USD/CAD at 4-mo. low as Mnuchin talks down the Greenback

USD/CAD was up and down as much as all the U.S.-dollar-based currency pairs on Tuesday but finally settled around $1.2435, having ranged from $1.2430-$1.2490 in the Northern Hemisphere trading day. As the U.S. dollar has come under further selling pressure throughout the past 12 hours, so USD/CAD has moved lower. It has broken below the immediate post-Bank of Canada-meeting low last Wednesday of $1.2375 and fallen to $1.2325; its weakest in exactly four months.

Much of Prime Minister Justin Trudeau speech to the World Economic Forum in Davos focused on gender inequality and the benefits to be derived from hiring, promoting and retaining women. On more immediately market-sensitive issues, he said, "We’re working very hard to make sure that our neighbour to the south recognizes how good NAFTA is and that it has benefited not just our economy but his economy and the world economy." He also said the new Trans-Pacific trade deal would create "well-paying middle-class jobs for decades to come" even though it did not involve the United States.

Next up for Canadian currency traders – who will be digging out their charts to see that last September’s low was USD/CAD $1.2104 – are November retail sales data on Thursday and then Friday’s Consumer Price Index numbers. As for energy prices, WTI crude is back up to $64.50 per barrel, just a quarter of a cent below last week’s three-year high of $64.75.

The Canadian dollar opened in North America this morning at USD $1.2325 and GBP/CAD $1.7435.

USD/CAD: Expected Range $1.225 -- $1.238

In these first 3½ weeks of 2018, the U.S. dollar index against a basket of major currencies has fallen almost 3%; its worst start to any year since 2013. Early on Tuesday, its index against a basket of major currencies bounced from 89.98 to a best level of 90.21. From then on, however, it was downhill all the way to a fresh 37-month low of 89.77 and in Europe this morning, it continued to fall, trading as low as 89.30.

In part some of the weakness of the U.S. dollar is political and reflects international investors’ distaste for President Trump’s ‘America First’ policy. Whereas a year ago the U.S. dollar was rallying in anticipation of what it would mean for growth in what looked like one of the few rapidly-expanding parts of the world, today there’s plenty of choice. Indeed, the International Monetary Fund has just upgraded its world Gross Domestic Product forecast to 3.9%; the best since the Global Financial Crisis.

Certainly, the language used by Treasury Secretary Steve Mnuchin in the Swiss Alps this morning only gave encouragement to sellers of the U.S. dollar. Though he stuck to a familiar script that, “longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency," he went on to say that, “Obviously, a weaker dollar is good for us as it relates to trade and opportunities.”

Speaking alongside the treasury secretary, Commerce Secretary Wilbur Ross only inflamed the situation by saying that "Trade wars are fought every single day… a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart." President Donald Trump himself said last August that, “the dollar is getting too strong” and the currency world will be watching to see if he aligns himself with this talk of trade war when he gives his Davos speech later this week.

The U.S. dollar index opened in North America this morning at 89.30 with U.S. 10-year bond yields 2 bps lower at 2.63%.

CAD/EUR: Expected Range $0.6545 -- $0.66

Tuesday was a good day for the euro - and a less good one for those European Central Bank Council members who were talking it down last week. EUR/USD rose to a best level during the day of $1.2294; the highest in almost a week. This morning in Europe, it was up further to $1.2352; the strongest level since December 2014.

Whilst the ECB worries about whether euro strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader euro-zone economy.

This morning’s ‘flash’ Purchasing Managers’ Index surveys were remarkably upbeat. The headline euro-zone PMI rose to 58.6 in January, up from 58.1 December and its highest since June 2006. An acceleration of service sector growth to the fastest since August 2007 was partly countered by a slowdown in manufacturing output growth, though the latter remained very buoyant.

The latest three months have seen the strongest factory output increase since 2000. The Press Release noted, “The euro-zone started 2018 with a further acceleration of growth to a near 12-year high, accompanied by the largest payroll gain since 2000 and the highest price pressures for nearly seven years… Activity was buoyed by a further marked and broad-based increase in new business”.

In Davos today, German Chancellor Angela Merkel, French President Emmanuel Macron and Italian Prime Minister Paolo Gentiloni were all scheduled to give speeches. They’ll certainly find their economic arguments supported by the latest data.

The EUR opened in North America this morning at $1.2340 U.S. and EUR/CAD $1.5210.

