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CAD steady ahead of Wednesday’s BoC policy meeting

By Nick Parsons

The Canadian Dollar is the only major currency which has fallen against the US Dollar over the past seven days. Having opened last Monday morning at USD/CAD1.2400, and been much higher (CAD weaker) in the meantime as investors began to question whether a rate hike at this Wednesday’s BoC monetary policy meeting really is nailed-on, it sits this morning at USD/CAD1.2425; still 20 pips higher than a week ago.

Even after the weekend, investors are still none the wiser as to what the US’s true intentions are on NAFTA and what economic impact it may have either side of the Canada-US border. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28th and it is now widely expected that Mr Trump might deliver a letter giving 6-months’ notice of an intention to withdraw from the agreement. The only official comment from the White House is that, “there has been no change in the president’s position on NAFTA” and Mr Trump’s attention has instead been focused on damage repair after some intemperate comments about other foreign countries.

Market expectations about the Bank of Canada have swung quite a bit. Back in December, a January rate hike was only a 50-50 call. After the second strong monthly employment report, the probability of a 25bp hike jumped to 90% but after the uncertainties over what changes to NAFTA might mean, it was back down to just 60%. This morning it is at 85%. At present, the average of the 3 core measures of Canadian inflation is at 1.7%; still below the 2.0% target level. In December BoC Governor Poloz noted that “the downside risk to the inflation forecast is slack in the labour market… we put stock in data showing higher wages but that does not mean there is no slack left.”

Amidst all the many uncertainties, the Canadian Dollar opens in North America this morning at USD1.2425 and GBP/CAD1.7125.

The US Dollar had a very bad week and this Monday morning in Europe it got a whole lot worse. On 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 been steady in the Asia session and opened in London around 90.45, the Dollar’s index then tumbled to 89.92; the lowest since December 19th 2014.

It is another one of those periods when the dollar is falling because it is falling: momentum itself is one of the biggest drivers of the price. Certainly, there was nothing in Friday’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.

There are no economic data released today and the cash equity market is closed in observance of the Martin Luther King holiday. Futures markets are open, however, and the S+P 500 is up around 8 points at yet another record high of 2794 as we go to print. Bond markets are steady with 10-year US Treasuries at 2.55% and the 2-year note at 2.00%. Later in the week we’ll see manufacturing and industrial production data on Wednesday, and a number of regional reports such as the Empire State survey on Tuesday and the Philly Fed survey on Thursday. Sandwiched between these is the latest Federal Reserve Beige Book on Wednesday afternoon New York time.

The US Dollar index opens in North America this Monday morning at 90.00.

It is less than a week ago that the euro was trading down at a 2018 low of USD1.1918 and here we are up almost 3 ½ cents from that level after a 36-hour surge from Thursday lunchtime has extended into a third day. At 7am European time this morning, EUR/USD was at 1.2210 but has since added another half a cent, largely on the absence of any attempt from monetary officials to express discomfort with its current level or pace of appreciation.

As we explained last week, after a sharp move in either foreign exchange or currency markets, the ECB sometimes does an off-the-record briefing with select journalists to attempt to halt or even reverse what it might see as an unwelcome development. These are often referred to in the professional market as “ECB sources” stories as they are always anonymous with no names attributed to them. The main feature of this morning’ trading in Europe is that there has been no such push-back. For professional FX traders, this is seen as giving the move the official seal of approval.

Of course, the latest Eurozone economic data did no harm. The seasonally adjusted trade surplus rose to €22.5bn in November from €19.0bn in October, largely driven by a 3.4% m/m rise in exports -mostly from Germany - offsetting a 1.4% increase in imports. Tomorrow and Wednesday we’ll get to see December’s final CPI readings in both Germany and the Eurozone and on Friday we’ll see how the trade numbers are contributing to a very healthy current account surplus. Amidst all the data flow, ECB Council Member and Bundesbank President Jens Weidmann is speaking along with his colleague Benoit Coeure at an IMF conference on Thursday.

The EUR opens in North America this Monday morning at USD1.2265 and EUR/CAD1.5245.

The Pound began this week after an enormous swing from Thursday’s low to Friday’s close and one of the biggest daily rallies in recent memory. From late morning on Thursday, GBP/USD rose from a fresh 2018 low of 1.3462 to 1.3560. Friday saw a surge of almost 2 cents with no domestic UK news of any kind: neither economic nor political. Instead, as the USD fell back, the so-called ‘cable’ rate breached the post-referendum high of USD1.3590 seen on September 15th 2017 and triggered a huge wave of buy orders which took the pound up to a high of USD1.3740, GBP/AUD1.7345 and GBP/NZD1.8920. This morning in London it has further extended gains up to highs of USD1.3815.

