USD/CAD - Loonie Continues Strong Run

Canadian Dollar (CAD)

The Canadian dollar was marginally weaker against the U.S. dollar at the North American open though it requires a magnifying glass to read too much into its price action. Recall the pair began last Monday at $1.2763 U.S. and after a bit of a wobble Tuesday -- which saw it back up from $1.2702 to $1.2797 -- it was then a steady grind lower to end the week at $1.2689, thus, a very slight pullback to a high in London of $1.2709 before settling back at $1.27 should not be over-exaggerated.

As with the euro-zone and the United States, perhaps the most important economic data in Canada this week is Consumer Price Index data, though the annual rate is expected to ease back a touch from 1.6% to just 1.4%. Before then, there are few statistics on house prices to digest. September’s -0.8% m/m decline was the biggest monthly drop nationwide since 2010 while prices in Toronto tumbled -2.7% m/m. The Bank of Canada, like its U.S. counterpart, only has eight monetary policy meetings per year and the next one isn’t scheduled until December 6. The U.S.-Canada is unlikely to drift too far either way from $1.27 during the coming session and if it does, the catalyst is more likely to come from south of its border with the U.S.

U.S. Dollar (USD)

USD/CAD expected range: $1.2710 – $1.2830

After two very poor sessions on Thursday and Friday, the U.S. dollar index against a basket of major currencies ended the week at 94.10; its’ lowest close since October 26. Overnight in Asian and London trading it has stabilized somewhat and opens in New York today very marginally higher at 94.25. The chief reason for the U.S. dollar’s drop was nervousness about the likely success – or otherwise – of President Trump’s tax reform bill. This was delayed so much since last year’s Election that in the first 10 months of his term of office, the U.S. dollar index had tumbled from a high of 103.3 at the beginning of January to just 90.9 by late-September.

A near-5% rally was then seen on more talk of tax cuts and further interest rate hikes from the Federal Reserve and the U.S. index reached a recent best of 94.70 just 10 days ago. If tax reform runs into the ground once more, September’s low will again become the downside target. Some support ahead of that comes from the 200-day moving average at 93.25, and while interest rate hike expectations are still very much alive, Wednesday’s U.S. CPI figures will be key for the near-term fortunes of the U.S. dollar. Its overnight rally could be very fragile.

Euro (EUR)

CAD/EUR expected range: $0.6740 – $0.6820

From a low point last Tuesday of $1.1561, the euro climbed slowly but steadily to a high of $1.1666 U.S. before ending the week at $1.1662. Against the relatively buoyant Canadian dollar, the euro did quite well to hold pretty steady in a range from $1.4744 to $1.4812 before ending the week at $1.4792. Overnight trading in both Asia and Europe has been pretty uneventful and the euro-U.S. dollar pair has been trapped between $1.1639 and $1.1658 with the euro's pairing with the Canadian dollar exactly unchanged from where it finished on Friday evening.

For the week ahead, euro-zone CPI on Thursday will likely be the most important of the economic numbers to be released. With Continental Europe now enjoying its 17th consecutive quarter of Gross Domestic Product growth, subdued prices are the only reason the European Central Bank continues its policy of Quantitative Easing, albeit now at a somewhat slower monthly pace. Provisional estimates for October showed prices rose just 0.1% on the month for a 1.4% annual inflation rate though with oil prices rising and already feeding into higher pump prices for petrol and diesel, it may not be long before CPI resumes its upward path. As we keep saying, these are the key driver (pun very much intended!) of inflation right across the G20 and the Emerging Markets universe. For the session ahead, it would be no surprise to see the euro-U.S. pairing firmly anchored on a $1.16 handle with the euro-Canadian pairing not moving far from the high $1.47’s.

Great British Pound

CAD/GBP expected range: $0.5950 – $0.6000

If the pound was on a roller-coaster ride for much of last week, today’s fairground metaphor has most definitely been the slide. The pairing with the U.S. dollar had been as high as $1.3220 after Friday’s economic data before ending the week at $1.3190. The pairing with the loonie, meantime, had been in a range from $1.6644 to $1.6831 before closing at $1.6717. Overnight this Monday morning, GBP/USD slid 70 points in the Asia session to a low of 1.3120 then extended these losses to a low in London of 1.3078. GBP/CAD has traded down to 1.6617; the lowest since October 20.

The weekend press in the U.K. was again dominated by politics; a constant stream of bad news for Prime Minister Theresa May’s minority government which remains in office (though arguably not in power) only because of a coalition agreement with the Ulster Unionists. The arcane rules of a leadership challenge in the Conservative Party require 48 of its MPs to sign a letter of no-confidence. Reports on Sunday suggested there were now 40 such signatories and the number could rise as the European Union withdrawal bill returns to the House of Commons on Tuesday. This week also brings U.K. inflation and unemployment data. CPI on Tuesday is likely to rise above the Bank of England’s 1-3% target range and Bank of England Governor Mark Carney will have to write a letter to the Chancellor of the Exchequer explaining what he will do to bring it down. With real earnings still falling, the British pound is unlikely to rally much until wages show signs of picking up or the political situation improves.