Canadian Dollar holding on to gains after Poloz speech
Friday 15 December, 2017
Daily Currency UpdateThe Canadian Dollar did extremely well on Thursday and knocked the AUD off top spot in the one-day performance table. We’ve been flagging up here all week the fascinatingly-titled speech from Bank of Canada Governor Stephen Poloz on “things that keep me awake at night”. He did not disappoint. He is always a wonderfully thought-provoking speaker, never afraid to go against the prevailing G7/BIS consensus and full of insight into the policy-making process. He is a very under-estimated Central Banker; erudite but self-deprecating in equal measure. His speech to the Canadian Club in Toronto is worth reading in full. It can be found here. To summarize briefly here, the three issues were cyber threats, high house prices and “The tough job market for young people”. He also threw in a wonderful dismissal of bitcoin: “the term “cryptocurrency” is a misnomer: “crypto,” yes, but “currency,” no. For something to be considered a currency, it must act as a reliable store of value, and you should be able to spend it easily. These instruments possess neither of these characteristics, so they do not constitute “money.” Overall, the context of his speech was that the Canadian economy is doing extremely well and is at a “sweet spot” in the economic cycle. “The economy has made tremendous progress over the past year, and it is close to reaching its full potential. We are very encouraged by this, and we are growing increasingly confident that the economy will need less monetary stimulus over time.” Needless to say, currency markets loved this speech. USD/CAD tumbled a full cent to a one-week low of 1.2735. It opens in North America this morning at 1.2760 with GBP/CAD at 1.7110.
Key MoversA quick look at the US Dollar index tells you that the USD had a good day on Thursday. A closer look behind the scenes, shows this is not strictly true. The EUR had a very poor day and as it comprises 57% of the index (which we highlighted here earlier this week), so the USD index was able to fight back. Having tumbled from a high on Tuesday afternoon in New York of 93.81 to 92.95 in Sydney yesterday morning. the USD index climbed back to 93.30; regaining almost exactly half its losses over the period. Overnight in Asia and the European morning session, the USD has turned lower once more. In part this is a function of a EUR/USD rate which is 30 pips higher but it reflects also some investor nervousness as to whether the President’s tax reform bill will actually be signed into law. Stock markets Thursday not only failed to make record highs but actually ended lower on the day. This comes as Florida Senator Marco Rubio said he would not vote for the package unless there were changes to child tax credits. With only a slim majority in the Senate, which is set to narrow to just one vote after the Alabama election, some kind of compromise plan is expected to be released today, in expectation of final votes early next week. S+P futures are up around 5 points as we write, whilst the Dow Jones Industrial Average is indicated up 43 points after yesterday’s 76-point loss. The US Dollar index is still, just, in positive territory for the week. It opened in Asia on Monday morning at 92.75 and is at 93.0 today. A busy week of US economic data finishes with the Empire manufacturing survey and November’s industrial production.
Thursday was another day of broad-based losses for the EUR which completely unwound all of Wednesday gains against the US Dollar and finished firmly in bottom spot on the one-day FX performance table. EUR/USD fell from a high of 1.1844 to 1.1765 with EUR/CAD tumbling from 1.5210 to 1.5020. At yesterday’s ECB meeting, new staff economic projections showed upward revisions to growth forecasts. 2018 GDP is now seen at 2.3% (previously 1.8%) with 2019 at 1.9% from 1.7%. 2018 CPI was nudged up from 1.2% to 1.4% though 2019 and 2020 were left unchanged at 1.5% and 1.7% respectively. The significance of the CPI forecasts is that on a 2-year horizon, inflation is not yet back at the ECB’s target of “close to but just below 2%”. This provides the justification for continuing the very accommodative monetary policy. The Introductory Statement after the meeting was basically a “copy/paste” job from October and Mr Draghi had so little to say the Press Conference actually finished 7 minutes ahead of schedule. EUR/USD opens in North America this morning at 1.1800 and EUR/CAD1.5050.
