CAD consolidating after last week’s sharp rise

The Canadian Dollar had a very good start to the new year 2018, finishing way at the top of the performance table after further gains in energy prices and a second consecutive labour market report which was considerably stronger than consensus expectations. Having briefly dropped below USD/CAD1.2500 on Thursday, the pair tumbled at one point to 1.2372 on Friday; the lowest since September 27th. Overnight in Asia and in the European morning it has stabilised in a range 1.2385-1.2415.

One month ago, it was the November employment numbers which first lit a fire under the CAD with a 79,500 monthly increase in jobs. Friday’s report showed that in December, the jobless rate fell to 5.7%, the lowest in the current data series that begins in 1976. The number of jobs rose by 78,600, smashing expectations and bringing the full-year employment gain to 422,500, the best annual increase since 2002. Since September, the Canadian economy has added 193,400 jobs; the biggest 3-month gain in over 40 years.

The yield on 2-year Canada bonds jumped 6bp to 1.77% on Friday, close to a seven-year high whilst the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% in the week. The CAD opens in North America this morning at USD1.2405 with GBP/CAD at 1.6805.


There are two ways of looking at the Dollar’s performance last week: the bearish view is that with all the good news on the economy, the stock market and a rising trend of yields across the maturity spectrum, it still couldn’t rally and made a fresh 14-week low of 91.44 on its index against a basket of major currencies. The bullish view is that for all the growing political storm around President Trump, a disappointing labour market report and a stream of negative forecasts for it from major financial hit a one week high of 91.92 in this morning’s European trading session.

Away from the Fire and Fury of US politics, Friday’s labour market report was generally viewed as a bit of a disappointment even though the full year numbers for 2017 were pretty encouraging. Non-farm payrolls rose just 148,000, compared with the 190,000 consensus estimate. The jobless rate was at 4.1% for a third month, while average hourly earnings increased by 2.5% from a year earlier, after a 2.4% gain in November that was revised downwards. The December numbers, while below forecast, brought the 2017 total to 2.06 million jobs; below 2016 but slightly more than analysts had been expecting at the start of Donald Trump’s first year as president.

Overnight in Asia and the European morning, the USD has strengthened as both EUR/USD and GBP/USD are between 20-30 pips lower than Friday’s close. All eyes now will be on Friday’s US CPI to see whether or not the strength in the economy and labour market is at last feeding through into higher prices. Before then, the Fed’s Bostic, Williams and Rosengren are all scheduled to speak on the economy and inflation targeting. The US Dollar index opens in North America this morning around 91.80.