CAD steady after ‘dovish’ rate hike
Thursday 18 January, 2018
Daily Currency UpdateThe Bank of Canada finally put the market out of its misery yesterday. In line with the majority expectation, it raised rates 25bp to 1.25%. The initial reaction in FX markets was the usual mix of algorithm-driven stop-loss and stop-entry orders as the headlines flashed across the screens. Your author was watching a tick-chart of prices and in the space of less than 20 seconds, USD/CAD moved up from 1.2420 to 1.2540, down to 1.2375 and back to 1.2500.
The main points from the BoC Statement were that, “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.” On the domestic economy, “Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive. Exports have been weaker than expected although, apart from cross-border shifts in automotive production, there have been positive signs in most other categories”.
Looking forward, “consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank's outlook takes into account a small benefit to Canada's economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.”
The two mentions of NAFTA in the Statement and the sentence that “some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential” mean we should probably characterize the BoC move as a ‘dovish hike’; hence the volatility as the headlines were released.
As the dust settles, the Canadian Dollar opens in North America this morning at USD1.2435 and GBP/CAD1.7240.
Key MoversWednesday was a very fluid day for the US Dollar. Its index against a basket of major currencies tumbled to a 2018 low in Sydney of 89.93, recovered by lunchtime in Europe to 90.43 then lost half a point to another fresh low of 0.8990 in the New York afternoon before rallying 40 pips to 90.30. At times it was hard simply to keep up with the shifting price action.
The volatility in FX was replicated across asset classes. A 367 point intra-day plunge in the DJIA on Tuesday was partially reversed by the close and yesterday the futures market added another 300 points to be back on a 26k handle and a fresh all-time record high. This Wednesday morning, stock index futures are indicating a flat open.
All these wild price swings across asset classes have come against a background where the US economy continues to perform very well. After last week’s higher core inflation and retail sales numbers, industrial production surged +0.9% in December as unseasonably cold weather at the end of the month boosted demand for heating. For all of 2017, industrial output rose 1.8% the first increase since 2014.
According to the Federal Reserve Beige Book released at 2pm in Washington, the US economy and inflation expanded at a modest-to-moderate pace from late November through the end of 2017, while wages continued to push higher. “Most districts said that wages increased at a modest pace… A few districts observed that firms were raising wages in a broader range of industries and positions since the previous report… Firms in some districts noted an ability to increase selling prices. Retailers in some districts reported modest price increases and there were reports of rising home prices across the country,”.
The focus today shifts to the property market with figures on housing starts and building permits. We’ll also get the Philly Fed business survey as well as the weekly jobless claims numbers. Ahead of all that, the US Dollar index opens in North America morning at 90.25 but keep an eye on US 10-year bond yields at 2.60%.
The EUR underperformed the USD for much of the day on Wednesday and after a yo-yo session in New York it finished in bottom spot in our one-day performance table. Overnight in Asia, EUR/USD has been down to a low of 1.2165 but has subsequently regained around three-quarters of a cent and in the toady’s European session it has been the strongest of the major currencies.
There have no Eurozone data releases of any note, though Bundesbank President Jens Weidmann and IMF Managing Director Christine Lagarde have been speaking at a joint conference in Frankfurt. The German central banker defended his country’s record budget and current account surpluses after criticism from the International Monetary Fund that they are hobbling growth in the euro zone and widening global economic imbalances. “Raising public spending in order to reduce Germany’s current account surplus would likely be a futile undertaking”, he said.
To give an idea of the scale of the numbers, Germany’s current-account surplus over the 12 months through November totalled 262 billion euros ($320 billion). The budget surplus was 1.2% of gross domestic product last year, the biggest since reunification in 1990 and the fourth in row. German manufacturers and exporters are loving the level of the euro.
The Frankfurt conference, at which ECB Executive Board member Benoit Coeure and former Italian Prime Minister Mario Monti are among speakers, is scheduled to examine why growth in German wages remains so weak. Weidmann said migration from other European Union member states is partially responsible for muted wage pressures. Labour unions are also playing a part by insisting on reduced working hours and more training instead of higher pay.
The EUR opens in North America this morning at USD1.2235 and EUR/CAD1.5220.
It is not quite at Bitcoin levels of randomness and volatility, but the British pound yesterday evening had another totally unexplained surge and reversal with no incoming news at all to support it. Having rallied from a low in early European trading of USD1.3760, the GBP was chased up to another fresh 2018 peak of 1.3837 just before London traders headed for home. By the time they got to their front doors, GBP/USD had added another cent to a post-referendum high of 1.3930, yet by bedtime, it was back down at 1.3810. In Europe this morning, it has rebounded to 1.3875.
