USD/CAD - CAD falls sharply after reports U.S. to pull out of NAFTA

The Canadian dollar has had a very poor week so far week as investors start to question whether a lot of good news is already ‘in the price’ and whether a rate hike at next Wednesday’s Bank of Canada monetary policy meeting really is a done deal. USD/CAD touched a low of $1.2375 last Friday but after touching a high of $1.2490 in Europe yesterday, it then surged late in the New York afternoon to a high of $1.2578. The catalyst for this latest sell-off was concern over the renegotiation of the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico

A report by the Reuters news agency on Wednesday afternoon, citing two government sources, and picked up immediately by all the Canadian newspapers and TV channels, said that Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA. President Trump has long called the 1994 treaty a bad deal that hurts American workers.

According to the Reuters report, “the U.S. negotiating team has set proposals that have alarmed their Canadian and Mexican counterparts. Among the most divisive are plans to establish rules of origin for NAFTA goods that would set minimum levels of U.S. content for autos, a sunset clause that would terminate the trade deal if it is not renegotiated every five years, and ending the so-called Chapter 19 dispute mechanism”. A White House spokesman said “there has been no change in the president’s position on NAFTA”. Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28.

In a new world of media engagement and direct communications with an audience, it is increasingly difficult to separate fact from fiction, and to determine what is real and what is fake news. This story’s sources are no doubt genuine, but their motives are unknown. Was it intended merely to extract further concessions or a genuine warning about future progress? We simply don’t know.

Whatever the case, in foreign exchange markets its often a case of shoot first and ask questions later. After Wednesday’s sharp sell-off, the Canadian Dollar opens in North America this morning at $1.2570 U.S., GBP/CAD $1.6930 and AUD/CAD $0.9895.

USD/CAD: Expected Range $1.25 -- $1.266

‘Fake news’ from China has meant a very lively 24 hours for the U.S. Dollar. On Wednesday, it was slammed lower in the European morning after reported comments that officials who are reviewing China's FX holdings have recommended slowing or halting buying of U.S. Treasuries. The USD index was sold down to a low of 91.60 before recovering to 92.00 later in the day. Overnight, it recovered further to a best level of 92.17.

The Chinese comments said that U.S. government bonds are becoming less attractive relative to other assets and that trade tensions with the U.S. may provide a reason to slow or stop buying American debt. We said yesterday in our Sydney morning commentary that, “Of course, there is no way of knowing the status of the comments: whether they are a genuine sign of an imminent policy shift or merely a diplomatic response to the U.S. Administration’s talk of tightening restrictions on China’s exports.”

Overnight, China’s State Administration of Foreign Exchange (SAFE) has put out a statement saying, “We are also aware of the news through some media reports. We think the report might have cited wrong sources or may be fake news… China has always managed its forex reserves investments in accordance with the principle of diversification, to ensure the overall safety of FX assets, to maintain and increase their value. Like other investments, FX reserves investments in U.S. treasuries is managed in a professional way according to market conditions and investment needs. China’s FX reserves management department is a responsible investor both for the FX reserves and for the market in which it participates. China’s investments have promoted the stability of international financial markets and the preservation and appreciation of China’s foreign exchange reserves.”

Whether it was “fake news” or not, one lasting effect of the fiasco is to remind international investors and the U.S. Administration of the financial power of China. The U.S. Dollar index is now back where it was 24 hours ago at 92.08 and U.S. 10-year bonds are back at 2.53% having hit 2.59% yesterday. On the domestic economic calendar in the U.S. today, we have weekly jobless claims and December’s producer price index.

The U.S. Dollar index opens in North America this Wednesday morning at 92.08.

CAD/EUR: Expected Range $0.663 -- $0.6735

After two poor days at the beginning of the week, the euro rallied on Wednesday following the Chinese comments on purchases of U.S. Treasuries. On Tuesday, EUR/USD had fallen to a 2018 low of $1.1919 U.S; its lowest since December 28 but on Wednesday morning it hit $1.2011 before then giving back around half its gains to $1.1960. This morning it is a touch lower again at $1.1945 U.S.

It may well be the case that U.S. bonds are unattractive relative to other assets but exactly the same can be said about euro-zone bonds. 10-year U.S. Treasuries hit a 10-month high of 2.59% on Wednesday but their German equivalents yield only 0.53%. For sure, this is still well above the December lows of 0.30% but the differential with the United States is back over 200 basis points at the 10-year maturity. And, in terms of attracting capital flows at the shorter end of the yield curve, two-year U.S. notes yield 1.97% compared to a still negative -0.63% in Germany.

So, for the euro there are a whole bunch of conflicting forces. The negatives are the yield differential and political uncertainty in Germany. The positives are continued rapid economic growth and large current account surpluses resulting from a very healthy external trade position. On a daily basis, each of these factors becomes either more or less important and the euro is finding it difficult at the moment to gain much traction above $1.20 U.S.

