Canadian Dollar soft despite BoC Poloz’s weekend comments.
Monday 18 December, 2017
Daily Currency UpdateThe highlight of last week for the Canadian Dollar was a speech on Thursday from Bank of Governor Stephen Poloz. The overall message of the 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.”
Currency markets loved what they heard. USD/CAD tumbled a full cent on Thursday to a one-week low of 1.2735 and it was the best performing currency of the entire day, gaining even against a buoyant Australian Dollar. On Friday, however, the CAD was unable to resist in the face of the US Dollar’s late surge and USD/CAD ended the week very little changed from where it had begun at 1.2870.
Over the weekend, the Governor gave an interview to the Globe and Mail newspaper in which he played down the importance of so-called forward guidance. “I'm confident that other central banks, now that we are getting much more into normalcy, will gradually temper down the details around their forward guidance, too… I'm not going to judge whether the market got it right or not. But it does seem like the market has a tendency to seize on a new word as if it's a new secret code. Caution does not mean sitting back and doing nothing.”
For the moment, the Canadian Dollar hasn’t yet responded to these latest comments and for the week ahead, there’s still plenty to come on the Canadian economic data calendar. Wednesday is wholesale trade, Thursday is CPI day and on Friday it’s the monthly GDP numbers for October. First up today, though, are numbers on international securities transactions and consumer confidence.
USD/CAD opens in North America this morning at 1.2880 with GBP/CAD at 1.7220.
Key MoversThe Dollar had a very volatile week but its index against a basket of major currencies ended almost exactly where it had begun at 93.50.
Record highs for the stock market brought the dollar’s high for the week on Tuesday at 93.81 before a Senate election defeat in Alabama reduced the Republican majority in the Senate to just one seat. The USD turned lower and despite what looked to be a very non-controversial FOMC Statement and subsequent Press Conference, extended its decline in the last 2 hours of trading in New York, with the index falling to a 1-week low of 92.95.
From the New York opening on Friday, however, stocks began to surge on news that the last Republican hold-out on tax reform was now going to offer his support after being offered some concessions on child care provisions. The S+P 500 index jumped a stunning 25 points to a fresh closing high, dragging the USD index up three-tenths to end a volatile week exactly where it had begun at 93.50.
Overnight in Asia and this morning in Europe, the Dollar has slipped just over a quarter of a point to 93.20. All eyes are on the passage through Senate of the tax reform bill. Vice President Mike Pence has delayed a trip to the Middle East as the Republican majority is so slim the party can’t afford even to have one Senator away. Stock index futures are up yet again, however, with another 13-point gain for the S+P 500 and the DJIA called up 150 points at would be yet another all-time high around 24790.
The Euro had another generally disappointing week, failing to gain any upside traction even as incoming data continued to show the economic recovery in the Eurozone to be broadening and deepening. It opened in Asia last Monday morning at USD1.1765 but on Tuesday it fell to the week’s low of 1.1724 on reports that Italian parliamentary elections would be held on March 4th. Wednesday’s post-FOMC Dollar sell-off saw EUR/USD jump more than a cent, and on Thursday morning, it reached its best level of the week at 1.1843, helped by very strong purchasing managers surveys. By Friday’s close, the EUR had given up all of Thursday mornings gains and more; ending in New York at the session lows of USD1.1751 as the USD surged in a very illiquid market.
In overnight trading in Asia this Monday morning, the EUR gained around 20 pips to 1.1765 with EUR/CAD up a similar amount at 1.5160. During the European morning, we’ve had a very dovish speech from ECB Council member and Bank of Finland Governor Erkki Liikanen and the details of the final Eurozone CPI numbers for November.
Ms Liikanen said the recovery of the Euro area economy and reduction of economic slack supports confidence in inflation converging towards our inflation aim in due course but, “An ample degree of monetary stimulus is still required for underlying inflation pressures to continue to build up and support headline inflation developments over the medium-term”.
Inflation in the Eurozone was confirmed at 1.5% y/y in November. This was boosted by higher energy prices (which are now up 4.7% y/y) whilst food, alcohol and tobacco eased back to 2.3%. Core CPI rose just 0.9% y/y, in line with the preliminary estimate and it is for this reason that the ECB persisting with a very easy monetary policy even as the real economy is accelerating at a pace not seen since well before the GFC.
So far this Monday morning, the EUR is – just – the strongest of the major currencies. It opens in North America at USD1.1795 and CAD1.5190.
The British Pound ended last week as the worst performer amongst all the major currencies and is also in bottom spot on the month-to-date performance chart.