Overnight, the Royal Institution of Chartered Surveyors released its always excellent monthly report on the UK residential property market. The headlines showed the UK housing market continued to display a lack of momentum in December, with buyer interest edging lower whilst changes to Stamp Duty for first time buyers are having little immediate effect.
In December, activity in the UK housing market continued to drop. After new buyer enquiries came close to stabilising in November, 15% more respondents noted a decline in demand (as opposed to an increase) in the month of December. Furthermore, when contributors were asked whether they have seen an increase in first time buyer enquiries following changes to Stamp Duty in the Autumn Budget, an overwhelming majority of 86% across the UK said they hadn’t.
Agreed transactions also fell at the national level with 13% more respondents reporting a decline in volumes over the month. Significantly, Scotland, Northern Ireland and the North East region were the only areas to suggest stronger transactions, whereas sales trends were either flat or negative across the rest of the UK. It could be a very long Winter for real estate professionals.
The British Pound opens in North America this morning at USD1.3880, CAD1.7270 and AUD1.7370.
The Aussie Dollar certainly had an interesting session in the Northern Hemisphere on Wednesday. At the London opening it was down to 0.7945 but then was bought steadily and persistently through the European day and in the New York afternoon had regained all its prior losses and more to be back on US 80 cents for the first time since September and on to an intra-day high of 0.8021. Within a few hours it had lost three-quarters of a cent to 0.7955.
Overnight, the big news locally has been the Australian labour market report. According to the Australian Bureau of Statistics (ABS), employment rose by a seasonally adjusted 34,700, beating consensus expectations of a 15,000 increase. Employment has now increased in each of the past 15 months, which equals the longest consecutive streak on record. One more positive month in January, would be the longest uninterrupted period of jobs growth since the survey began in 1978.
Full-time employment increased 15,100 to 8,518,900 in December and part-time employment increased 19,500 to 3,921,800. The ABS noted that, "Full-time employment has now increased by around 322,000 persons since December 2016, and makes up the majority of the 393,000 net increase in employment over the period," It was the fastest growth over a calendar year on record, and the second fastest over any 12-month period, only beaten by a 409,300 increase in August 2005.
For all the positive headlines, the AUD was strangely unmoved. It had twice surged on absolutely nothing during the day yet an extremely good labour market report gave it no lift whatsoever. Perhaps it was news that the unemployment rate however rose to 5.5% from 5.4%. This was due to much stronger labour-force participation which might indicate some further spare capacity in the labour market and therefore a lack of wage pressure.
After a session in which European traders seemed to like the employment report more than their Australian colleagues, the AUD opens in North America this morning at USD0.7990 with AUD/CAD at 0.9950 and AUD/NZD1.0960.
The New Zealand Dollar is up more than half a cent from Wednesday’s low of USD0.7230 but hasn’t yet been back on to a US 73 cents big figure in either the Asian or European sessions. Of course, we’re not yet half-way through the Northern Hemisphere day and if yesterday’s experience is any guide, NZD/USD could move up and down by a full cent on several occasions before the close of business this evening.
We note here that China’s delayed fourth quarter GDP figures were released this morning. These showed annual growth was unchanged from the 6.8% pace seen in Q3; a tenth higher than consensus estimates. Ordinarily, these figures might offer some support to an export-dependent currency such as the New Zealand Dollar but its volatility has been so great over the last 4-5 weeks that the data sometimes don’t seem to matter.
Of much more interest is the Department of Internal Affairs data on baby names. Charlotte and Oliver have topped the list of New Zealand’s most popular baby names for 2017. Charlotte is up from second last year whilst 2017 marks the fifth year in a row that Oliver tops the boys’ list. Taking a longer historical view, analysis by stuff.co.nz shows Michael is the most popular name of the past 60 years in New Zealand. More than 40,000 babies have been named Michael since 1954, after which comes David (36,792), James (27,224) and John (26,867). All the names in the Kiwi top 10 are male. The top-ranking girls' name is Sarah, at number 12, which has been given to 19,901 babies in the past 60 years, followed by Karen at number 22 (13,524) and Emma at number 23 (13,245). We might not be able to explain why the NZD is going up or down, but we know the names of those who it affects!
The New Zealand Dollar opens in North America at USD0.7295 with NZD/CAD at 0.9085.
- USD/CAD: 1.2375 - 1.2470 ▼
- CAD/EUR: 0.6545 - 0.6600 ▼
- CAD/GBP: 0.5770 - 0.5830 ▼
- CAD/AUD: 1.0000 - 1.0140 ▼
- CAD/NZD: 1.0870 - 1.1085 ▼