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CAD awaits Bank of Canada announcement and Press Conference

By Nick Parsons

There are, thankfully, only a couple of hours more to wait before the Bank of Canada’s interest rate decision and little than can be usefully added to the debate so close to the announcement at 10am local time in Ottowa. For the last 48 hours, USD/CAD has traded sideways in a 50 pip range from just 1.2405 to 1.2555.

To sum up the current state of expectations this week, just eight of 31 analysts surveyed on Monday said they expect the BoC to hold rates steady at 1.0% at today’s meeting with 23 looking for a 25bp hike to 1.25%. Looking forward, the median forecast is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75% by the end of 2018. Analysts predict another hike in the first quarter of 2019.

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.

The way the information on rates is released is as follows: From 7am -10am, journalists are invited to review the Rate Announcement press release and the Monetary Policy Report, under embargo, at the Bank’s head office in Ottawa. A briefing session on the Report will take place during the lock-up. At 10:00 (ET), the lock-up ends, the embargo is lifted and the rate announcement press release and the MPR will be available on the BoC’s website. At 11:15, Stephen S. Poloz, Governor of the Bank of Canada, will hold a press conference in the auditorium. He will be accompanied by Senior Deputy Governor Carolyn A. Wilkins.

As the long wait draws to an end, the Canadian Dollar opens in North America this morning at USD1.2435 and GBP/CAD1.7160.

Tuesday was on track to be first day in a week that the US Dollar index actually managed to rally. Its index against a basket of major currencies held on to a 90 ‘big’ figure across all three time-zones but then lost around 25 pips in the last couple of hours to end on its lows around 90.05. Overnight in Asia there was a notable – but totally unexplained – spike lower in the USD as GBP/USD jumped 40 pips and EUR/USD jumped 60. There were no news headlines whatsoever to trigger this move and, given the changed regulatory environment these days in wholesale FX markets, no chat around what client flows may have triggered it.

Whatever the cause, the spike lower came around 01.00GMT and took the USD index down to 89.93. It has subsequently recovered to a high in Europe this morning of 90.38 and as we write stands at 90.30; pretty much at the mid-point of yesterday’s entire trading range.

Just as FX markets have been volatile, so too have equity markets. Cash indices were closed Monday and as they played catch-up to futures on Tuesday, so the 26,000 milestone for the DJIA was duly passed in the New York morning; just 8 trading days after it first passed 25,000. What is interesting in the price action, however, is that the index failed to hold on to 26k and from 10.40am Eastern Time in the US, it moved back on to a 25k handle and then erased all its prior gains to end down on the day. Amidst the selling pressure, the VIX measure of equity market volatility jumped to a 5-week high of 12.1. Futures markets are calling the DJIA up around 150 points at today’s open though VIX remains quite elevated at 11.6.

There’s not much economic data scheduled today but plenty of Fed-speak, both written and verbal. The Federal Reserve releases its Beige Book summary of economic conditions whilst Evans and Mester are talking on the economy, monetary policy and communication. The US Dollar index opens in North America this Wednesday morning at 90.30.

The EUR ended Tuesday a touch higher against the USD. It hit a session low in the European afternoon of USD1.2205 before rallying around 60 pips into the close at 1.2265. Overnight in Sydney – as we’ve already mentioned – it jumped to a fresh 2018 high of 1.2303 but has subsequently fallen more than three quarters of a cent. There is still no plausible explanation for the earlier spike but it should be taken as a warning about the scope for a pick-up in volatility more generally.

We’ve been highlighting for the last few days, the lack of any push-back from ‘ECB sources’ after the bombshell dropped last Thursday. Yesterday evening we finally got it. According to a Reuters story, “three sources on or close to the ECB’s policy-making Governing Council said any fundamental change to the guidance was likely to come only later, with the March meeting, when policymakers get updated economic forecasts, seen as a more likely option. ‘We need more thorough analysis before making any change,’ one of the sources said”.

This morning, in an interview with Italy’s La Repubblica newspaper, ECB Vice President Vitor Constancio said “I am concerned about sudden movements which don’t reflect changes in fundamentals… Looking at fundamentals, inflation declined slightly in December.” The next ECB Governing Council meeting is on January 25th and Constancio signaled little prospect of a change in the guidance on policy at that gathering, saying officials should be careful not “choke off growth too soon.”

