USD/CAD - Is Loonie Streak Nearing an End?

Canadian Dollar (CAD)

The Canadian dollar’s recent strong run may be coming to an end. Having finished last week at $1.2690 U.S., the pair moved steadily higher throughout the London and New York time trading sessions on Monday to finish around the highs of the day at $1.2733. Overnight, it has extended this move (U.S. dollar higher, loonie weaker) to a high of $1.2752 before the latest bout of U.S. dollar weakness pushed it down to $1.2728 at the North American opening.

In an otherwise quiet market, there’s a bit of chat around upcoming talks around the North American Free Trade Area (NAFTA). The fifth round of re-negotiations is due to be held between November 17 and 21 in Mexico City and with 75% of all Canada’s exports headed to the United States, there’s a concern these talks might be the catalyst for a bit of profit-taking on long Canadian dollar positions. Before then, investors get some statistics on house prices and inflation. Weaker Consumer Price Index and lower house prices probably won’t help the loonie but investors are urged to keep an eye, too, on oil and natural gas which have recently been one of the big props for the currency. NYMEX crude futures open around 20 cents lower at $56.57 U.S. with Natural Gas more than 2% down at $3.09.

U.S. Dollar (USD)

USD/CAD expected range: $1.2680 – $1.2760

The U.S. Dollar was largely out of the spotlight Monday. Its index against a basket of currencies edged very marginally higher to end in New York at 94.20 but after a dull session in Asia overnight it has moved steadily lower, mirroring the strength of the Single European Currency which is back to $1.17 U.S. for the first time in almost three weeks. The good news for the greenback yesterday was that early weakness in equity index futures was reversed and a 10-point loss for the S+P 500 turned into a net five-point gain by the close.

"Buy the Dip" was alive and well. The problem is that the market is going to have to repeat that feat today, albeit on a smaller scale. Futures markets are indicating a loss of around three points before the opening bell. On the U.S. economic data front, the latest NFIB survey of small businesses was pretty upbeat. "The Index of Small Business Optimism gained 0.8 points to 103.8 in October, maintaining a streak of robust readings. Four of the 10 Index components posted a gain, five declined and one was unchanged. Labour market indicators point to continued good jobs reports and job openings surged to record territory”. Will it be enough, though, to help the U.S. dollar and stock market reverse their early losses?

euro (EUR)

CAD/EUR expected range: $0.6685 – $0.6725

From a low point last Tuesday of $1.1561 U.S., the euro has moved steadily and persistently higher. It ended the week at $1.6662, reached a high Monday of $1.1672 and in overnight trading has surged to $1.1723; its best level since the day of the European Central Bank meeting back on October 26. Against the Canadian dollar, the euro finished last week at $1.4792. It touched $1.4854 Monday and this morning opens in North America at $1.4921, having been as high as $1.4935 in the European session. The reason for the euro’s strength today is yet another set of better than expected economic numbers.

Gross Domestic Product of 0.5% q/q pushed the annual rate of growth in Italy up to a six-year high of 1.8%. Germany grew +0.8% in Q3 - driven by public consumption, investment and net exports - and some of its back data were also revised higher. Taken together with a solid German ZEW Survey (a survey of investment professionals rather than industrialists) the near-term outlook for the euro looks pretty good. Experts take it as certainly a relief not to see it once again nailed to a $1.16 U.S. big figure.

Great British Pound

CAD/GBP expected range: $0.5965 – $0.6020

The British pound is again a bit weaker this morning, driven by a combination of both politics and economics. The pound's pairing with the U.S. dollar recovered off yesterday’s London low of $1.3068 to finish in North America around $1.3116 while the pairing with the Canadian dollar rallied from its three-week low of $1.6598 to end around $1.6700. This morning, the GBP/USD rate is down at 1.3111 with GBP/CAD at 1.6685.

Investors won’t be subjected to the details of the latest twists and turns of the Brexit plot here, but suffice to say the leaders of the U.K. Government continue to fight against each other while the European Union withdrawal bill returns to the House of Commons for debate this afternoon. Meantime, official statistics this morning show that inflation was steady at 3.0% y/y in October, rather than the 3.1-3.2% consensus of analysts’ expectations. This is important for several reasons. It continues the squeeze on real earnings (wages are growing only around 2% y/y) but it calls into question both the Bank of England’s recent decision to raise interest rates and undermines the arguments for any further tightening of monetary policy. It would be a very brave trader or investor to play the pound from the long side today and the sterling is unlikely to rally much until wages show signs of picking up or the political situation improves.