USD/CAD - Oil, Natural Gas Supply Concerns Should Lend Strength to Loonie

The Canadian dollar was pretty much sidelined throughout Monday, 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. The surprising feature of the loonie’s price action yesterday was its failure to gain any support from a big jump in oil prices which came on news that the North Sea Forties Pipeline System – which carries 400,000 barrels per day of oil to Scotland – is being closed for repairs after the discovery of a serious crack whose repair will likely take weeks rather than days. Fortunately (for production rather than prices) the damage is on an onshore section of the pipeline which would have been much easier to repair than if it had been underwater.

The Norwegian Krone and Russian Ruble – two of the three currencies which traditionally benefit from higher oil prices – both rose yesterday but the Canadian dollar was largely unmoved. NYMEX crude (not a perfect substitute for Brent but still highly correlated to it) is up from $57.16 U.S. less than 24 hours ago to an overnight high of $58.47 U.S. and opens this morning at $58.35. Natural gas futures are also around 0.5% higher after a fatal explosion at a facility in Austria which supplies around one-10th of total European gas demand.

USD/CAD eventually fell around 25 pips in London this morning and opened in North America at 1.2825 with GBP/CAD at $1.7110.

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. Bank of Governor Stephen Poloz has a fascinatingly titled speech "Issues keeping me awake at night on Thursday lunchtime in Toronto.

USD/CAD: Expected Range: $1.278 -- $1.287

The U.S. dollar gave back some of its gains during the London session on Monday, largely because a 30-pip rise in the EUR/USD exchange rate outweighed a 30-pip fall in GBP/USD. As was explained in yesterday morning’s commentary, because of the index weightings, GBP/USD has to fall almost five times as much as the EUR/USD rises in order to keep the U.S. dollar index unchanged. By the New York close, as equity markets rallied once again, the dollar had regained its earlier losses and closed at 95.60

The S&P 500 Index ended the day up 0.32% at 2,659, a new record close, led by the telecoms, technology and energy sectors. In particular, a 2% gain for Brent crude, the global oil benchmark, helped to lift energy stocks on optimism about higher oil prices after a shutdown of a major pipeline which brings the U.K.’s North Sea oil onshore. The Dow Jones Industrial Average added 0.23% to 24,386; another all-time closing high. Futures markets were again indicating a very modest increase at the open and investors might well see more headlines later about fresh intra-day stock market records being set; yesterday’s records came using daily closing levels.

The Federal Reserve begins its two-day Federal Open Market Committee meeting today and it is a near-certainty that rates will be raised 25 bps. The only reason that some of the online calculators show an 88% probability of a 25bp hike is that the residual 12% reflects a one-in-eight chance of a 50-bp move. Now that would be a shock!

On the U.S. economic calendar this week, the NFIB Survey of small business optimism is out today, 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, the U.S. dollar ought to continue to find some support, especially given the generally constructive price action seen on Monday.

EUR/USD: Expected Range: $0.659 -- $0.664

After a pretty poor performance last week, the euro rallied for almost the whole of the London session Monday before giving back nearly all its gains in the New York afternoon. It rose from $1.1770 U.S. to a best level of $1.1801 U.S. but couldn’t hold on to a 1.18 big figure and slid around 30 pips to finish pretty much where it began. This morning it has been up to $1.1790 but rallies are struggling to gain traction and the pair opens in North America at $1.1795. EUR/CAD, meantime, is down around 30 pips at $1.5092.

The latest ZEW survey of professional investors in Germany was released earlier today. The headline expectations index dipped to 17.4 in December from 18.7 in November, marginally below the consensus of 18.0. The current situation index rose slightly to 89.3, from 88.8, very slightly above the consensus 88.7. The details showed that both euro-zone and German inflation expectations increased in December, and short-term rate expectations also rose a little. Expectations for the stock market rose across the major euro-zone countries, and investors also anticipate a slightly weaker dollar versus the euro.

Over the next few days, there’s an European Central Bank meeting scheduled for lunchtime on Thursday at which new staff economic projections will be unveiled and investors get the 'flash' December Purchasing Managers' Index’s 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 European Union Economic Summit in Brussels on Friday.

GBP/USD: Expected Range: $0.576 -- $0.595

It is a rare day when Brexit doesn’t make the lead story on the front page of the major U.K. newspapers but that’s the situation this morning and one which will doubtless bring some relief into Downing Street. It has allowed the pound some early respite, too, after yesterday’s fall, with GBP/USD trading broadly sideways in the Sydney session.

