Home Daily Commentaries NAFTA talks resume, Prime Minister Trudeau flies to Davos.

NAFTA talks resume, Prime Minister Trudeau flies to Davos.

Daily Currency Update

Last week’s trading in the Canadian Dollar was completely dominated by Wednesday’s first Bank of Canada monetary policy meeting of the year at which 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. After the dust settled, USD/CAD spent the next 48 hours firmly bounded by the immediate post-BoC range of 1.2385-1.2470 but in the very last hour of trading in New York on Friday moved up to end the week at 1.2500. Overnight in Asia and Europe, USD/CAD has eased around 35-40 pips to be back at 1.2465. The sixth round of talks on renegotiating the North American Free Trade Agreement, or NAFTA, is due to take place in Montreal from January 23-29th. In its Statement announcing the rate hike, BoC said the future of NAFTA was the most significant downside risk the economy faced. Canada sends about 75 percent of its exports to the United States. After spending the past two weeks all across the country speaking with ordinary Canadians in town hall meetings, Prime Minister Justin Trudeau must be the only leader going to the World Economic Forum in Davos to find the temperature warmer than at home! According to his office, one of the key pieces of Trudeau’s program will be the speech he

delivers on Tuesday. “It will be an opportunity to present our international priorities and to talk about the five themes of the G7 that we’ve already unveiled”. As well as the progress of NAFTA talks and headlines from Davos, currency traders will also be waiting Thursday’s November retail sales data and Friday’s CPI numbers. They’ll be keeping an eye too on energy prices after WTI crude last week hit a fresh 3-year high of $64.75 before ending the week around $63.50 per barrel. The Canadian Dollar opens in North America this morning at USD1.2465 and GBP/CAD1.7325.

Key Movers

Perhaps the most surprising feature of the Asian and European trading sessions has been that it took so long for the US Dollar to give back Friday’s gains. Last week, the USD index made four fresh lows on four different days at 89.99, 89.96, 89.92 and 89.89 before rallying on the final day to end around 90.35. At no point overnight has it traded higher than Friday’s close but it took almost 12 hours for the gains to be fully unwound and the index slipped to a low of 90.06 during the London morning. At midnight on Friday, the US government began to shut down; the first time ever that a party which controls the White House, Senate and House of Representatives has overseen a government shutdown. It is the 19th such occasion in the last 40 years. Four of these 19 have lasted just one day with the longest in 1995 lasting 21 days. During the last government shutdown in October 2013, 850,000 federal workers were laid off, equal to nearly 40% of the government workforce. The

shutdown lasted for 16 days, triggered by a disagreement over Obamacare. According to Standard & Poor’s, it cost the economy $24 billion. We don’t yet know the extent to which there is any genuine bipartisan desire to end the standoff. Senate majority leader, Mitch McConnell, has said he would allow a vote on immigration reform in February if Democrats agree to fund the government. The top Senate Republican said he would push for a Monday vote on a short-term deal to fund the government through 8 February, as well as extend a popular health insurance program called Chip that provides healthcare coverage to nine million children for six years. With no economic data scheduled for today, currency markets will continue to be buffeted by the progress – or otherwise – of political negotiations. It could be a very frustrating day. The US Dollar index opens in North America this morning at 90.10 with US 10-year bond yields at 2.65%; within 1bp of a fresh 40-month high.

Having briefly spiked to a fresh 2018 high of USD1.2303 on Wednesday, some deliberately plain and unsubtle verbal intervention from ECB Council members helped knock the EUR back down to 1.2220 by Friday’s close. Their task feels a little like holding balloon under water, though, and the euro has been back up to USD1.2260 this morning in Europe as traders try to figure out what the US shutdown might mean in the very near-term. The main event of the week ahead is of course Thursday’s ECB Council Meeting. After a totally unexpected shift in language in its summary of the last meeting, the big question is whether President Draghi will attempt to dial back market expectations around an actual shift in interest rate policy. He has form on this: at a meeting in Sintra, Portugal on June 27th last year, he spoke of a strengthening and broadening recovery in the Eurozone but then spent the last 2 months up to the Jackson Hole gathering in late August trying to undo the impact of his words on the euro exchange rate. Ahead of the ECB meeting, we have the German ZEW survey on Tuesday and then the preliminary Eurozone ‘flash’ PMI surveys on Wednesday and the ifo survey on Thursday morning. The EUR opens in North America this morning at USD1.2260 and EUR/CAD1.5280.

