to now, and one shouldn’t overdramatize it.”
ECB Council Member and Bundesbank President Jens Weidmann is speaking along with his colleague Benoit Coeure at an IMF conference on Thursday and it will be interesting if they share the same hard-line stance as their Estonian colleague.
The EUR opens in North America this morning at USD1.2230 and EUR/CAD1.5210.
It’s quite unusual to begin a commentary on the GBP by noting that it is lower than last night’s closing levels. On Friday, the British Pound traded at USD1.35, 1.36 and 1.37. Yesterday it moved on to 1.38 around the middle of the European morning but after a quick half a cent pullback, then went on to a best level in New York around 1.3815. Overnight, with a somewhat steadier US Dollar, GBP/USD is around 50-60 pips lower at 1.3755.
We mentioned yesterday the collapse of one of the UK’s largest construction companies, Carillion, which employs around 43,000 people and has been working on a host of government-funded infrastructure projects as well as many contracts for hospitals, schools, prisons and the Army. We said, “this is a story which is sure to get bigger over the coming days”. Today, unsurprisingly, we’re now hearing about the second-round impacts on a host of subcontractors and small business, many of whom are now unsecured creditors and likely to lose huge amounts of money. It is an added uncertainty the UK economy could do without right now.
As for the Brexit negotiations which are set to resume soon, a report in today’s Guardian newspaper claims that, according to senior diplomatic sources, “repeated representations have been made to EU officials by Oslo over their fears that an overly generous offer to the UK will fuel calls in Norway to renegotiate its ties with the bloc”. Norway makes larger financial contributions to the EU per capita than the UK and accepts free movement of people in order to have access to the single market. But it has no decision-making role in Brussels’ institutions. A senior official said: “The Norwegians are following this very closely to make sure that we are not giving the UK a much more favourable deal.”
UK CPI figures this morning showed the first fall in the annual rate since June last year. The Office for National Statistics said the fall in inflation from 3.1% to 3.0% came mainly from air fares, along with a fall in the prices of a range of recreational goods, particularly games and toys. These were partially offset by an increase in tobacco prices, reflecting duty increases that came into effect following the Autumn Budget, along with an increase in petrol and diesel price. It’s only a tiny fall in inflation, but the figures do at least give some hope that the peak in CPI might now have been seen.
The British Pound opens in North America this morning at USD1.3755, CAD1.7110 and AUD1.7300.
The Australian Dollar managed to extend its recent gains in Monday’s Northern Hemisphere trading and ended up joint strongest of the major currencies we track here, along with the NZD. More than half its rise against the US Dollar came during the Sydney session but as the rising EUR continued to pressure the USD index, so the AUD rose to an intra-day high in New York of 0.7975; the highest since September 21st.
In a week which will be dominated locally by the December employment report on Thursday, there’s still plenty of second and even third tier data to keep the statistics enthusiasts occupied. Earlier today we saw monthly motor vehicle sales; the final time the Australian Bureau of Statistics publishes this series. In December there were a seasonally-adjusted 36,339 passenger vehicles registered, 42,240 SUV’s and 25,164 ‘other vehicles’ to give a total of 103,743. This was a 0.2% increase m/m and a 4.5% rise y/y.
The ABS also released figures on dwelling approvals. These showed 21,055 units were approved; an 11.7% monthly increase and a 17.1% y/y gain. This was driven largely by high-rise apartments in Victoria which jumped 38% after a 21% rise in October, while the rest of Australia was relatively flat, down 2.0% in the month following October’s 8.3% drop.
The AUD opens in North America this morning at USD0.7950 with AUD/CAD at 0.9890 and AUD/NZD1.0930.
Given its recent volatility, it should come as little surprise that having been in joint top spot with the Aussie Dollar on Monday, the NZD is this morning back at the bottom of the performance table. This comes after a pretty downbeat Quarterly Survey of Business Optimism published by the New Zealand Institute of Economic Research (NZIER) which has conducted a comprehensive quarterly survey of business opinion - known as the QSBO - ever since 1961.
This latest QSBO shows a sharp drop in business confidence following the General Election, with a net 11 percent of businesses expecting economic conditions to deteriorate over the first half of 2018. Business confidence had fallen in the previous quarter ahead of the General Election, and it appears uncertainty over new Government policies have made businesses even more downbeat. The decline is more modest when it comes to businesses’ own demand. A net 10 percent of businesses reported a lift in own trading activity in the December 2017 quarter, an easing from the net 13 percent in the previous quarter. As the NZIER puts it, “Businesses may be worried about the outlook for the New Zealand economy under the new Labour-led Government, but for now this is not reflected in demand in their own business”.
The decline in business confidence was broad-based across the sectors, with retailers and manufacturers particularly downbeat. However, the pessimism was not reflected in activity indicators. Domestic sales remain solid in the retail and manufacturing sector. The building sector also reported solid output and new orders. Across the regions, the pessimism was evident in the urban regions including Auckland, Wellington and Canterbury. In particular, a net 33 percent of Wellington businesses expected a worsening in economic conditions over the coming months.
The New Zealand Dollar opens in North America at USD0.7275 with NZD/CAD at 0.9050.
- USD/CAD: 1.2405 - 1.2515 ▼
- CAD/EUR: 0.6550 - 0.6625 ▼
- CAD/GBP: 0.5825 - 0.5885 ▼
- CAD/AUD: 1.0050 - 1.0155 ▼
- CAD/NZD: 1.0980 - 1.1100 ▼