Canadian Dollar awaits BoC Governor Poloz lunchtime speech
Thursday 14 December, 2017
Daily Currency UpdateThere’s been so much to keep the foreign exchange market busy over the past few days that the Canadian Dollar has largely been overlooked. For most of Wednesday, USD/CAD was trapped in a very narrow range even as oil prices fell quite sharply during the North American morning. With the US Dollar in a broad-based sell-off after the FOMC, USD/CAD fell 70 pips to 1.2800 but this was very much about the ‘Big Dollar’ rather than its Canadian cousin. Overnight in Asia and the London morning, the fall in USD/CAD has been largely reversed. Canada’s official statisticians yesterday released their always-fascinating annual survey of household spending. In 2016, households spent an annual average of $62,183 on goods and services ranging from clothing to communications; up 2.8% from 2015. Despite the overall increase in 2016, households still spent the same proportion of their total consumption on the three largest expenditure categories as they did in 2015: shelter (29.0%), transportation (19.2%) and food (14.1%). Canadian households spent an average of $18,032 on shelter in 2016, little changed from 2015. They paid an average of $16,293 for their principal residence (including rent, mortgage payments, repairs and maintenance costs, property taxes and utilities) and an average of $1,739 for other accommodations, such as owned secondary residences and hotels. On transportation, Canadian households spent an average of $11,909 in 2016, almost the same as 2015. On average, Canadian households spent $8,784 on food, also little changed from 2015. They spent an average of $6,176 on food purchased from stores, and an average of $2,608 on food purchased from restaurants. Today we’ll find out from BoC Governor what it is that keeps him awake at night when he speaks at an event in Toronto. Ahead of this, USD/CAD opens in North America this morning at 1.2820 with GBP/CAD at 1.7215.
Key MoversAfter seven days without a fall (six up and one unchanged) the USD was arguably ripe for a bit of a correction ahead of last night’s FOMC Statement and Press Conference. Having touched 93.81 on Tuesday, its index against a basket of currencies was already slipping back as the CPI figures were released. A softer than expected 1.7% y/y print for the core ex-food and energy number then pushed the USD index down almost 0.4% from Tuesday’s high. The Fed Statement 5½ hours later noted, “the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.” In its new economic projections, it revised up 2018 GDP forecasts from 2.1% to 2.5% with further more modest upgrades to the outlook in 2019 and 2020. Though two of the nine voting members dissented, there were no downward revisions to future ‘dot points’ and the belief that inflation would indeed pick up was again reiterated. Despite what looked to be a very non-controversial Statement and subsequent Press Conference, and even though equity markets reached yet more all-time highs, the Dollar extended its decline in the last 2 hours of trading in New York, with the index falling to a 1-week low of 93.00. Overnight in Sydney it printed at 92.95 but has recovered slightly off the lows to open in North America this morning at 93.05.
From the publication of US CPI figures until close of business in New York Wednesday, EUR/USD rallied almost a full cent from 1.1735 to 1.1825. This came after almost 10 days of underperformance which had seen the pair at one stage slip back to a 3-week low of 1.1723. Overnight in Asia and this morning in London, the EUR hasn’t been able to build on these gains despite another very strong set of ‘flash’ PMI data in the Eurozone. Markit’s Press Release was full of seasonal good cheer. “The eurozone economy picked up further momentum at the end of 2017, with December seeing the fastest growth of business activity for nearly seven years. The best factory output and order book gains since 2000 pushed the manufacturing headline PMI to a record high, while an upturn in service sector to growth to the highest since early-2011 underscored the broad-based nature of the current surge in activity”. We’ll find out shortly how the strong incoming data is feeding into thinking at the ECB when Mr Draghi hold his final Press Conference of the year. Going into the meeting, the main interest amongst analysts is the colour of Draghi’s tie. Yes, honestly!! If we look back over the last three years, there have been 5 announcements on QE. On four of these he wore a blue tie, the first three being the same blue tie he wore when he famously vowed to do “whatever it takes” to save the euro”. October was a light purple. Since January 2015, he has never announced a policy easing whilst wearing a red tie. So, if you’re at your screens for 2.30pm Frankfurt time, watch to see how EUR/USD reacts as he walks into the Press Conference. Maybe he’ll fool everyone and wear a green tie to match the Christmas tree outside the ECB building… The EUR opens in North America this morning at USD1.1835 and CAD1.5175.
