USD/CAD - CAD steady amidst uncertainty over U.S. NAFTA stance

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. A week ago, after the latest labour market report, USD/CAD touched a low of $1.2375. By yesterday afternoon in New York it had risen to a high of $1.2585 before settling down in Europe this morning in the low $1.25’s.

Even two days after the news of a potential U.S. withdrawal from the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, we are still none the wiser as to what the U.S.’s true intentions are and what economic impact it may have either side of the Canada-U.S. border. Among the most divisive proposals said to come from the U.S. side 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.

President Trump has long called the 1994 treaty a bad deal that hurts American workers and during the presidential campaign, called it the "worst trade deal in the history of the country." Officials are due to hold a sixth and penultimate round of negotiations in Montreal from January 23-28 and it is now widely expected that Trump might deliver a letter giving six-months’ notice of an intention to withdraw from the agreement. The only official comment from the White House is that, “there has been no change in the president’s position on NAFTA”. We’ll see if the weekend Press and news media can shed any further light on the matter.

The Canadian dollar opens in North America this morning at $1.2520 U.S., GBP/CAD $1.7070 and AUD/CAD $0.9855.

USD/CAD: Expected Range $1.243 -- $1.2585

The last 48 hours have been pretty wild for the U.S. dollar. ‘Fake news’ from China had seen it fall sharply then erase all its losses before the European Central Bank’s bombshell hit the foreign exchange market on Thursday and sent the greenback tumbling once more. Having recovered from 91.60 to a high in London of 92.17, the U.S. dollar Index against a basket of major currencies fell sharply throughout the New York session to end the day back down at 91.50. This morning in Europe it has fallen further with the index now back testing the 2017 low of 90.98 on September 7.

As well as the ECB news, the U.S. dollar was not helped by a very soft set of U.S. Producer Price Index figures. The U.S. Labor Department said its producer price index for final demand slipped 0.1% last month. That was the first drop in the PPI since August 2016 and followed two straight monthly increases of 0.4%. In the 12 months through December, PPI rose 2.6% after accelerating to 3.1% in November. There isn’t a perfect – or even a very good – correlation between PPI and Consumer Price Index on a monthly basis. Indeed, if there was, there’d be no need to publish CPI figures separately or for markets ever to worry about them: all the fresh information value would be in the PPI.

We’ve said before that the FX market reaction is often to shoot first and ask questions later, so it would have been a brave analyst who stood up in the middle of a busy dealing room to announce that the PPI figures didn’t matter. The market has passed its verdict that soft PPI means expectations for CPI today should be lowered. That might be a wrong assumption but we’ll see this morning when the numbers are released at 08:30 Eastern Time. Consensus expectations are for a +0.2% m/m gain to leave the annual rate of CPI inflation at 2.1%. Separate but simultaneously released numbers on December retail sales are expected to show both the headline and core (ex-autos) measures rose 0.4% on the month.

The U.S. dollar index opened in North America this Wednesday morning at 91.00.

CAD/EUR: Expected Range $0.655 -- $0.6625

The euro was quietly trading in the $1.1940’s U.S. in the European morning on Thursday, caught between the usual opposing forces of very strong economic data and worries about German politics. Then, at lunchtime, the ECB released its usually bland account of the last monetary policy meeting of the Governing Council. Buried deep in the report, the ECB dropped the bombshell on to financial markets that it was considering changing its guidance to markets about future monetary policy.

As it quickly dawned on investors what the implications of this would be, EUR/USD immediately surged to $1.2040 U.S., where it closed in New York. This morning in Europe, the euro as had another leg higher, almost reaching 1.2130; the highest in just over three years. We have to go all the way back to December 2014 to find the last time the euro was at this level. One of the great ironies of this dramatic correction higher in the external value of the euro was the sentence in the ECB’s account of the December Council Meeting that, “It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.”

Oftentimes, after a sharp move in either foreign exchange or currency markets, the ECB does an off-the-record briefing with select journalists to attempt to halt or even reverse what it might see as an unwelcome development. These are often referred to in the professional market as “ECB sources” stories as they are always anonymous with no names attributed to them. The main feature of this morning’ trading in Europe is that there has been no such pushback.

Euro-zone money markets now price in a 70% chance of a 10-basis-point rate hike by year-end; up from around 50% at the beginning of the week. The euro opened in North America this Thursday morning at $1.2125 U.S. and EUR/CAD $1.5185.

CAD/GBP: Expected Range $0.58 -- $0.588

The pound sterling had a classic day of two halves on Thursday; weak in the morning after the publication of the Bank of England Credit Conditions Survey but then rallying hard against the U.S. dollar – but not the Australian or New Zealand dollars or the euro - during the London afternoon. The pound hit a fresh 2018 low of $1.3461 just before the ECB lit a fire under the continental currency but by the close of business in Europe it had gained more than three quarters of a cent to a high of $1.3547. This morning in Europe it has added another full cent to reach $1.3640; a fresh high for 2018 and the strongest since the day after the European Union referendum back in June 2016.

Three of the U.K.’s biggest retailers this week delivered disappointing Christmas figures as weak consumer confidence and aggressive discounting from online retailers hit sales. Retailers are trapped in a profit squeeze as the past devaluation of sterling pushes up the cost of sourcing products at a time when real disposable incomes are shrinking. Next week we’ll get to see the latest figures on U.K. inflation on Tuesday and the official retail sales numbers on Friday.

Though the pound’s rally against the U.S. dollar over the past 24 hours has certainly been impressive, it has still lagged the euro with GBP/EUR, at one point this morning falling to within 10 pips of making a fresh low for 2018. After a 160-pip rise today, GBP/AUD is still only back to where it was on Monday, while GBP/NZD is only back to Wednesday’s levels.

The British pound opened in North America this morning at $1.3630 U.S., $1.7065 Canadian and $1.7310 Australian.

CAD/AUD: Expected Range $1.01 -- $1.0205

AUD/USD rose more than 40 pips on Thursday but could still only make it to third place on the one-day performance table behind the New Zealand dollar (yet again!) and the euro. After an early boost locally from retail sales figures, it then traded pretty much sideways until late in the New York afternoon when it reached a fresh 14-week high of $0.7895; the best since late September. Overnight in Asia it marginally extended these gains to just a couple of pips below 79 cents before slipping a little in the European morning.

The Aussie was quite resilient in the face of latest Chinese trade data which showed a big slowing of imports last month. China’s exports for the full year rose 7.9%, the fastest rate since 2013, while imports gained 15.9%, the best since 2011. For December, however, exports rose 10.9% from a year earlier, beating analysts’ forecast of a 9.1% increase while imports grew at a slower pace of 4.5%. That left the country with a trade surplus of $54 billion for the month, the highest since January 2016.

As well as the strength of domestic economic data the Aussie has also been given a boost from higher gold prices. The yellow metal is up $14 per ounce over the past 24 hours to $1,331 U.S.; the highest since September 14, 2017, while silver, platinum and aluminium have all registered gains. AUD/USD hasn’t been on a U.S. 80-cent big figure since September 20 but given the foreign exchange market’s love of round numbers, this is the level which will be increasingly talked about now.

The Aussie opened in North America this morning at $0.7870 U.S. with AUD/CAD at $0.9860 and AUD/NZD $1.0850.

CAD/NZD: Expected Range $1.098 -- $1.1125