USD/CAD - Loonie hits 81 cents U.S. for first time in four months

As the U.S. dollar has tumbled, so USD/CAD has moved lower. Wednesday, it fell below the immediate post-Bank of Canada-meeting low of $1.2375 and went on to an intra-day low of $1.2320, its weakest in exactly four months. When quoted the ‘other’ way round, then as USD/CAD hit $1.2345, the Canadian dollar moved on to 81 cents U.S. for the first time since September. Overnight in Asia, USD/CAD extended losses to just below $1.23 though it needs to reach $1.2195 to be back on 82 U.S. cents.

All negotiators like to claim victory, and there has been no shortage of Canadians lining up to take credit for the CPATPP. International Trade Minister François-Philippe Champagne said his country got a better deal than the one the other nations wanted to sign back in November. "When we were in Danang, we stood up for Canada. We said, for this agreement to work for Canada. we need to address specific issues," he said. "You saw that we were forceful in our position and since then we have worked to get agreements with our partners, notably on the cultural sector ... to protect, defend and promote out culture across Canada."

With North American Free Trade Agreement representatives already embarked on the sixth round of talks in Montreal, they at least know Canada and Mexico are signing free trade deals with large new markets in the Pacific Rim. though more immediately important 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 this afternoon and then Friday’s Consumer Price Index numbers. Consensus estimates are for retail sales to be up +0.7% m/m with the core, ex-autos number up +0.8%.

The Canadian dollar opened in North America this morning at $1.2320 U.S. and GBP/CAD $1.7575.

USD/CAD: Expected Range $1.225 -- $1.236

January isn’t finished yet but the U.S. dollar index against a basket of major currencies has now fallen over 3%, its worst start to any year since 1987. Wednesday was the worst day in 10 months for the greenback, which began at a 37-month low around 89.70 and fell without interruption to a fresh low this Thursday morning of 88.50.

Somewhat predictably after the damage done yesterday, Treasury Secretary Steve Mnuchin at a news conference at the World Economic Forum in Davos, today played down his comments that a weaker dollar was “good for us as it relates to trade and opportunities”. Mnuchin told reporters, “I thought my comment on the dollar was actually quite clear yesterday. I thought it was actually balanced and consistent with what I’ve said before, which is, we are not concerned with where the dollar is in the short term.”
Mnuchin said there were “both advantages and disadvantages of where the dollar is in the short term” and stressed that the United States wanted fair economic competition. “We want free and fair and reciprocal trade. So, I think it’s very clear. We’re not looking to get into trade wars. On the other hand, we are looking to defend America’s interests.”

Air Force One touched down at Zurich airport earlier this morning and President Trump is scheduled to address the World Economic Forum on Friday morning local time. The president himself said last August that, “the dollar is getting too strong” and the currency world will be watching to see if he aligns with or distances himself from this talk of trade war. U.S. economic data out today on the trade balance, wholesale inventories and the trade balance are an irrelevance when set against the broader geopolitical and macro backdrop.

The U.S. dollar index opened in North America this morning at 88.75 with U.S. 10-year bond yields unchanged at 2.64%.

CAD/EUR: Expected Range $0.652 -- $0.658

The euro couldn’t quite match the strength of the British Pound but it had another strong day on Wednesday, rising to $1.24 U.S. for the first time since December 2014. Overnight, it has extended the rally to a best level around 1.2455 before a bit of profit-taking ahead of today’s key European Central Bank meeting.

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. The Ifo Business Climate Index out this morning rose to 117.6 points in January from 117.2 points in December. This was due to far better assessments of the current business situation, with the sub-indicator hitting a record high. Business expectations for the next six months, by contrast, were scaled slightly back, but remain at a high level. As the Ifo puts it, “the German economy made a dynamic start to the year.”

In Davos, German Chancellor Angela Merkel and French President Emmanuel Macron both did the ‘vision thing’, most especially Ms. Merkel, who reminded delegates that 2018 marks the 100th anniversary of the end of the first world war. The political actors a century ago ‘sleepwalked’ into a crisis, Merkel said. “This generation born after the Second World War will have to prove it has learned the lessons of history. That means remaining committed to multilateralism, working together to solve problems”.

Today is the first ECB Council Meeting of the year, with President Mario Draghi giving his regular Press Conference. Given the very strong upward momentum in the euro-zone economy, it is very hard to see how he can credibly warn against currency strength and argue for negative interest rates to be maintained until well into next year. This won’t stop him trying and he is a past master at finding new turns of phrase to keep markets where he wants them. It should be a fascinating but potentially very volatile day ahead.