It may well be only a temporary reprieve, both politically and for the currency. Monday was the sixth day of Parliamentary debate over the Brexit Bill; what is known as the Committee Stage. The trickiest votes have been scheduled for tomorrow and for next Wednesday. Though the Government has either backed down with concessions or narrowly won all of the procedural stuff so far, there is a proposal by the former Attorney General that would require the Prime Minister to write the terms of her Brexit deal into a law that would have to be passed by Parliament. This could well be the moment for a more serious rebellion than the votes thus far which have been on the scale of what colour paperclips to use.

Also today, investors have had the November CPI data. Invested were warned in the London commentary that, the back of the envelope projections suggest higher petrol prices might outweigh Black Friday discounting” and luckily this is exactly how it turned out. CPI printed at 3.1% y/y which will require the Governor of the Bank of England to write a letter of explanation to the Chancellor; the central banking equivalent of being made to sit on the naughty step.

There is little realistic chance of a near-term rise in U.K. interest rates but the U.K. Press, predictably, is focusing on the squeeze in real earnings which is worsening as the holiday season begins. GBP/USD did its usual 50 pip intra-day high-low swing on the CPI release and opens in North America this this morning at $1.3343 U.S. with GBP/CAD at 1.7100.

CAD/AUD: Expected Range: $1.028 -- $1.0365

The Australian dollar had a decent day on Monday in the Northern Hemisphere. Having stabilized in the low 75’s against the U.S. dollar Friday afternoon, it traded better right from the off and once it broke through Friday’s $0.7528 high, an improving technical picture helped lift the pair up to a best level in New York of $0.7542 before slipping into the close against a generally well-bid U.S. dollar.

Though it is now in technically somewhat better shape, the Aussie still needs some better fundamental news if it is to build on yesterday’s gains. 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 incoming economic data in Australia have been disappointing recently. Last week saw Gross Domestic Picture and trade data fall shy of analysts’ expectations while the previous week saw softness in consumer confidence, wages and house prices.

Overnight, investors have seen the latest NAB Business Survey. In the previous survey a month ago, Business Conditions jumped fully seven points to +21; the highest in its 20-year history. The puzzle then was that Business Confidence was unchanged at +8; only barely above its long-term average. Today the puzzle is solved: the surge in Business Conditions was more than fully unwound, tumbling nine points to +12 whilst business confidence fell 3 to +6. Despite the softness in the headlines, the AUD has taken some comfort from stable employment (+7) and the fact that most measures of activity and confidence are still above their longer-term averages.

For today, AUD/USD opens in London up around half a cent higher at $0.7575. The two notable technical levels to watch are the 20-day moving average at $0.7577 then last Tuesday’s RBA high of 0.7650. Against the Canadian dollar, meantime, the AUD is up around 40 pips at $0.9716

NZD/USD: Expected Range: $1.111 -- $1.13

The Kiwi dollar finished Monday way out at the top of the FX pile; up against every major currency. NZD/EUR rallied 55 pips, NZD/USD was up 80 pips, NZD/CAD rose 100 while GBP/NZD plunged more than 2 ½ cents. All this came after the appointment of a new Governor of the Reserve Bank of New Zealand. 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.

Why is it, readers may wonder, that the appointment of person might have such a disproportionate impact on the FX market? There are two parts to the answer: firstly, investor positioning must be taken into account. After the September 23 General Election in New Zealand, there were worries about the overall direction of economic policy, the attitude towards inward capital flows into the residential property market and a change in the Central Bank’s inflation fighting mandate.

Investors were generally short of NZD, either outright or relative to neutral benchmark weights. Such positions are always vulnerable to a squeeze on unexpected positive news flow. Secondly, New Zealand doesn’t have a monetary policy committee with separate votes for each member. As the RBNZ notes on its own website, "At the Reserve Bank of New Zealand responsibility and accountability for monetary policy rests on one individual - the Governor of the Reserve Bank”. If he or she wants to change interest rates, they are changed. It’s as simple as that.

After Monday’s spectacular price action, overnight in Asia and Europe the NZD has extended these gains even further. It opens in North America at a one-month high of $0.6945 NZD/CAD at $0.8910.