The Loonie continues in correction mode following a price consolidation in crude oil WTI.
Monday 14 January, 2019
Daily Currency UpdateThe USD/CAD pair traded within a wide range last Friday of almost 100 pips; from 1.3183 to 1.3279 as crude oil WTI prices decreased more than 1 percent and Canadian bond prices rose across a flatter yield curve. However, last week, the Bank of Canada said that the challenges facing the economy were temporary. This morning, the USD/CAD is rising only 0.05 percent (weaker Loonie), despite a decrease of 1.64 percent in the price of crude in a risk-off environment. Furthermore, global stocks and US futures fall after China’s trade data miss as well as the US Treasuries, Yen, and gold gain. Chinese trade data posted the worst performance since 2016, with imports falling 7.6 percent and exports drifting 4.4 lower. This is seen as a direct result of China’s trade war with the US. The three-month correlation between the Canadian dollar and oil has climbed to about 90 percent.
Key MoversThe US dollar index increased 0.23 percent last Friday after losing more than 2.3 percent in the previous 30 days. This morning, the US dollar index has barely moved. Additionally, the Euro has been quiet and has traded at around 1.1465 over the last 12 hours. The US dollar keeps looking to the broad risk-appetite trends for direction, while market participants continue to adjust to Friday’s inflation figures for December, which were in line with previous estimates. Nothing is scheduled today in the US calendar. US producer price inflation will be released tomorrow. If figures tomorrow indicate that inflationary pressures are cooling, there could be a further reprieve from concerns over the prospect of additional rate hikes in the coming months. Some Fed officials will also be speaking this week. Speeches from Fed’s Kashkari, George and Kaplan will give additional opportunities to reassure market watchers that they will take a patient approach towards monetary policy. In other news, China, the second largest/most influential economy in the world, will press on with economic liberalization in 2019. According to an interview by MNI with U.S. former commerce minister Wei Jianguo, this will make it easier to resolve trade disputes. Wei said that policies could include reforms of state subsidies and state-owned enterprises and improving market access for foreign financial institutions. Additionally, he noted that many of these policies coincide with demands made by the U.S. in trade talks, and would likely comply with the 90-day window accepted by presidents Xi Jinping and Donald Trump.
The Euro has lost some ground since Friday as risk aversion sees the shared currency pare some of its recent gains against the dollar. It seemed like the Euro had finally got a handle above 1.15 after breaking out of its current ranges; however, the move has been short-lived as concerns linger over the health of some of the Euro Zone’s largest economies. Germany has been stricken by falling demand from China and to a lesser extent the UK of its exports. There is a chance the world’s fourth-largest economy could slip into recession when Q4 GDP figures are released early next month. Italy has also been hit by a slowdown in output, which was accentuated by its recent budget negotiations. Italian GDP tracked lower throughout 2018 and may print negative when Q4s preliminary reading is announced on Feb 1st. The EUR/USD sits at 1.1465 this morning.
It’s the start of another crucial week for Theresa May with her Brexit withdrawal agreement due to be voted on in the House of Commons tomorrow evening. Defeat for the plan is all but assured; however, it is the margin of defeat and what happens after that which will be the primary mover of the Sterling. Should May succumb to a narrow(ish) defeat of 60-80 votes, then that may encourage the EU to issue some further comment regarding the Irish border to try and win over hardcore Tory Brexiteers to agree to May’s plan. If, as expected, the margin of defeat is closer to 200 votes, then the EU may decide to keep quiet and see how events play out. Once defeated, the government will have to put forward another plan within three legislative days, which means another vote could take place on Monday the 21st. It seems increasingly likely that Labour leader, Jeremy Corbyn is going to issue a vote of no confidence in the government should it lose the election, which could open the door to a softer Brexit. There is also the possibility that we could see MPs table a motion that the UK is not allowed to leave the EU without a deal. With limited time for any of these permutations to play out, it seems more and more likely we will get some extension to Article 50. The chances of another referendum and the UK not leaving altogether are also increasing, especially seeing as EU courts recently gave the UK the unilateral right to cancel Brexit if it wished. This is likely the reason GBP/USD is up above the 1.28 handle this morning, as any hint of Brexit not happening or at least being delayed is pound positive. As a footnote, we also have CPI and Retail Sales numbers from the UK this week; expect these to be entirely overlooked by the fx markets. The GBP/USD pair is trading at 1.2841 this morning.
The proxy for Chinese economic sentiment, the Aussie dollar, is back under 0.7200 against the US dollar as the poor export numbers from China weigh on global risk sentiment. Japanese markets are closed today for Coming-of-Age Day however all other major Asian and European bourses are trading lower as the week gets going. The AUD/USD pair is trading at 0.7191 at the time of this writing.
The NZD/USD briefly dipped below the 0.68 handle during the Asian session however some support has been restored to its value over the past couple of hours. It currently trades at 0.6818 at the time of this writing.
- USD/CAD: 1.3227 - 1.3305 ▼
- CAD/EUR: 0.6532 - 0.6595 ▲
- CAD/GBP: 0.5823 - 0.5955 ▼
- CAD/AUD: 1.0387 - 1.0520 ▼
- CAD/NZD: 1.1000 - 1.1065 ▲