The euro opens in North America this morning at $1.2405 U.S. and EUR/CAD $1.5290.

CAD/GBP: Expected Range $0.5675-- $0.5725

The pound has continued its remarkable run which has seen GBP/USD rise for 10 consecutive days without breaking the previous day’s low. From the day the ECB dropped its bombshell about possibly changing the language around forward guidance of monetary policy on Thursday January 11, (ironically, in an attempt to smooth market volatility) GBP/USD has risen almost nine cents, its biggest 10-day gain since June 2009. In London trading earlier this morning, the pound moved higher still and hit a best level of $1.4325 before then slipping around half a cent.

In an interview with Bloomberg Television in Davos, U.K. Chancellor of the Exchequer Philip Hammond said, “We’re very happy with where the currency is at the moment… Getting the inflation rate down - and a rising pound helps to do that - helps to drive increases in real wages, and that’s good for our economy and good for our society,” he said.

In economic news today, mortgage approvals by Britain’s banks fell to their lowest level since April 2013 in December, according to trade association U.K. Finance. Banks approved just 36,115 mortgages for house buying, down from 39,007 in November and 19% lower than a year ago. The RICS survey last week was consistent with even lower levels of activity in this first quarter of 2018.

Separately, the Confederation of British Industries’ latest distributive trades survey, showed U.K. retail sales at a slower pace than anticipated. The survey showed a balance of +12 for January, down from +20 in December. Sales for the time of year were the weakest compared to the norm for more than four years. Orders to suppliers also fell, and looking ahead retailers expect similar growth in sales volumes while orders are forecast to be flat.

For the moment at least, weaker U.K. economic numbers don’t seem to matter to currency traders. The British Pound opened in North America this morning at$ 1.4255 U.S., $1.7560 Canadian and $1.7655 Australian

CAD/AUD: Expected Range $1.00 -- $1.007

As the U.S. treasury and commerce secretaries pulled the rug from under the U.S. dollar on Wednesday, the Aussie dollar traded up to a high of $0.8080 U.S. 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. Early this morning in London, AUD/USD hit almost $0.8120 before then easing back around half a cent.

According to a very upbeat article in The Australian today, the country is expected to see an increase in income of up to 1% of Gross Domestic Product from the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which would reduce 98% of all tariffs between member countries.

The sectors that stand to benefit the most are beef, dairy, sugar, grain, seafood, manufactured goods, and services industries. The Australian Meat Industry Council has backed the deal, claiming it will create greater opportunities for the red meat industry. To cite just a couple of examples, the newspaper notes that Canada and Mexico currently have import tariffs of 25% on beef but these will be reduced to zero over the next 10 years. Mexico has pledged to abolish its 115% tariff on barley within five years and its 67% tariff on wheat within 10 years.

The Australian dollar opened in North America this morning at $0.8075 U.S. with AUD/CAD at $0.9950 and AUD/NZD $1.0955.

CAD/NZD: $1.095 -- $1.105

The New Zealand dollar on Wednesday rose to a high of $0.7433 U.S., the first time it has been on a 74-cent U.S. ‘big figure’ since early-August 2017. Overnight in Asia, however, it suffered a very sharp reversal as the long-awaited quarterly inflation numbers fell well short of consensus expectations. NZD/USD immediately tumbled a full cent to around $0.7325 before then recovering just under half these losses.

The median published estimates were for a quarterly increase in CPI of 0.4% which would have left the annual rate at 1.9%. Instead, StatsNZ reported that prices rose just 0.1% in the December 2017 quarter. Higher petrol prices, air fares, and housing-related costs were offset by lower prices for vegetables, new cars, and a range of household goods. The relatively flat result this quarter leaves the inflation rate at 1.6% for the December 2017 year.

In its last published monetary policy assessment back in early November, the Reserve Bank of New Zealand saw inflation reaching 2% in Q2 2018 as opposed to Q1 2019 which they had previously forecast. It also said it no longer sees headline inflation declining. As that forecast now heads to the shredder, analysts have been quick to revise down their interest rate expectations. ANZ, for example, said the data, coupled with their belief the “economy is set to go through somewhat of a near-term growth wobble”, have pushed its expectations for the Reserve Bank of New Zealand to hike the official cash rate back from November 2018 to mid-2019.

The New Zealand dollar opened in North America at $0.7375 U.S. with NZD/CAD at $0.9085.