USD/CAD - NAFTA talks resume, Prime Minister Trudeau flies to Davos

CAD

Last week’s trading in the Canadian Dollar was completely dominated by Wednesday’s first Bank of Canada monetary policy meeting of the year at which it raised rates 25bp to 1.25%. The initial reaction in FX markets was the usual mix of algorithm-driven stop-loss and stop-entry orders as the headlines flashed across the screens. After the dust settled, USD/CAD spent the next 48 hours firmly bounded by the immediate post-BoC range of 1.2385-1.2470 but in the very last hour of trading in New York on Friday moved up to end the week at 1.2500. Overnight in Asia and Europe, USD/CAD has eased around 35-40 pips to be back at 1.2465. The sixth round of talks on renegotiating the North American Free Trade Agreement, or NAFTA, is due to take place in Montreal from January 23-29th. In its Statement announcing the rate hike, BoC said the future of NAFTA was the most significant downside risk the economy faced. Canada sends about 75 percent of its exports to the United States. After spending the past two weeks all across the country speaking with ordinary Canadians in town hall meetings, Prime Minister Justin Trudeau must be the only leader going to the World Economic Forum in Davos to find the temperature warmer than at home! According to his office, one of the key pieces of Trudeau’s program will be the speech he delivers on Tuesday. “It will be an opportunity to present our international priorities and to talk about the five themes of the G7 that we’ve already unveiled”. As well as the progress of NAFTA talks and headlines from Davos, currency traders will also be waiting Thursday’s November retail sales data and Friday’s CPI numbers. They’ll be keeping an eye too on energy prices after WTI crude last week hit a fresh 3-year high of $64.75 before ending the week around $63.50 per barrel. The Canadian Dollar opens in North America this morning at USD1.2465 and GBP/CAD1.7325.

USD

Perhaps the most surprising feature of the Asian and European trading sessions has been that it took so long for the US Dollar to give back Friday’s gains. Last week, the USD index made four fresh lows on four different days at 89.99, 89.96, 89.92 and 89.89 before rallying on the final day to end around 90.35. At no point overnight has it traded higher than Friday’s close but it took almost 12 hours for the gains to be fully unwound and the index slipped to a low of 90.06 during the London morning. At midnight on Friday, the US government began to shut down; the first time ever that a party which controls the White House, Senate and House of Representatives has overseen a government shutdown. It is the 19th such occasion in the last 40 years. Four of these 19 have lasted just one day with the longest in 1995 lasting 21 days. During the last government shutdown in October 2013, 850,000 federal workers were laid off, equal to nearly 40% of the government workforce. The shutdown lasted for 16 days, triggered by a disagreement over Obamacare. According to Standard & Poor’s, it cost the economy $24 billion. We don’t yet know the extent to which there is any genuine bipartisan desire to end the standoff. Senate majority leader, Mitch McConnell, has said he would allow a vote on immigration reform in February if Democrats agree to fund the government. The top Senate Republican said he would push for a Monday vote on a short-term deal to fund the government through 8 February, as well as extend a popular health insurance program called Chip that provides healthcare coverage to nine million children for six years. With no economic data scheduled for today, currency markets will continue to be buffeted by the progress – or otherwise – of political negotiations. It could be a very frustrating day. The US Dollar index opens in North America this morning at 90.10 with US 10-year bond yields at 2.65%; within 1bp of a fresh 40-month high.