USD/CAD - Quiet Start to Week for Loonie

The Canadian dollar was pretty much sidelined in both Asia and London this morning, after a week in which it reversed all its prior strength after the really good employment report on the very first day of the month. Last Tuesday morning. it reached a best level of $1.2644 U.S. as investors anticipated the possibility of a hawkish surprise from Wednesday’s Bank of Canada policy meeting. This did not materialize. Instead, BoC noted 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."

USD/CAD jumped up to $1.2800 almost immediately and by the New York close on Friday it was up at $1.2850; almost exactly where it was just before the jobless report. The week ahead is pretty light in terms of economic data with just new house prices on Thursday and the monthly survey of manufacturing on Friday.

Crude oil is around 20 cents per barrel lower on the day and 50 cents down from Friday’s high with NYMEX at $57.20. The Canadian dollar opened this morning in North America at USD/CAD $1.2855 and GBP/CAD $1.7200

USD/CAD: Expected Range $1.283 -- $1.288

The U.S. dollar last week completed a clean sweep, rising for five consecutive days. Friday’s gain was only very marginal but the statistics don’t lie: its index against a basket of major currencies ended the week at 93.50 having begun around 92.80. For sure, it was not a huge percentage gain but it did have the benefit of being stable and progressive, without the volatility which most of the other currencies suffered throughout the period.

In overnight trading in Asia and London, the U.S. dollar gave back around 15 pips of its gains to open in New York this morning around 93.35. This mostly resulted from a modestly higher exchange rate with the euro as the continental currency comprises around 57% of the dollar’s narrow trade-weighted index. The Japanese yen has a 14% weight, GBP 12%, CAD 9%, with the Swedish Krone and Swiss Franc both at 4%.

The U.S. Federal Reserve begins its two-day Federal Open Market Committee meeting tomorrow and it is a near-certainty that rates will be raised 25 basis points. First up on this week’s U.S. economic data calendar is the so-called “JOLTS” report; the Job Opening and Labour Turnover Survey. This is often said to be one of Fed Chair Janet Yellen’s favourite indicators of labour market activity though it hasn’t gotten much traction with currency or interest rate analysts. The NFIB Survey of small business optimism comes Tuesday, Consumer Price Index is released Wednesday, Thursday brings retail sales and Friday is industrial production. If the stock market can withstand higher rates and a new set of interest rate projections for 2018 (S&P futures are indicating a very modestly higher open), the U.S. dollar ought to find some support though we wouldn’t rule out a move down to 93.00 in the meantime

EUR/USD: $0.656 -- $0.6675

The euro’s low last week came right at the open of North American trade on Friday morning when it simultaneously hit $1.1735 U.S. and $1.5067 Canadian (It had been lower against the CAD before the BoC meeting when it printed at 1.4930). It recovered a little into Friday’s close at $1.1775 U.S. and has marginally extended its gains early this Monday morning.

There was some talk at the weekend that the euro’s poor performance might have been linked to the European banking sectors’ seasonal demand for U.S. dollar financing ahead of year-end; a phenomenon which has seen the cross-currency basis swap move sharply lower (U.S. dollar more expensive to borrow) in each of the last two calendar years and which seems to be repeating again in 2017. The very last working day of 2016 proved to be especially painful for international bank funding desks and there may be a willingness to pay up early for year-end money rather than suffer the extreme and very expensive volatility of end-Dec 2016. If this explains last week’s EUR weakness, however, it still doesn’t solve the puzzle of why it’s a bit stronger this morning.

For the week ahead, there’s an European Central Bank Council Meeting at lunchtime on Thursday at which new staff economic projections will be unveiled. Before that, tomorrow its Germany’s ZEW survey of professional investors and we’ll get the 'flash' December Purchasing Managers' Index numbers on Thursday morning. On Wednesday, European Commission President Jean-Claude Juncker and European Council President Donald Tusk are scheduled to brief members of the European Parliament about Brexit negotiations ahead of the EU Economic Summit in Brussels on Friday. At the start of business in North America today, the EUR opens up very slightly against the U.S. dollar at $1.1790 EU/CAD at $1.5160.

GBP/USD : $0.5765 -- $0.585

The British pound first rallied hard then fell sharply on Friday in reaction the deal finally announced in Brussels between the U.K. and Irish governments which allowed the Brexit negotiations to move forward to ‘Phase Two’ at which trading arrangements between the U.K. and E.U. are supposed to be agreed. The sterling decline came as worries grew about whether the Government’s own MPs would support the Irish border deal and whether in fact ‘regulatory alignment’ was just the same as staying in the E.U. but paying a big bill in order to do so!

Over the weekend, with the Foreign Secretary away for meetings in Iran, the Minister for Exiting the European Union, David Davis, described the agreement as a "statement of intent" which was not legally enforceable, suggesting that the government could walk away from the deal. He also said that Britain would not pay a divorce bill without securing a trade deal with the E.U. in return; in contrast to the chancellor who said last week it was "inconceivable" that Britain would fail to honour its international obligations. Davis said of the bill, "It is conditional on getting an implementation period, conditional on a trade outcome. No deal means that we won’t be paying the money."

Investors are struggling to know what weight to ascribe to policy announcements which seem to be made up, announced, then quickly rescinded. Indeed, only this morning the Brexit Secretary was forced to issue 'clarification' of his comments, none of which left observers any wiser.

For the week ahead, there’s a busier economic calendar than we’ve seen recently. CPI, average earnings and retail sales are all due before Thursday’s Bank of England Monetary Policy Committee meeting. So far in Asia and the European morning sessions, the pound has already been up, sold off then reversed again without ever gaining much traction in either direction. It opened in North America this this morning at $1.3370 U.S. with GBP/CAD at $1.7180.

CAD/AUD: $1.03 -- $1.037

The Australian dollar is a bit firmer in London this morning after a week which wasn’t dramatically bad but nonetheless saw the currency slide to six-month lows against the U.S. dollar (0.7503) and its worst level in almost 18 months against the British Pound ($1.7985).

With the Reserve Bank of Australia clearly in no rush whatsoever to tighten monetary policy (and now not having another Board meeting for almost two months), the income economic data in Australia have largely been disappointing. Last week saw Gross Domestic Product and trade data fall shy of analysts’ expectations whilst the previous week saw softness in consumer confidence, wages and house prices. It would be an even more depressing picture were it not for the fact that its nudging 80 degrees Fahrenheit in Sydney this week with another blistering Summer in prospect.

Analyst expectations centre on a 15,000 increase in employment with the unemployment rate steady at 5.4%.

For today, the AUD opens in New York and Toronto around 50 degrees cooler than in Sydney. AUD/USD is at %0.7525 with AUD/CAD at $0.9670.

NZD/USD : $1.112 -- $1.135

After a very choppy week, the volatility of the New Zealand dollar has continued and it is back at the top of the FX pile, up against every major currency. This time, at least, there is some genuine news to explain the move: the appointment of a new Governor of the Reserve Bank of New Zealand. Finance Minister Grant Robertson has announced Adrian Orr – a well-respected and highly experienced professional economist, former head of financial stability at the RBNZ and currently head of the NZ Superannuation Fund - will take up the post in the New Year.

The new Labour-led government in New Zealand wants to add full employment to the bank’s inflation-fighting mandate and change its governance structure, including the appointment of outside experts to its policy committee. The appointment of a classically-trained insider to be the new Governor will help calm investor fears about a too-radical shift of direction which have weighed on the NZD since the election on September 23.

NZD/USD is up around 80 pips at $0.6920 in North America this morning with NZD/CAD more than a full cent higher at $0.8890.