USD/CAD - Currency Pair testing $1.23 ahead of CPI and Trump speech

USD/CAD has continued to edge a bit lower, albeit the Canadian Dollar has lagged other major currencies after some slightly softer than expected retail sales data. The low point for USD/CAD on Thursday came just before lunch time in North America at 1.2287 before a rally back to almost 1.2390 after President Trump’s comments on the U.S. dollar. Overnight and in the European morning, it has traded around three-quarters of a cent lower to 1.2305.

Speaking in Davos, Bank of Canada Governor Stephen Poloz said he did not know what potential there would be for further interest rate hikes this year, reiterating that policymakers remained both data dependent and alert to developments with NAFTA. "We've explained to people that there are a number of important issues that force us to not be mechanical or to use a rule or to plan ahead in that way. We've said we are totally data-dependent."

Asked if the BoC was also "NAFTA-dependent," Poloz said: "Oh yes, very." But he said it was impossible to do the arithmetic ahead of time to know what policy response may be needed if the North American Free Trade Agreement is terminated or significantly altered. "If the economy began to slow as a result, then we'd be able to put those pieces together, then it would go into the mix, the inflation target would be at risk, and we'd be cutting rates into that. But a lot of things could move at the time.”

This morning, we have the monthly Consumer Price Index data. The consensus expectation is that CPI fell -0.3% in December to take the annual rate from 2.1% to 1.9%. The Canadian dollar opened in North America this morning at $1.2305 U.S. and GBP/CAD $1.7535.

USD/CAD: Expected Range $1.225 -- $1.259

The U.S. dollar continued to slide Thursday until a fairly emphatic intervention in Davos from President Trump. The U.S. dollar index against a basket of major currencies had fallen almost 4% so far in January; its worst start to any year since 1987 and reached a low point of 88.21, down more than 0.5% on the day. During the evening, in an interview with CNBC, President Donald Trump said, "the dollar is going to get stronger and stronger and ultimately, I want to see a strong dollar," He added further that Treasury Secretary Steven Mnuchin's comments were taken out of context. The U.S. dollar index jumped from 88.40 to 89.25, though overnight it has fallen more than half a point to be back at 88.60.

President Trump’s keenly-awaited speech to the World Economic Fund is due around 2 p.m. local time; around half an hour before the Q4 U.S. Gross Domestic Product figures are published. The U.S. economy grew an annualized 3.1% in 2Q17 and 3.2% in 3Q 2017 and consensus looks for another 3% growth figure in today's report. This would be the first time the U.S. has experienced three consecutive quarters of 3% growth since 2004/05. The Federal Reserve Bank of Atlanta’s GDPNow forecasting model has been one of the most accurate in recent years and as of last night it suggests GDP will come in at 3.4% with real consumer spending growth of 4%.

Ahead of all this, the U.S. dollar index opened in North America this morning at 88.60 with US 10-year bond yields 1bp lower at 2.63%.

CAD/EUR: Expected Range $0.65 -- $0.6545.

Having hit $1.24 U.S. for the first time since December 2014 earlier in the week, during European Central Bank President Draghi’s Press Conference yesterday, it touched a high of $1.2530 before then crashing to $1.2370 after U.S. President Trump’s comments on the greenback. Overnight in Asia and in Europe this morning, it has rallied almost a full cent to $1.2465.

The big issue for the ECB was whether Draghi would change forward guidance on interest rates (he didn’t), try to talk the euro lower (he didn’t) or sound in any way concerned about the impact of a strong euro on growth and inflation forecasts (he didn’t). The standard practice amongst central bankers when asked to speak about the actions of another is a diplomatic “no comment”. Instead, he entered a war of words with unnamed (but clearly American) officials for manipulating the currency, saying “someone else’s FX talk doesn’t comply with agreed terms... When I said communication, I didn’t mean ECB communication but other people’s communication. We don’t target the exchange rate.”

Instead of throwing stones from inside the ECB’s elegant glass house in Frankfurt, perhaps Mr. Draghi should reflect that the ECB has done more to push up EUR/USD than anything on the U.S. side. We described the January 11 account of the December meeting as a ‘bombshell’ which said “language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in coming year". EUR/USD rose 4.5 cents after that so it seems a bit odd to blame the United States for the rise in exchange rate volatility.

The euro opened in North America this morning at $1.2465 U.S. and $1.5340 Canadian

CAD/GBP: Expected Range $0.5675 -- $0.573

The pound sterling still hasn’t broken its 11-day sequence of rallying without testing the previous day’s low, even though the price action over the last 24 hours suggests a more two-way market than we’ve seen over the last couple of weeks. GBP/USD yesterday reached a high around $1.4330 during Mario Draghi’s Press Conference before giving back more than two cents to $1.4115 after President Trump’s comments in favour of a stronger U.S. dollar. It has subsequently recovered more than a full cent to $1.4250.