USD/CAD - Dollar Strong Following BOC Meeting

After a two-day surge, the Canadian dollar had a more mixed performance on Tuesday; rising against the pound sterling but falling against the U.S., New Zealand and Australian dollars. Overnight it has been largely out of the spotlight, though USD/CAD is down around 20 pips at $1.2670. The loonie was helped by figures showing the trade deficit narrowed to $1.47 billionn in October from a revised $3.36 billion in September as exports increased after four consecutive monthly declines. Economists had forecast a deficit of $2.70bn.

The Bank of Canada – like all its global peers – stresses how its monetary policy actions are dependent on incoming economic data. Today we’ll get to see how these export numbers and last Friday’s labour market report are influencing their current thinking. It would be a big surprise if rates are moved from their current 1.0% today, though Governor Stephen Poloz has previously spoken about his preference for surprises rather than forward guidance if policy is to be most effective. Before last week’s stunning employment numbers, markets were pricing around a 47% probability of a rate hike in January. This has now risen to a little over 50%. The policy rate decision was scheduled for 10.00 a.m. Eastern Time though this is one of the four meetings a year at which no Monetary Policy Report is simultaneously published.

USD/CAD Expected Range: $1.258 -- $1.285

The US. dollar had a good time for much of Tuesday before slipping into the close and then overnight in Asia. Its index against a basket of major currencies rose from 92.75 to 93.13 - its best level in almost two weeks – but slid to 93.0 at the New York close. In Asia overnight, it traded down to 92.86 but has subsequently recovered to open this morning in North America at 93.00. As we flagged here yesterday, the Atlanta Fed’s "GDPNow model” was updated Tuesday evening. This takes incoming high-frequency U.S. economic data and updates in real-time its forecast of the current quarter’s Gross Domestic Product number.

As yesterday brought not just the Institute for Supply Management survey, but also the merchandise trade deficit for October, the econometricians nudged down their Q4 estimate from 3.5% to 3.2%. This is still higher than anywhere else in G7 but may not be enough on its own to support the dollar if bond yields and stock markets now turn lower. The average daily move on the S+P 500 for the last three months has been barely 0.2% either way but yesterday saw a 0.4% drop and futures markets indicate another five points lower at today’s opening.

It’s not just U.S. equity markets which are under the spotlight today: Asia’s equivalent of America’s FANG stocks, the so-called TATS (Taiwan Semi, Alibaba, Tencent and Samsung) have been down for seven consecutive days with a cumulative drop over 10%. Keep a close eye on equities as the outlook for stocks (and bonds) is an important element of the investment case for the U.S. dollar. Technical support on the greenback index around 92.5 then last Monday’s low of 92.2 is now very important.

EUR/USD: Expected Range: $0.6645 -- $0.671

The euro had a poor day Tuesday, losing almost half a cent to the U.S. dollar to finish around $1.1813 and EUR/CAD down a similar amount to exactly $1.5000. Overnight this Wednesday, EUR/USD is down 10 pips but EUR/CAD is 30 pips lower and threatening to break down to what would be its lowest level since November 14. The euro’s drop today comes despite figures showing German factory orders climbed in October for the third month in a row, confounding expectations of a decline. Factory orders increased 0.5% in October from the previous month, according to the Federal Statistics Office.

September’s gain was also revised higher to 1.2% m/m from a previous reading of 1.0%. Details of the report showed orders from companies within Germany increased 0.4%, while international orders were up 0.5%. The international component was led by firms outside of the euro-zone, where orders increased 1.6%. Clearly, there’s still plenty of demand for the very high-quality consumer goods, autos and machinery for which Germany is so deservedly famous. Elsewhere in this morning’s batch of data releases, euro-zone Retail Purchasing Managers' Index improved to 52.4 points in November, its highest level since June. The problem for the euro continues to be that whilst the economic news is almost without exception positive, it is well known and already 'in the price'. Traders are reluctant either to sell dips or to buy into the rallies so we’re left in a familiar $1.1750-$1.1930 U.S. range unless and until some genuine 'news' hits the screens.