The British Pound had a much better day than might have been expected on Thursday, rising against most currencies except the newly-buoyant Australian Dollar and Canadian Dollars. Its best performance came – in order - against the NZD, EUR and USD. During the European morning today, the GBP has slipped back as investors try to interpret the political signals from across the English Channel. Ahead of an EU Leaders’ Summit today, Prime Minister Theresa May had dinner in Brussels yesterday evening to lobby for swift agreement on the terms of a post-Brexit transition period. According to Press reports, May told the leaders that the British government “makes no secret of wanting to move on to the next phase and to approaching it with ambition and creativity”. “I believe this is in the best interests of the UK and the European Union,” she said. “A particular priority should be agreement on the implementation period so that we can bring greater certainty to businesses in the UK and across the 27.” Just ahead of lunchtime in Brussels, European Commission President Donald Tusk tweeted, “EU leaders agree to move on to the second phase of #Brexit talks. Congratulations PM @theresa_may”. At its final meeting of the year, the Bank of England’s MPC voted unanimously 9-0 in favour of no change in Bank Rate. Its accompanying Statement read very cautiously, stressing that the pace of future rate hikes would be very gradual and limited in extent. It reiterated its judgment that that “inflation is likely to be close to its peak, and will decline towards the 2% target in the medium term.” Interest rate changes – if they are made – are more likely to be announced in months when there is also a Quarterly Inflation Bulletin and Press Conference. The cycle for this is February, May, August and November so we shouldn’t have to worry about a rate hike at the January MPC meeting. The Pound opens in North America this morning at USD1.3395 and EUR1.1350 with GBP/CAD at 1.7110.
The Australian Dollar is now on track for five consecutive daily gains; something it hasn’t done for several months. Those traders who observed the squeeze in the Kiwi Dollar on Monday and thought it might be prudent to scale back their Aussie shorts too most definitely did the right thing. From a low point of USD0.7502 last Friday, AUD/USD is up 175 pips and stands this morning at a 5-week high. There have been no fresh economic numbers in Australia today, leaving traders locally to focus entirely on the second day of the international cricket match against England in Perth. We wonder if this match can make it to a fifth day on Monday or whether investors can give the Government’s Mid-Year Fiscal and Economic Outlook (MYEFO) their full and undivided attention. Budgets in Australia don’t have the same drama as their British equivalent though they are far less drawn out than in the United States. They are only occasionally market-moving events but they do give the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability. The Australian Dollar opens in North America at 0.7675 with AUD/CAD at 0.9790.
The New Zealand Dollar rarely travels in a straight line. After three consecutive days of gains at the beginning of the week which took it back to US 70 cents for the first time since October 19th, on Thursday it retraced around half a cent to 0.6980. Overnight, it has bounced back on to 70 cents, helped in part by the strength of its Aussie cousin. Finance Minister Grant Robertson managed to avoid any traps set for him by a TV interview with CNBC. He said the New Zealand Dollar – the word’s 11th most widely traded currency – had slipped from very high levels and "We want a sustainable exchange rate that gives our exporters a fair go". Being careful not to give any hostages to fortune, he noted, "I am comfortable with the general trend but specific targets for the exchange rate are not ones for the finance minister." In other news overnight, Stats NZ has projected New Zealand's labour force (which includes both employed and unemployed people will keep growing, driven by an increasing population and people working into older ages. Currently 2.6 million people are in the labour force. The new projections indicate a total labour force of around 3.0 million in 2030 and 3.5 million in 2068. People aged 65 years and over (65+) will make up an increasing share of the labour force. In 1991, just 1 percent of the labour force was aged 65+. Currently the 65+ share is 6 percent; this is projected to increase to 9 percent in the late 2020s. NZD/USD opens in North America at 0.7025 with NZD/CAD steady at 0.8970.
- USD/CAD: 1.2800 - 1.2890 ▼
- EUR/USD: 0.6600 - 0.6660 ▼
- GBP/USD: 0.5835 - 0.5890 ▲
- CAD/AUD: 1.0145 - 1.0265 ▼
- NZD/USD: 1.1110 - 1.1220 ▼