CAD/GBP: Expected Range $0.5715 -- $0.5755

The pound continues its remarkable run which has seen GBP/USD rise for nine consecutive days without once testing or breaking the previous day’s low. Yesterday it jumped to a fresh 2018 high of $1.4018 and this morning in London has traded up to $1.4147; the highest since the European Union referendum on June 23, 2016; some 410 trading days ago.

The latest economic data published this morning by the Office for National Statistics showed that in the three months to November 2017, the number of people in work increased, the number of unemployed people was little changed, and the number of people aged from 16 to 64 not working and not seeking or available to work (economically inactive) decreased. There were 32.21 million people in the workforce, 102,000 more than for the previous three-month period and 415,000 more than for a year earlier.

The unemployment rate was 4.3%, down from 4.8% a year earlier and the lowest since 1975, while average weekly earnings in nominal terms (that is, not adjusted for price inflation) increased by 2.5% including bonuses and by 2.4% excluding bonuses, compared with a year earlier.

On Brexit, about which we have heard very little so far in 2018, Secretary of State David Davis has been giving evidence to the U.K. Parliament this morning. Giving evidence to the House of Commons Exiting the E.U. Committee, Davis said that he wants “substantive” negotiations on Britain’s future relationship with the E.U. to be concluded by the time it leaves the bloc in March 2019 and that it would be a mistake to allow negotiations to carry on into the proposed transition period following Brexit.

Davis said he expected a clash with the European Union over whether the UK will be able to seek its own trade deals during the transition period. “There may be an argument over the issue of doing outside negotiations, there may well be an argument over that.”

For the moment, nothing seems to stand in the way of the British Pound which opens higher once again in North America this morning at $1.4145 U.S., $1.7435 Canadian and $1.7540 Australia.

CAD/AUD: Expected Range $1.00 -- $1.01

Tuesday was a day in which the Australian dollar struggled to hold on to U.S. 80 cents. Overnight as the U.S. dollar struggled, however, AUD/USD was up to $0.8073; taking it above last September’s peak and to the best level since January 2015 when it was around three-quarters of the way through its multi-year decline from an all-time high around $1.10 U.S. to just 70 cents.

There have been contradictory readings on the Australian economy so far this week. The latest ANZ-Roy Morgan Australian Consumer Confidence index released yesterday fell 3.3% to 119.4. By contrast, this morning’s Westpac leading index was very strong. the six-month annualized growth rate - which indicates the likely pace of economic activity relative to trend three to nine months into the future - jumped from +0.66% in November to +1.41% in December.

Westpac noted, “This is a very strong above trend reading and, following the solid results in October and November, points to solid above trend growth in the early part of 2018.” They also cautioned, however, that “there are still key negatives around housing, household incomes and the consumer which are likely to challenge the sustainability of any upswing in 2018.”

The Aussie opened in North America this morning at $0.8065 U.S. with at $0.9945 Canadian and AUD/NZD $1.0895

CAD/NZD: Expected Range $1.0905 -- $1.105

On Tuesday, the New Zealand dollar gained against every one of the major currencies we follow here. By late afternoon in Europe it had extended these gains to a high around $0.7360 U.S.; the best since September 20. This morning in Europe as U.S. Treasury Secretary Mnuchin pulled the rug from underneath the greenback, the kiwi rose to a high of $0.7406; the first time it has been on a U.S. 74 cents ‘big figure’ since early August 2017.

The kiwi’s strong performance Tuesday came after news that New Zealand, along with 10 other nations, agreed to the new formation of the Trans-Pacific Partnership (TPP). The Pacific trade pact was abandoned by U.S. President Trump and the 11 remaining members reached a deal on a revised agreement, with the nations to work toward signing the deal by early March, according to Singapore’s government.

The deal has been renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and its trade minister enthused that, “The CPTPP will enhance trade among countries in the Asia-Pacific, resulting in more seamless flows of goods, services, and investment regionally.”

The big economic news domestically will be Thursday’s quarterly inflation numbers which consensus estimates will be around +0.4% q/q and 1.9% y/y. New Zealand (like Australia) doesn’t publish monthly Consumer Price Index numbers so they’re always very keenly anticipated for clues to the Reserve Bank of New Zealand’s interest rate policy.

The New Zealand dollar opened in North America at $0.7405 U.S. and at $0.9130 Canadian