Poloz’s speech added to the bearish narrative of the Loonie.
Friday 22 February, 2019
Daily Currency UpdateThe USD/CAD pair has been feeling the pressure from the “risk-off” environment in North American equity when Bank of Canada’s Poloz spoke and said that the path back to a neutral range is ‘highly uncertain’ due to housing and investment. This situation can provide the narrative to make a bullish case for the USD/CAD (bearish Loonie), because of the lack of investment linked to a deteriorated state of global uncertainty. Additionally, USMCA implementation risks have risen, which will continue to undermine capital flow support in Canada.
The medium-term outlook for the Loonie is starting to deteriorate and the balance of external risks to the Loonie has shifted to the downside. Unless the crude oil WTI begins to rise sharply towards the 70s, it might not look pretty for the Loonie. Furthermore, the Fed (dovish) versus BoC (neutral) divergence might end soon, with a riskier Loonie to pay the consequences of better fundamentals in the US than in Canada.
To make things more interesting, the Canadian retail sales number came in at -0.1 percent when the expected was -0.3 percent. This improvement and a substantial crude oil price this morning is making the Loonie erase most of yesterday’s losses. Technically speaking though, 1.3150 is a strong support, and it is finding another support at around 1.3190 at the time of this writing. If the USD/CAD falls below the 1.3100 handle, or below 1.3068 (the lowest rate since November 7th), it might change the technical view, but for now, the USD/CAD still trading in an uptrend.
Key MoversThe US dollar index finally got a break in yesterday’s trading session, moving within a range of a bit more than 0.30 percent. The US dollar index increased following a week of continued losses, even though durable good orders suddenly fell in December amid declining demand for machinery and primary metals. Lower US equity and weakness in emerging market currencies also pushed the US dollar to the upside, and the most significant signal was gold falling over 1 percent.
Trump is scheduled to meet China’s top trade negotiator this afternoon during the current round of US-China negotiations in an attempt to produce an exploratory agreement on trade ahead of the March 1st deadline. As we know, Trump had reportedly considered pushing back the US-China trade deadline by 60 days, so the going ahead meeting is viewed as a good sign for progress, bolstered by China’s proposal to purchase $ 30 billion more in US agricultural products. Still, the economic damage from the uncertainty is growing, putting further pressure on both sides to come to a deal.
The US dollar index is increasing 0.1 percent this morning.
The Euro was unmoved by yesterday’s release of the minutes of the European Central Bank’s January policy decision. With economic gloom descending on the Eurozone recently, a move higher in interest rates looks unlikely this year with the first half of next year penciled in for a hike. ECB chief Mario Draghi is due to speak this afternoon in Bologna; however, it’s unlikely monetary policy will be discussed as he accepts an honorary degree from the University of Bologna. The EUR/USD pair trades at 1.1336 this morning, reflecting no change since yesterday’s close.
The GBP/USD pair is trading 0.30 percent lower at 1.2995 in the absence of any concrete developments about Brexit. UK PM Theresa May and EU Commissioner Jean-Claude Juncker’s meeting on Wednesday produced little other than warm words that talks would be ongoing to break the deadlock. Another parliamentary vote on Brexit is due on the February 27th, with May stating that should no agreement be in place by then, she will open the door to parliament taking control of the process thereby shelving her withdrawal agreement. An extension to Article 50 is becoming ever more likely with many senior government ministers warning about the threat a no-deal scenario will cause the UK economy.
Next week could be very choppy for the British Pound.
The Aussie dollar remains subdued after the announcement that China was banning imports of its coal through the Dalian port network. Reserve Bank of Australia chief Philip Lowe kept his cards close to his chest in his testimony on monetary policy overnight. Lowe indicated that he expects rates to be kept on hold throughout this year, as falling house prices were highlighted as being a concern for the economy. The AUD/USD pair trades at 0.7126, representing a 0.54 percent increase this morning; technically speaking, this looks more like a “dead cat bounce” price action.
The Kiwi has recovered after dropping on this week’s announcement regarding Australian coal imports to China. The NZD/USD pair is currently just above the 0.6800 handle with any breakthrough in the US/China trade dispute likely to be the main mover for the local dollar throughout Friday.
- USD/CAD: 1.3127 - 1.3230 ▼
- CAD/EUR: 0.6650 - 0.6695 ▼
- CAD/GBP: 0.5779 - 0.5860 ▲
- CAD/AUD: 1.0616 - 1.0657 ▲
- CAD/NZD: 1.1015 - 1.1145 ▼