USD/CAD - Loonie Steadies After Sharp Post-BoC Drop

The Canadian dollar’s strong run came to an abrupt end on Wednesday after the Bank of Canada’s final monetary policy meeting of the year. Its review of incoming economic data noted the bank was, “in line with October’s outlook, which was for growth to moderate while remaining above potential in the second half of 2017. Employment growth has been very strong and wages have shown some improvement, supporting robust consumer spending in the third quarter. Business investment continued to contribute to growth after a strong first half, and public infrastructure spending is becoming more evident in the data.

"Following exceptionally strong growth earlier in 2017, exports declined by more than was expected in the third quarter. However, the latest trade data support the MPR projection that export growth will resume as foreign demand strengthens. Housing has continued to moderate, as expected”.

There was nothing too troubling in that assessment. Instead, the loonie was hit by the line that, "While higher interest rates will likely be required over time, the Governing Council will continue to be cautious, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation". After its recent strong run and with traders positioned for a hawkish BoC surprise which failed to materialize, the Canadian dollar fell sharply. USD/CAD rose from $1.2665 to nearly $1.2800. The Canadian Dollar has slipped a little further overnight and opens in North America this morning at $1.2825 U.S. ahead of data on building permits and the purchasing managers’ survey.

USD/CAD: Expected Range $1.275 -- $1.288

The U.S. dollar pretty much uninterrupted rise to a best level of 93.30 before closing in New York around 93.25 as stocks found some support Overnight today it has extended these gains to 98.40; the highest in just over a week. The greenback at the moment remains unusually sensitive to movements in equity markets both at home and abroad, not least because there’s been such a lack of volatility recently that only a very small decline in stock scan provoke a bout of jitters. The average daily move on the S+P 500 for the last three months has been barely 0.2%. To put this into perspective, the S+P 500 index on average has fallen by at least 5% on three or four occasions every year over the past decade.

It would certainly be unusual to end the year with a drop; December has not been the weakest month of any year going all the way back to 1928. Markets usually approach the monthly U.S. labour market report in a state of eager anticipation, but it’s hard to see anything – however dramatic – shifting the Fed from a 25-basis-point hike next week. More of the same hasn’t been a bad backdrop for the stock market in 2017 and equities need only to advance another 1% to be back at fresh all-time highs. The U.S. dollar should continue to find support if stocks hold up.

EUR/USD: Expected Range $0.6757 -- $0.6685

The euro continues to grind lower without any particular catalyst and without getting any support from further strength in incoming economic data. This morning brought the final estimate of third quarter euro-zone Gross Domestic Product which fleshes out the provisional numbers in a little more detail. The very encouraging feature of Q2 had been a 2.2% jump in investment spending. Q3 has added to this with a further 1.1% gain. For those who remember the accounting identity that GDP=C+I+G+(X-M)+S, we see that household consumption and investment both contributed around 0.2% to the 0.6% q/q total, with net trade and government both contributing +0.05% and inventories 0.1%. Within the euro-zone, the fastest quarterly growth rates were registered in Malta (+1.8%) Slovenia (+1.0%) and Cyprus (+0.9%) while the slowest were Belgium, Estonia and Greece (+0.3%).

Broadening the analysis to the European Union 28, Romania grew a hugely impressive 2.6% q/q whilst at the other end of the table, Denmark was the only economy which contracted in Q3. At 4 p.m. European time today, there is a Press Conference with European Central Bank President Mario Draghi, hosted by the ECB in Frankfurt but in his capacity as Chair of the Group of Governors and Heads of Supervision (GHOS) of the Bank for International Settlements. In the meantime, traders are reluctant either to sell dips or to buy into the rallies so investors are left in a familiar $1.1750-1.1930 U.S. range unless and until some genuine 'news hits the screens.

GBP/USD: Expected Range $0.5815 -- $0.5905

The pound has been much calmer overnight but still trades with a negative bias. In a Press Conference yesterday, Irish Prime Minister Leo Varadkar said that his U.K. counterpart Theresa May had told him she would come back with fresh proposals late on Wednesday or Thursday. As the first of these deadlines slipped with no word from London, so nervous currency traders have marked down the value of the GBP. Michel Barnier, the EU’s chief Brexit negotiator, has told member states that the British government has just 48 hours to agree a text on a potential deal or it will be told that negotiations will not move on to the next stage. A failure to move talks on in December would mean that the terms of a transition period could potentially only be discussed after the next European council summit of leaders in March, leaving businesses in the U.K. to face more uncertainty over the shape and content of any post-Brexit transitional deal. This leaves the pound once more at the mercy of rumours and leaks about the precise status of talks between Dublin, London and the Democratic Unionist Party. The Twitter feeds of interested parties – politicians and senior journalists – will be the primary source of information on what threatens to be a nervous day of trading. The trading day begins in North America with the GBP at $1.3365 U.S. with GBP/EUR at $1.7140 U.S.

CAD/AUD: Expected Range $1.031 -- $1.0405

The Australian Dollar had a bad day on Wednesday and overnight it has weakened further. The disappointment of the Q3 GDP figures was followed this morning by a poor set of merchandise trade figures. October’s trade surplus fell dramatically, falling to $105 million from $1.6 billion the month before. This was way short of consensus expectations of a surplus around $1.4 billion. The worse-than-expected result was driven by both a 3% slide in exports and a 2% increase in imports, according to the ABS figures.

A big factor in the export decline was a slump in iron ore sales, which fell by 10% over the month to just over $7 billion. Coal exports were also down 3% to $4.3 billion. Detailed data on Australia's two biggest commodity exports show both the quantity and price of iron ore fell in October, while it was a massive fall in the volume of hard coking coal exports that caused most of the decline for that sector. These are the first trade numbers for Q4 and unless there’s a significant rebound next month, worries will grow about the contribution that net trade can make to GDP. AUD/USD has fallen below key technical support at $0.7540 U.S. and opens this morning in North America at a five-month low of 0.7521. AUD/CAD, meantime, is around 30 pips below yesterday’s high at $0.9648.

NZD/USD: Expected Range $1.135 -- $1.147

The Kiwi dollar continues to frustrate and defy analysis, swinging from top to bottom in the daily performance tables almost at random. Today it is the worst performing currency of all the majors, even though the economic data has actually been pretty solid. The job vacancy numbers Tuesday were sound and yesterday investors learned that building activity in the Wellington region grew strongly over the past year.

The value of activity rose 27% on the previous September year – the largest annual increase ever recorded for Wellington. In the year ended September 2017, the value of building work put in place in the region totaled $1.7 billion (up $0.4 billion), almost tripling the growth rate seen in 2015. Overnight, Stats NZ reported that seasonally adjusted total wholesale trade sales value rose 1.1% in the September 2017 quarter, after rising 1.6% in the June 2017 quarter.

This was the sixth consecutive quarterly rise, driven mainly driven by fruit exports and grocery wholesaling. The New Zealand dollar paid no attention to the economic data, with NZD/USD down half a cent over the past 12 hours to a two-week low of 0.6830. NZD/CAD is now a full cent below Wednesday’s high and opens in North America today at $0.8763.