GBP/USD: Expected Range: $0.588 -- $0.595

The British Pound’s volatility continues so for our North American clients, so analysts will try to summarize the situation as it currently stands. U.K. Prime Minister Theresa May leads a minority government which has entered into a formal Coalition with Northern Ireland’s Democratic Unionist Party in order to get the 326 seats it needs for a majority in the House of Commons. Before Brexit negotiations can move to a second phase after an European Union Leaders’ Summit on December 14, the U.K. and E.U. must agree on a customs arrangement, the size of the divorce bill and the rights of E.U. nationals living in Britain. The last two of these appear settled.

However, the question of the Irish border is fiendishly complicated, due to the historical troubles between Northern Ireland and the Republic. The Dublin Government insists on an open border with complete freedom of movement and no physical controls. The U.K. agrees with this in principle but there will still have to be a border somewhere in the U.K.. The DUP is implacably opposed to anything which it sees a dilution of the territorial integrity and rights of the United Kingdom. It will not accept a border with mainland Britain. That is its whole reason for existence as a political party in Northern Ireland. With the clock ticking down, either something has to give or the Brexit talks could collapse, bringing the U.K. Government down with it. We said in our London comment this morning that from its opening level of $1.3425 U.S. today, the GBP could move as much as 3-4% in either direction depending on whether there’s movement to a transition Brexit deal or the collapse of the Coalition Government and a fresh General Election. So far, GBP has moved 0.5% lower to open in North America at $1.3368 U.S. and $1.6950 Canadian

CAN/AUD: Expected Range: $1.034 -- $1.047

The Aussie dollar did well through Tuesday’s Sydney session but the day’s high of $0.7650 U.S. came just before London traders arrived at work and it was downhill all the way from there against a generally better-bid U.S. dollar. By the New York close, the pair was struggling to hold on to a 76-cent handle though the AUD had made net gains against the CAD, GBP and EUR. Overnight, the big news has been the Q3 GDP figures which came in softer than consensus expectations. Most analysts’ forecasts had pinned growth around 0.7-0.8% q/q so the headline gain of just 0.6% was a clear miss.

The annual rate of growth had been expected at 3.0% but printed only at 2.8%. The main culprit was the household expenditure category which struggle to grow at all and rose just 0.1% q/q. This weakness is due to a combination of very soft earnings growth and some nervousness over personal finances and the residential property market. A deeper dive into the GDP figures shows that the savings rate increased from 3.0% to 3.2%; the first increase since Q2 2016. The AUD/USD rate fell from 0.7612 to 0.7576 then stabilized at this lower level. It opened in North America this morning at $0.7587 with AUD/CAD at $0.961

NZD/USD: Expected Range: $1.136 -- $1.156

Foreign exchange can be a very frustrating asset class at times. Having ended Monday as the worst performer of the major currencies tracked here, it was very much a case of 'Turnaround Tuesday'. The New Zealand dollar finished top of yesterday’s FX pile even though arguably very little had changed other than Reserve Bank of New Zealand Acting Governor Grant Spencer’s speech on “Low inflation and its implications for monetary policy” which was reported on here. Overnight, investing have seen the ANZ job vacancy numbers which inched down 0.1% in November from the previous month.

Despite this slip – which was the first drop in four months - job ads remain near historic highs as the country experiences a skilled labour shortage. Annual job ads growth in Canterbury and Wellington eased to 6% and 8% respectively while Auckland is slowly heading towards a broadly flat outturn. The Kiwi dollar has extended yesterday’s gains overnight and is again up against every one of our featured currencies apart from the U.S. dollar. Having briefly clawed its way back on to a 69-cent U.S. handle, it opens in North America today at $0.6895 U.S. and NZD/CAD $0.8730.