USD/CAD higher but CAD performs well on crosses


The Canadian Dollar had a great start to the New Year 2018. USD/CAD tumbled at one point on Friday to 1.2372; the lowest since September 27th, though yesterday it stabilised in a range 1.2385-1.2435. Overnight as the USD has rallied, and after a full session in Asia and the European morning, USD/CAD opens higher at 1.2445. After Friday’s Canadian employment report, the market-derived probability of a rate hike at the Bank of Canada’s next meeting on January 17th surged to 70%, from 40% earlier in the week.

Yesterday, those rate hike odds hit 86% after the Bank of Canada published its Q4 Business Outlook Survey; the last real chance for the Central Bank to communicate something dovish ahead of next Wednesday’s monetary policy meeting. The Business Outlook Survey indicator rebounded almost to its summer peak, consistent with widespread positive sentiment. “Firms plan to expand operations to accommodate sustained demand, which is evident in a rebound of investment and employment intentions since the autumn survey.

Reflecting strong demand and tightening labour markets, indicators of capacity pressures and labour shortages picked up. Survey results suggest that economic slack is now largely limited to the energy-producing regions. Firms expect growth of input prices to rise, owing to gains in commodity prices. Pass-through of input costs and emerging wage pressures to output prices remains limited due to competitive forces. Inflation expectations are modest and unchanged from the third quarter”. The CAD opens in North America this morning at USD1.2445 with GBP/CAD at 1.6840.


We have been expressing our puzzlement and the Dollar’s decline in late December and early in the New Year given the strength of the US stock market, the rise in yields across parts of the maturity spectrum, the passage of a historic tax reform bill and the prospects for upward revisions to growth forecasts in 2018. Perhaps for a moment, we might be allowed to set humility to one side and repeat what we said here last Wednesday: “For the moment, it seems just that the dollar is falling because it is falling.

The technical tail is wagging the fundamental dog. When price action itself is such a dominant feature of trading, investors seek confirmation of the prevailing trend by seeking out the bits of news which support a continuation of the move rather than viewing the incoming information more objectively. Of course, we’ve been here before and a year ago it happened in precisely the opposite direction. All the news was interpreted as dollar bullish post the 2016 Presidential elections and it rose until January 3rd last year. Here we are on that very same date, with sentiment arguably as bearish today as it was bullish then…”

We repeat these comments because January 3rd 2018 did, indeed, mark the low point for the USD after its latest sell-off, when its index against a basket of major currencies reached a 14-week low of 91.44. Yesterday’s low of 91.56 was above Friday’s 91.50 low and from that point it moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week. This morning in London it has reached 92.21 and though it is too early to say with confidence that a decisive turning point has been made, the USD bulls are winning the argument in the near-term.

The Dollar’s rise on Monday came despite a generally very dovish speech on the US economy from Federal Reserve Bank of Atlanta President Raphael Bostic. He urged his colleagues to be patient in raising interest rates, citing some indications that the public’s expectations on inflation could slip below the central bank’s 2 percent target. He said, “I am comfortable continuing with a slow removal of policy accommodation. However, I would caution that that doesn’t necessarily mean as many as three or four moves per year.” The US Dollar index opens in North America this morning at a 10-day high around 92.21.