USD/CAD - Loonie sidelined ahead of Wednesday’s Bank of Canada meeting

Having gone from being the strongest currency in the first week of the New Year 2018 to the weakest in the second week, the Canadian dollar has been very steady over the first few sessions of this third week. Indeed, for the last 24 hours USD/CAD has traded sideways in a 40-pip range from just $1.2407 to $1.2547.

In a Reuters poll on Monday, just eight of 31 analysts surveyed said they expect the Bank of Canada to hold rates steady on Wednesday as it waits for inflation to pick up and to see how the next round of North American Free Trade Agreement negotiations later this month proceed.

The median forecast in the Reuters poll is for one rate increase apiece in the third and fourth quarters, bringing the benchmark to 1.75% by the end of 2018. Analysts predict another hike in the first quarter of 2019. Economic growth is expected to average 2.2% this year, slightly higher than the 2.1% forecast in the previous poll in October. Expectations for 2019 were unchanged at 1.8%

Over the past 25 years, Canada’s main policy rate has been on average around 25 basis points higher than the U.S. rate. At the moment it’s 0.375 percentage points below, so there could be some catching up to do. The Bank of Canada estimates its so-called neutral rate - which allows the economy to run neither too hot nor too cold - at about 3%. The U.S. Federal Reserve sees its neutral rate at 2.75%, according to the median estimate in their most recent projections in December.

As the long wait to Wednesday’s meeting continues, the Canadian dollar opened in North America this morning at USD $1.2435 and GBP/CAD $1.7110.

USD/CAD: Expected Range $1.2405 -- $1.2515

On Friday, the U.S. dollar broke below last year’s September 7 low of 91.00; taking the index down to its lowest level in more than three years at 90.50. Having opened in London around 90.45, the dollar’s index yesterday tumbled to 89.98; the lowest since December 19, 2014. Overnight, it has steadied a little and is clinging to an index level of 90 as the euro and pound sterling ease back somewhat after their sharp rallies since last Thursday.

Later this week, we’ll see manufacturing and industrial production data on Wednesday, and a number of regional reports such as the Empire State survey today and the Philly Fed survey on Thursday. Sandwiched between these is the latest Federal Reserve Beige Book on Wednesday afternoon New York time. For sure, there was nothing in last week’s numbers – core Consumer Price Index greater than expected and a stronger than consensus retail sales report – that would have knocked the Fed off its tightening bias or suggested that growth expectations needed to be revised lower. The market-derived probability for a 25-bp hike at the March Federal Open Market Committee meeting has gone up from 67% a week ago to 73% now and there’s a tiny chance (2%) of a surprise hike at the January 31 meeting.

Cash equity markets were closed yesterday in the States for the Martin Luther King holiday but futures on the S+P 500 index rose around seven points while Dow Jones Industrial Averages futures advanced 150 points or 0.6%. On January 4, the Dow jumped past 25,000 for the first time ever and by the close of business that day it had made the fastest run ever to a fresh 1,000-point milestone. The jump from 24,000 to 25,000 took 23 trading days. The move in the futures market to 26,070 has taken eight days. We wonder how many baseball caps the often-pictured veteran stock trader has had sewn!

The U.S. dollar index opens in North America this Wednesday morning at 90.30

CAD/EUR: Expected Range $0.655 -- $0.625

This time last week, the euro was at a 2018 low of $1.1918 U.S. It has subsequently been up to a high of $1.2285 yesterday and even after a half-cent pullback over the past 24 hours, it is still up more than 2 ½ cents from last Tuesday.

In an interview with the Börsen-Zeitung in Germany, European Central Bank Governing Council member Ardo Hansson said that that many euro-zone countries are badly prepared for interest rate hikes in the euro area. The head of the central bank of Estonia made it very clear that the European Central Bank (ECB) is in the process of normalizing its ultra-loose monetary policy and could not take account of individual countries.

Hansson said the bond-buying program should be ended after September 2018 if there were no nasty surprises: "If growth and inflation are more or less in line with the projections, it would certainly be conceivable and appropriate to end the purchases after September. Why not? The last step to zero is not a big deal anymore. You do not have to do a lot of fine-tuning. I think we can go to zero in one step without any problems.” As for the euro, the appreciation of the single currency “is not a threat to the inflation outlook up to now, and one shouldn’t over-dramatize it.”