The Pound made a whole series of fresh 2018 highs last week, even though incoming economic data was generally soft and there has been no progress at all in Brexit negotiations. Instead, investors have been

piling in to a currency which looks fundamentally inexpensive and has plenty of positive momentum. After a quiet session in Asia overnight which saw GBP/USD in a range from 1.3760-90, it moved back on to a 1.38 big figure during the European morning. The week ahead begins very quietly in terms of market-moving economic releases though Prime Minister Theresa May will be at the World Economic Forum in Davos, Switzerland where she is scheduled to meet with US President Donald Trump. A Downing Street spokesman said the bilateral meeting would take place "in the margins" of the forum, though no further details were made public. On Wednesday we get the latest month unemployment and average earnings numbers and on Friday it’s the Q4 GDP numbers where consensus looks for a +0.4% q/q increase compared to the +0.5% rise which the Bank of England appears to have penciled in. The British Pound opens in North America this morning at USD1.3905, CAD1.7330 and AUD1.7350.

Last week, the Australian Dollar hit 80 US cents for the first time since September but stopped just 20 pips short of what would have been its best level in 32 months. Friday’s high was USD0.8035 whilst the high back on September 12th last year was 0.8052. It ended in New York on Friday around 0.7985 but after staying on a 79 cents handle through much of the Asian session, it is back now at 80 US cents at the end of the European morning session. The week ahead kicks off slowly for the AUD then gets even slower with the Australia day holiday on Friday January 26th; the day the commander of the First Fleet, Captain Arthur Phillip, rowed ashore at Sydney Cove, raised the Union Jack and proclaimed British sovereignty over part of the continent in 1788. Whatever the rights and wrongs of an increasingly controversial holiday, it is sure to be celebrated in some style as it conveniently starts a long, warm Summer weekend. There are no top-tier economic data releases locally this week, with nothing at all today then the ANZ Roy Morgan weekly consumer confidence numbers on Tuesday and the Westpac leading index and skilled vacancies numbers on Wednesday. The first RBA meeting of the new year is still more than a fortnight away and the currency is more

likely to be moved by news from the US and Davos, Switzerland than by anything at home. The AUD opens in North America this morning at USD0.8010 with AUD/CAD at 0.9985 and AUD/NZD1.0965.

The biggest surprise for the New Zealand Dollar today is how quiet it has been. Of the six major currencies we follow closely here, its position on the one-day performance charts over the past week was first, last, second, first equal and last equal. On Monday, NZD/USD got back on a US 73 cents big figure for the first time since the day after the General Election back in late September and was up over 5 cents from the November 8th low. On Wednesday it hit a best level for 2018 just under USD.7330 and closed in New York on Friday at 0.7275. This morning in Europe it has climbed back on to US 73 cents. The calm locally was explained by a partial holiday in New Zealand. Wellington Anniversary Day is celebrated on the Monday nearest to January 22nd and commemorates the arrival of the first settler ship to New Zealand in 1840. The settlers named the town they founded Wellington, in honour of the first Duke of Wellington, who had been victorious at Waterloo some 25 years earlier. Auckland has its own holiday next Monday, January 29th. After last Friday’s disappointment of the manufacturing PMI survey, Tuesday brings the performance of services index. The main focus of the week, though, will be Thursday’s quarterly CPI numbers which consensus estimates will be around +0.4% q/q and 1.9% y/y. The RBNZ’s published forecast is one-tenth lower on both measures. The New Zealand Dollar opens in North America at USD0.7310 with NZD/CAD at 0.9105.

Expected Ranges

  • USD/CAD: 1.2400 - 1.2505 ▼
  • CAD/EUR: 0.6525 - 0.6575 ▼
  • CAD/GBP: 0.5750 - 0.5805 ▼
  • CAD/AUD: 0.9970 - 1.0070 ▼
  • CAD/NZD: 1.0870 - 1.1040 ▼