As if to reinforce the message, ECB council member Francois Villeroy de Galhau said, “The only question is how long it will take to meet our inflation target. On this issue, the recent evolution of the exchange rate is a source of uncertainty which requires monitoring with regard to its possible downward effects on imported prices.”

All these ECB comments, whether anonymous or on the record, have had the desired effect, albeit only modestly. The EUR opens a touch lower in North America this morning at USD1.2220 and EUR/CAD1.5200.

After its breathless rally since last Thursday lunchtime, the GBP took a pause yesterday. Having dipped to a low of USD1.3747, the GBP rallied in the New York afternoon to close around 1.3790. Overnight in Asia, however, the GBP was caught up in the USD spike lower and reached a fresh high for 2018 of USD1.3825 though it held on to a 1.38 ‘big figure’ for less than a couple of hours before slipping back to a low of USD1.3760.

After CPI figures yesterday showed the first fall in the annual rate since June last year, there is nothing on today’s UK economic calendar. At midnight the Royal Institution of Chartered Surveyors will released its excellent monthly report on the UK residential property market but until then, the main interest will probably be political as all parties pick over the carcass of failed construction company Carillion at Prime Minister’s Question Time.

In the latest Brexit developments, European Commission President Jean-Claude Juncker has again been stirring the pot. He told MEP’s in Brussels this morning, “Our hand remains outstretched... We are not throwing the British out. We would like the British to stay. And if they so wish, they should be allowed to do so.. Even if the British leave according to article 50, then article 49 would allow them to accede again. And I would be happy to facilitate that. I would not want to push anyone into a corner.” It is an offer of help which is unlikely to be well received in Downing Street.

The British Pound opens in North America this morning at USD1.3790, CAD1.7155 and AUD1.7295.

The Aussie Dollar has not been immune to the effects of the US Dollar’s spike lower and subsequent recovery overnight. AUD/USD slipped to USD0.7940 in New York on Tuesday before recovering around 25 pips to close at 0.7965. During the Sydney morning session today, however, the pair jumped to a high of 0.7993; the highest since September 20th. Its volatility has continued into European trading hours with a low of 0.7945 then a rally back up to around 0.7985.

Certainly, some of the gloss has been taken off precious metals and other industrial commodities. As we write, gold is less than $10 off its recent $1343 peak but silver yesterday was down 1.3% and palladium lost just over 3%. Elsewhere, base metals were all lower with losses extending to as much as 2.9% for nickel whilst copper fell 2.2%; the biggest drop since December 5th. The metal rose 7.2% in December, capping the biggest annual gain in eight years, but prices are down 2.6% so far in 2018.

The big number to watch locally in Australia will be tomorrow’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.

The AUD opens in North America this morning at USD0.7975 with AUD/CAD at 0.9920 and AUD/NZD1.0960.

Top of the pile Monday, back at the bottom Tuesday – just a normal pattern for the Kiwi Dollar! Thus far on Wednesday, NZD/USD has traded from a high of 0.7283 in Sydney to a low of 0.7237 at the start of business in London. It has subsequently regained almost all its losses but would need to make fresh highs above Monday’s 0.7313 peak if buyers are to be re-energised.

In economic news locally, New Zealand commodity prices dropped again in December. The ANZ commodity price index fell 2.2% and was up just 3% year-on-year. In New Zealand Dollar terms, however, the index fell a punchy 3.3% m/m as the Kiwi’s trade-weighted index rose 2.7% during the month. ANZ noted that, “this was the largest fall in world and local prices since the current upward cycle in commodity prices began in early 2016”.

The latest Global Dairy Trade (GDT) auction yesterday showed a 4.9% gain but this comes after ANZ’s survey showed very large falls in December as an upswing in global milk supply placed downward pressure on all product prices. Cheese prices fell 11% in the month, butter was down 10% while whole milk powder fell 2.2%.

The New Zealand Dollar opens in North America at USD0.7275 with NZD/CAD at 0.9045.