The gains come despite news of the collapse of one of the UK’s largest construction companies which employs around 43,000 people and has been working on a host of government-funded projects such as the high-speed rail link between London and Birmingham as well as many contracts for hospitals, schools, prisons and the Army. In total, Carillion has around 450 contracts with the UK government, equivalent to 38% of its 2016 revenue. The Government is to make a Statement in the House of Commons this afternoon, and it is certain that the Opposition parties will be seeking to put some of the blame on the system of government contracts, as well as the company itself. This is a story which is sure to get bigger over the coming days.

For the week ahead, the big economic talking point will be whether the annual rate of inflation might have peaked. The Consumer Prices Index (CPI) 12-month rate was 3.1% in November 2017, up from 3.0% in October 2017; it was last higher in March 2012. The consensus for December is that the annual rate might slip back a tenth to 3.0% as seasonal promotions and discounting at Christmas offset a continued increase in petrol prices. On Friday, we’ll find out what impact rising prices may have had on the volume of goods sold. Retail sales are expected to have fallen around -0.6% m/m after a +1.1% m/m surge in November helped by promotions such as Black Friday.

Bank of England MPC member Tenreyro is due to give a speech this evening on the causes and implications of low productivity. Ahead of that, the British Pound opens in North America this morning at USD1.3775, CAD1.7135 and AUD1.7330.

At the very end of last week in the last two hyours of trading in New York, the Aussie Dollar got back on to a US 79 cents big figure for the first time since September 26th, reaching a high of 0.7922 just before the close. This morning in Asia and then in Europe, it has extended gains to just over 0.7965 as gold continues its very strong performance.

The yellow metal began last week at $1318 per ounce and after dipping to $1309 on Wednesday, it then rose persistently and virtually without correction up to a high of $1337 on Friday; the highest since September 10th 2017, whilst silver, platinum and aluminium all registered weekly gains. Today, gold has added another $5 to $1342 to be up $33 in just four trading sessions.

For the week ahead as people drift back to work after the holidays, the big number to watch will be Thursday’s employment report. Consensus expectations are for a 15,000 increase in December employment after a huge 61,600 increase in November. Last time around, full-time employment increased 41,900 to 8,501,900 and part-time employment increased 19,700 to 3,901,100 although the unemployment rate remained steady at 5.4%. It is generally estimated that, over time, around 14-15k new jobs per month are enough to keep pace with demographic change and leave the unemployment rate steady though this doesn’t always hold for every individual month’s data. Ahead of this, we’ll get to see Westpac’s index of consumer confidence on Wednesday and figures on new motor vehicle sales tomorrow.

The AUD opens in North America this morning at USD0.7945 with AUD/CAD at 0.9880 and AUD/NZD1.0900.

The Kiwi Dollar continues to climb but not at the same breakneck pace as over the last few days. Since the start of 2018, NZD/USD is up almost 2 cents to 0.7275, whilst measured from the November 8th low, the gain is almost 5 cents.

Perhaps the most surprising feature of the Kiwi’s performance was that it came in the almost total absence of any fresh economic or political news. As the peak holiday season now begins to wind down, though, we’ll this week start to see some fresh incoming data. The main number to watch this week is probably the Quarterly Survey of Business Optimism. The New Zealand Institute of Economic Research (NZIER) has conducted a comprehensive quarterly survey of business opinion — known as the QSBO — since 1961. This survey asks respondent businesses a range of questions about their output, costs and prices, and employment and investment intentions. It also measures their perceptions of general business conditions. The survey data are widely used as indicators for assessing various aspects of New Zealand’s macro-economy.

Ahead of the QSBO, this Monday morning brought the monthly gauge of food prices. These are closely watched because, as in Australia, New Zealand only calculates CPI inflation on a quarterly basis and food makes up almost a fifth of consumer prices index. According to the official statisticians, total food prices were down 0.8% m/m in December – the fourth consecutive monthly drop - as all store-bought food groups fell during the month. Grocery food and seasonally cheaper fruit and vegetables were the main factors in the dip in food costs. Butter (-4.9%), chocolate bars, and wholemeal bread prices all fell. Tomatoes and nectarines were also cheaper, but avocado prices remain almost twice as expensive as they were a year ago.

The New Zealand Dollar opens this morning in North America at USD0.7285 with NZD/CAD at 0.9060.