CAD finds support ahead of OPEC meeting
Tuesday 21 November, 2017
Daily Currency UpdateThe Canadian Dollar continues to track oil prices quite closely. On Monday, a slightly firmer US Dollar and lower NYMEX crude prices pushed USD/CAD to 1.2812; its highest level since November 2nd. In London this morning the pair traded as high as 1.2835 before settling just below 1.28 at the North American opening. The 173rd OPEC meeting starts in Vienna next Thursday and we’re approaching the point where normally there’d be lots of talk about production cutbacks and quota ceilings but it hasn’t happened yet and NYMEX crude is only 10 cents firmer around $56.60. Last week, Bank of Canada Senior Deputy Governor Carolyn Wilkins said the central bank had decided to advance the timing of speeches providing economic updates to “align them more closely” with its interest rate decisions. Unfortunately, these speeches are going to come after BoC meetings in order to “explain the thinking”. A sceptic might call this ‘backward guidance’ as its certainly no help to predicting future decisions! Instead, as the market awaits fresh economic data, the focus is on Canadian wholesale sales numbers this morning and retail sales on Thursday. As the OPEC meeting approaches, however, keep a close eye on those oil prices for clues to the CAD.
Key MoversThe US Dollar is trading as though the Thanksgiving holiday is already here. Its index against a basket of currencies opened the week around 93.50, but slipped in Monday to test the big support level we’ve been highlighting at 93.30. By the close of business in New York yesterday, renewed jitters over the German political situation weighed on the EUR and pushed the USD index around 40 pips off its low. In the Asian session overnight, it traded to 93.78 but has been exceptionally quiet through the European morning and opens around this level today. There are no US economic data today other than existing home sales which rarely shift the market dials much. Instead, ahead of tomorrow’s FOMC Minutes, outgoing Fed Chair Janet Yellen is at Stern Business School in New York this afternoon in an event billed as “In conversation with Mervyn King”. Whether her resignation yesterday loosens her tongue remains to be seen though note the CME probability calculator shows a 91.5% chance of a 25bp rate hike on December 13th with a scarcely-believable 8.5% probability of a 50bp move.
The EUR has very modestly extended the losses it suffered on Monday. Having closed in New York last night around USD1.1735, it managed a best level in Europe earlier today of USD1.1750 but is around 25 pips easier at the North American open. Against the Canadian Dollar, EUR/CAD had a very brief spike up to 1.5070 overnight but this was more than fully reversed and the pair opens at almost exactly 1.5000. With no fresh incoming economic data, the focus of attentions remains very firmly on German politics. We can summarise the four options facing Chancellor Merkel quite simply: She can try to struggle along with a minority government which then risks being defeated in Parliament on any single issue. She can call fresh Federal elections and hope to increase her party’s 33% share of the vote it won in September. She can try to form a Coalition with the SPD who have already rejected this option. Or she can try to restart Sunday’s failed talks in the hope that the FDP’s leader might cop the blame for the instability and be prepared to renegotiate. None of these four options look particularly appealing to Ms. Merkel and none of them provide the solid and stable leadership the EU needs during Brexit negotiations. Flash PMI data on Thursday might help switch investor attention back on the Eurozone economy, but for now politics are weighing on the euro.
The British Pound extended its recent gains with GBP/USD hitting a best level overnight of almost 1.3280 before opening in London at 1.3250 and then down to 1.3235 at the North American opening. Against the Canadian Dollar, GBP very briefly traded on to a 1.70 big figure but has subsequently fallen back to 1.6925. Talk this morning is that after a meeting of the Cabinet sub-committee on Brexit, Prime Minister Theresa May is prepared to increase the financial offer to the EU in an attempt to break the negotiating deadlock. No figure will be made public at present but it is expected to be put to the EU side at least a week before the next European Council on December 14 and 15. The ‘usual suspects’ on the Conservative benches are all over the British newspapers this morning arguing that not a penny more should be offered, but it is increasingly clear that the EU will not move on until the so-called divorce bill is settled. Elsewhere, BoE Deputy Governor Dave Ramsden gave his first official speech in London yesterday evening saying he had a “somewhat different” view of the economy to most of his colleagues. “I attach some weight to the idea that workers have responded to the changing outlook by showing greater flexibility in their wage demands… If true it would mean there is a little more room than headline measures of slack suggest for the economy to grow without generating above-target inflation in the medium term”. For the moment the GBP is not really being driven by interest rate expectations. Instead, it’s all about relative risks externally and how domestic politics will play out after Wednesday’s UK Budget speech.
The Aussie Dollar had looked fragile ahead of the RBA Minutes which were closely examined for reasons to knock it even lower. The RBA said, “retail sales had been weak in the September quarter, which was expected to translate into lower quarterly consumption growth than in the June quarter. Members noted that the outlook for consumption growth depended on the outlook for household income growth, which remained uncertain. They discussed the possibility that households might change their consumption and saving decisions if the period of low income growth persisted”. For interest rate and FX markets, the key phrase in the Minutes was, “there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure. In particular, they noted that, among other factors, pressure on margins from strong competition and a faster-than-expected pick-up in productivity growth could delay the pass-through of tighter labour market conditions to inflationary pressure.” The AUD fell from USD0.7557 to 0.7533 overnight but then caught a bid during the London morning to open in North America today around USD0.7575. Against the Canadian Dollar, the AUD is also a bit higher having clawed its way on to a 76 cents handle after overnight lows around 0.9650.
The decision for currency traders as they look at the Australian and New Zealand Dollars is which one they dislike least. A look at the AUD/NZD cross rate shows they couldn’t decide on Monday (just 20 pips separated the highs and lows for almost 24 hours) but this morning the Kiwi has underperformed its Aussie cousin. AUD/NZD is back above 1.11 and has its sights on Fridays high around 1.1125. It hasn’t been up to 1.12 at any point in November. NZD/USD managed to stay on a US 68 cents handle throughout the Northern Hemisphere’s trading sessions on Monday and having dipped briefly into the high 0.67’s overnight (a 19-month low), it is back at 0.6820 as North America opens. NZD/CAD is at 0.8730; almost a cent above the 2017 low of 0.8645 which it hit last Friday. New Zealand’s trade-weighted exchange rate (TWI) is now well below the 73.5 average level the Reserve Bank is projecting for the fourth quarter and the RBNZ's latest forecasts have only two rate hikes penciled in between now and December 2020. The 90-day bank bill rate fell to a record 1.91 percent on Friday last week and with commodity prices generally looking soft, it seems that profit-taking on short NZD positions is the only near-term positive for the currency.
- USD/CAD: 1.2760 - 1.2840 ▼
- EUR/USD: 0.6630 - 0.6690 ▲
- GBP/USD: 0.5890 - 0.5935 ▼
- CAD/AUD: 1.0280 - 1.0350 ▼
- NZD/USD: 1.1415 - 1.1550 ▲