ECB Council Member and Bundesbank President Jens Weidmann is speaking along with his colleague Benoit Coeure at an International Monetary Fund conference on Thursday and it will be interesting if they share the same hard-line stance as their Estonian colleague.

The euro opened in North America this morning at $1.2230 U.S. and EUR/CAD $1.5210.

CAD/GBP: Expected Range $0.5825 -- $0.5885

It’s quite unusual to begin a commentary on the pound by noting that it is lower than last night’s closing levels. On Friday, the sterling traded at $1.35, $1.36 and $1.37 U.S. Yesterday it moved on to $1.38 around the middle of the European morning but after a quick half-a-cent pullback, then went on to a best level in New York around $1.3815. Overnight, with a somewhat steadier U.S. dollar, GBP/USD is around 50-60 pips lower at $1.3755.

We mentioned yesterday the collapse of one of the U.K.’s largest construction companies, Carillion, which employs around 43,000 people and has been working on a host of government-funded infrastructure projects as well as many contracts for hospitals, schools, prisons and the Army.

We said, “this is a story which is sure to get bigger over the coming days”. Today, unsurprisingly, we’re now hearing about the second-round impacts on a host of subcontractors and small business, many of whom are now unsecured creditors and likely to lose huge amounts of money. It is an added uncertainty the U.K. economy could do without right now.

As for the Brexit negotiations which are set to resume soon, a report in today’s Guardian newspaper claims that, according to senior diplomatic sources, “repeated representations have been made to European Union officials by Oslo over their fears that an overly generous offer to the U.K. will fuel calls in Norway to renegotiate its ties with the bloc”.

Norway makes larger financial contributions to the E.U. per capita than the U.K. and accepts free movement of people in order to have access to the single market. But it has no decision-making role in Brussels’ institutions. A senior official said: “The Norwegians are following this very closely to make sure that we are not giving the U.K. a much more favourable deal.”

U.K. CPI figures this morning showed the first fall in the annual rate since June last year. The Office for National Statistics said the fall in inflation from 3.1% to 3.0% came mainly from airfares, along with a fall in the prices of a range of recreational goods, particularly games and toys. These were partially offset by an increase in tobacco prices, reflecting duty increases that came into effect following the Autumn Budget, along with an increase in petrol and diesel price. It’s only a tiny fall in inflation, but the figures do at least give some hope that the peak in CPI might now have been seen.

The British Pound opens in North America this morning at $1.3755 U.S., $1.7110 Canadian and $1.7300 Australian.

CAD/AUD: Expected Range $1.005 -- $1.0155

Given its recent volatility, it should come as little surprise that having been in joint top spot with the Australian dollar on Monday, the New Zealand dollar is this morning back at the bottom of the performance table. This comes after a pretty downbeat Quarterly Survey of Business Optimism published by the New Zealand Institute of Economic Research (NZIER) which has conducted a comprehensive quarterly survey of business opinion - known as the QSBO - ever since 1961.

This latest QSBO shows a sharp drop in business confidence following the General Election, with a net 11% of businesses expecting economic conditions to deteriorate over the first half of 2018. Business confidence had fallen in the previous quarter ahead of the General Election, and it appears uncertainty over new Government policies have made businesses even more downbeat. The decline is more modest when it comes to businesses’ own demand.

A net 10% of businesses reported a lift in own trading activity in the December 2017 quarter, an easing from the net 13% in the previous quarter. As the NZIER puts it, “Businesses may be worried about the outlook for the New Zealand economy under the new Labour-led government, but for now this is not reflected in demand in their own business”.

The decline in business confidence was broad-based across the sectors, with retailers and manufacturers particularly downbeat. However, the pessimism was not reflected in activity indicators. Domestic sales remain solid in the retail and manufacturing sector. The building sector also reported solid output and new orders. Across the regions, the pessimism was evident in the urban regions including Auckland, Wellington and Canterbury. In particular, a net 33% of Wellington businesses expected a worsening in economic conditions over the coming months.

The New Zealand dollar opened in North America at $0.7275 U.S. with NZD/CAD at $0.9050.

CAD/NZD: $1.098 -- $1.11