As Wednesday drew to a close, a quick look at the GBP/USD exchange rate would suggest it had been a good day for the British Pound. This would be a misleading conclusion. Instead, it was a bad day for the US Dollar which fell ahead of the FOMC Statement and then even more sharply in the final couple of hours of the New York session. The GBP ended the day up against the USD and CAD, unchanged versus the EUR but fell against both the Australian and New Zealand Dollars. Just as investors were digesting the Fed Statement came news that the UK Government had been defeated on one of last night’s four parliamentary votes on Brexit. The implications of this for the British Pound appear somewhat mixed. On the one hand, any defeat for the Prime Minister is something which will weaken her authority and arguably put her in a weaker negotiating position in Brussels. On the other, the substance of the 24-word Bill is to give Parliament a vote on the final terms of the Brexit deal. Essentially, it means that MPs could reject the terms of any withdrawal — or amend the legislation to delay Brexit — if they are not satisfied with the deal negotiated. In the event of “no deal” the amendment could be used by MPs to try to reverse Brexit. To the extent that it leaves the door open to a rejection of Brexit, this could perhaps be interpreted as a GBP positive, albeit not one which we’d put much weight on right now. For today, November retail sales rose a faster than expected +1.1% in November though the official statisticians cautioned they are having problems adjusting for the impact of Black Friday/Monday promotions and internet sales. Electrical household appliances, for example, jumped by nearly 9% in one month. The Bank of England 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.”. The Pound opens in North America this morning at USD1.3425 and EUR1.1345, with GBP/CAD at 1.7215.
The Aussie Dollar had a good day on Wednesday, getting back on to a US 76 cents big figure for the first time in just over a week even before the FOMC Statement. This was partly because the Westfield takeover has prompted thoughts of some ‘pre-hedging’ of the foreign exchange transactions associated with the deal and partly because traders didn’t want to be caught short of AUD ahead of today’s Australian labour market report. Those who closed out short positions were right to do so. Consensus estimates were for a 19,000 increase in employment with the jobless rate steady at 5.4%. According to the Australian Bureau of Statistics (ABS), employment actually jumped by 61,600 to 12.4 million in November. It was the largest monthly increase since October 2015, whilst the previous month’s figure of +3,700, was also revised up to show a gain of 7,800. The figures are arguably not quite as good as they look. Every month the sample of the population in the survey is rotated and it appears the incoming group may have had higher levels of employment than those who left the survey. Nevertheless, the rest of the report was very strong indeed. Full-time employment jumped by 41,900 to 8.5 million, beating a 19,700 increase in part-time employment which rose to 3.9 million. Over the last 12 months, full-time employment has increased by 304,600, far outpacing a 78,700 increase in part-time employment. Combined, total employment increased by a huge 383,300. Reflecting the strong rise in employment, the total number of hours worked by all Australians increased by 9.8 million hours, or 0.6%, to 1.7409 billion hours. Having reached a pre-FOMC high of 0.7612, the Aussie Dollar extended its gains in New York on Wednesday evening to a best level just above 0.7630 (the highest in 8 days). It has advanced further overnight and opens in North America at 0.7665 with AUD/CAD up at 0.9835.
The Kiwi Dollar had held on to a US 69 cents big figure ever since 06.00am London time on Monday morning and reached a 3½ week high of 0.6995 even before last night’s Fed Statement. After Janet Yellen’s final FOMC Press Conference, the US Dollar suffered a sharp and broadly-based sell-off. NZD reached US 70 cents for the first time since October 19th. Overnight, the new Labour-led Government in New Zealand released its Half-Year Economic & Fiscal Update. It forecast that economic growth would average close to 3 per cent over the next five years, peaking at 3.6 per cent in 2019. Unemployment is also forecast to fall to 4 per cent, despite hikes in the minimum wage pushing wage growth significantly higher. forecast that economic growth would average close to 3 per cent over the next five years, peaking at 3.6 per cent in 2019. The forecast sees revenue growth rising sufficiently to see net debt fall to below 20 per cent of gross domestic product by 2022, a core promise of Finance Minister Grant Robertson. The general consensus amongst analysts locally is that the Government is being too optimistic and has presented what is more likely a “best-case” scenario. Responding to criticism, Treasury secretary Gabriel Makhlouf said the forecasts assumed the sharp drop in business confidence since the election was assumed to be only temporary and would soon rebound. NZD/USD is around 30 pips below its best pre-FOMC level and opens in North America at 0.6995 with NZD/CAD down a quarter of a cent at 0.8975.
- USD/CAD: 1.2800 - 1.2890 ▼
- EUR/USD: 0.6575 - 0.6625 ▼
- GBP/USD: 0.5785 - 0.5830 ▼
- CAD/AUD: 1.0140 - 1.0215 ▼
- NZD/USD: 1.1100 - 1.1185 ▼