This morning’s economic news was pretty solid. Industrial production in the euro-zone rose 1.0% m/m in November with upward revisions adding another 0.2% to the previous level of output. The numbers were strong in Spain and Germany, while production fell slightly in France and Ireland continued to be very volatile with a 9.4% m/m after an 11.8% increase the previous month. We’ve only had two months of Q4 data, but the euro-zone looks on track for a 1.1% increase in industrial production and another +0.6% quarterly Gross Domestic Product number.

The EUR opens in North America this Thursday morning at $1.1945 U.S. and EUR/CAD $1.5000.

CAD/GBP: Expected Range $0.5885 -- $0.595

The pound sterling was notably weak early on Wednesday, hitting a fresh 2018 low of $1.3486 U.S.before jumping more than half a cent on the Chinese comments about buying US bonds (see U.S. dollar). Even after reaching 1.3555, the pound couldn’t sustain these gains and spent the rest of the day falling back to the low 1.35’s to leave it the worst performing currency on the day. Overnight in Asia and the European morning it has fallen once more, and along with the loonie is the bottom of the major FX pile.

The Bank of England today released its Quarterly Survey of Credit Conditions for Q4 2017. It is perhaps more encouraging from a regulatory perspective than in terms of the economic outlook as it shows some behavioural changes on the part of both borrowers and lenders. Lenders reported that the availability of secured credit to households was unchanged in the three months to mid-December 2017 and expected no change over the next three months to mid-March 2018. The availability of unsecured credit to households was reported to have decreased again in Q4, such that reductions were reported in all four quarters of 2017. Lenders expected a significant decrease in Q1. Credit scoring criteria for granting total unsecured loan applications tightened again in Q4, and lenders expected them to tighten significantly further in Q1.

On the demand side, lenders reported that household demand for secured lending for remortgaging increased significantly in Q4. At +49, the net percentage balance suggested the largest quarter-on-quarter change in demand for this type of lending since the falls reported in early 2009. While demand for credit card lending was reported to be broadly unchanged in Q4, demand for other unsecured lending was reported to have fallen significantly. This is the first material reported fall in demand for either component of unsecured lending since the fourth quarter of 2015.

Good news, then, from a regulatory and financial stability perspective, but maybe not so good in terms of driving the U.K. economy forward into 2018. The British pound opens in North America this morning at $1.3465 U.S., $1.6930 Canadian and $1.7105 Australia.

CAD/AUD: Expected Range $1.003 -- $1.016

The Australian dollar is joint top of the table this morning along with the New Zealand dollar, helped both by higher gold prices and a very punchy set of retail sales figures. Having hit $0.7861 U.S. late in the London morning on Wednesday before subsequently easing back a little in New York, overnight the Aussie has printed a fresh high of $0.7878 U.S. - its best level since October 18.

Australian retail turnover rose 1.2% in November 2017 after a 0.5% rise the previous month. This was way ahead of consensus expectations for a more modest +0.4% m/m gain. The Australian Bureau of Statistics noted, “rises were led by the household goods (4.5%) and other retailing industries (2.2%). Seasonally adjusted sales in both these industries are influenced by the release of the iPhone X and the increasing popularity of promotions in November, including Black Friday sales." There were also rises for clothing, footwear and personal accessory retailing (1.6%) and cafes, restaurants and takeaways (0.4%) Department stores fell (-1.1%) whilst food was unchanged in the month.

After news earlier this week of higher job vacancies and strong recent readings on employment, we’d wondered if it was time for consumers to dip into their pockets and actually spend some cash. They certainly did so in November and the detailed figures show they did so from their computers or smartphones: Online retail turnover contributed 5.5% to total retail turnover in original terms. This is the largest contribution from online sales in the history of the online series.

The Aussie opens in North America this morning at $0.7870 U.S. with AUD/CAD at $0.9855 and AUD/NZD $1.0895.

CAD/NZD: $1.087 -- $1.1085

The New Zealand dollar has had to share top spot with its Aussie cousin so far this Thursday morning. Yesterday, it reached a high of $0.7216 U.S., the first time it has been on a U.S. 72-cent big figure since way back on October 1. Overnight in Asia it fluctuated in a fairly tight range either side of $0.7200 U.S. though a brief spike late in the London morning took it up to a fresh 15-week high of $0.7230.

The first NZ private sector numbers of the year of relevance to foreign exchange markets were out overnight. Data from government valuer Quotable Value (QV) on Thursday showed its residential property price index rose 6.6% year-on-year last month, picking up the pace from the 6.4% rise in November. The robust growth in the final two months of the year was in stark contrast to a slowdown from the middle of the year as sentiment was dampened by uncertainty over an election in September, which brought in a new Labour-led government. “This was partly due to buyers delaying purchasing until the election result was decided and may also have been in part due to some buyers racing to purchase before the new foreign buyers’ ban,” said QV.

The new government has vowed to shake up the property market and introduce a ban on foreign homebuyers in the first few months of 2018 although the Reserve Bank of New Zealand has announced it will ease back its macro-prudential mortgage lending curbs at the start of 2018. House prices in Auckland are up only 0.5% over the past 12 months though the QV index is now 61.6% above the market’s previous peak in late 2007.

The New Zealand dollar opens in North America this Tuesday morning at $0.7220 U.S. with NZD/CAD at $0.9085.