This morning, (542 days after the referendum) a UK government subcommittee began talks on what kind of relationship Britain wants to have with the EU. This comes one day ahead of a full Cabinet meeting to decide what it wants from the negotiations. The Brexit secretary, David Davis, has suggested a “Canada plus plus plus” deal, broadly based on the EU’s trade deal with Ottawa, but covering services, including financial services, and allowing closer ties because the volume of trade covered is so much larger.
Foreign Secretary Boris Johnson wrote yesterday in a newspaper article that, “What we need to do is something new and ambitious, which allows zero tariffs and frictionless trade but still gives us that important freedom to decide our own regulatory framework, our own laws and do things in a distinctive way in the future”.
Whatever is decided on the UK side, the EU still holds all the aces in the Brexit negotiations. According to The Times newspaper, Michel Barnier, the lead EU Brexit negotiator, told Prospect magazine that “no way” could there be a bespoke trade deal that mixed those that applied to Canada and Norway. “There won’t be any cherry picking,” he said.
The Prime Minister always gives a statement to the House of Commons after EU summits. These used to be extremely dull, with little information content, but they have now become Brexit updates and major Westminster events. A long time has passed since Foreign Secretary Boris Johnson’s confident claim that he was “pro-cake and pro-eating it” but this afternoon in London we’ll hear if Mrs. May remains similarly upbeat.
The Pound opens in North America this morning at USD1.3370 and EUR1.1335 with GBP/CAD at 1.7220.
The Australian Dollar has just enjoyed its best week for several months; rising for four consecutive days then only finally giving ground to a resurgent US Dollar in the last few hours of trading in New York on Friday evening. Over the course of the whole week, the Australian Dollar was the second-best of all the major currencies we track here; just knocked off top spot by the Kiwi Dollar.
The main event in Australia today was the Government’s Mid-Year Fiscal and Economic Outlook (MYEFO). This update traditionally gives the Government a good opportunity to make soothing noises to the international ratings’ agencies about economic growth and debt sustainability. In this regard, today’s MYEFO was exactly as expected.
The Government continues to forecast a return to budget balance in 2019-20 and then a surplus of $10.2bn in the 2020-21 fiscal year. A slowdown in the housing market and slower growth in wages have reduced the estimate of 2017-18 GDP from 2.8% to 2.5% though the unemployment rate is now seen a quarter of a percent lower at 5.5% and CPI has been left unchanged at 2.0%.
The initial reaction from the credit agencies was broadly positive. Moody’s said, “Overall, the modest changes in Australia’s fiscal and economic outlook maintain a credit-positive commitment to returning the budget to a surplus in fiscal 2021.
Moody’s continues to see risks that fiscal deficits will be wider for longer than the government projects. This reflects our expectation for more subdued nominal GDP growth than over the past decade, a consequent dampening of revenue generation and a testing climate for spending restraint. The mild reduction in the expected profile for wages growth embodied in the forecasts remains a concern.”
The AUD opens in North America this Monday morning at USD0.7660 with AUD/CAD at 0.9865.
The New Zealand Dollar ended a volatile week at the top of the pile; the best performer amongst all the major currencies.
After jumping almost a full cent on news of a new Governor at the RNBZ, NZD/USD broke above the late November high of 0.6943 and the much-improved technical chart picture left it well positioned to capitalise on the USD weakness after the FOMC Statement on Wednesday evening. By the New York close, NZD/USD was on a 70 cents handle for the first time since October 19th. On Friday it reached a fresh high for the week of USD0.7027 before succumbing to the US Dollar’s late surge to finish the week in New York at 0.6990.
Overnight in Asia, the NZD has had another good day. The BNZ performance of services index rose 0.7 points to 56.4 last month, above its long-term average of 54.4. All of the five sub-indices were above the 50 reading that separates contraction from expansion. The survey's new orders sub-index posted the highest reading, rising to 60.7 from 60.3, while activity/sales advanced to 60.5 from 58.2. This was the seventh consecutive month the new orders index has been above the heady level of 60 though the survey's employment sub-index continued to be a relatively softer component of the PSI; printing at just 50.6 from 51 in October.
The week ahead is packed with economic data as the official statisticians clear their diaries ahead of the local holiday season. Q3 GDP figures will finally be published on Thursday with growth expected to slow to 0.6% in the quarter for an annual pace of 2.4 per cent, whilst tomorrow we’ll get to see if the sharp fall in November business confidence has been at all reversed.
NZD/USD opens in North America this morning at 0.7005 with NZD/CAD at 0.9020.
- USD/CAD: 1.2840 - 1.2895 ▼
- EUR/USD: 0.6510 - 0.6615 ▼
- GBP/USD: 0.5780 - 0.5835 ▲
- CAD/AUD: 1.0100 - 1.0205 ▼
- NZD/USD: 1.1025 - 1.1170 ▼