USD/CAD -- Update on NAFTA progress will be key for Loonie

All the drama for the Canadian dollar came two weeks ago as it became the first G7 central bank to raise rates in 2018. Since then it has been a much quieter period, though USD/CAD has settled in the lower part of a $1.2280-$1.25 range. The loonie has been helped by continued strength in oil prices (WTI crude is back above $66 this morning) and a sense that negotiations around NAFTA seem to proceeding well; albeit behind closed doors.

Speaking in an interview with Bloomberg, Bank of Canada Governor Stephen Poloz said central banks aren’t going to aggressively tighten policy because there are still underlying vulnerabilities in many economies. “Calling this the ‘end of easy money’ is a little too simple… It’s likely that money is going to remain easy for some time yet” because “economies are still working their way through a lot of underlying stresses. What happens in this late stage in the cycle is that investment becomes the principal driver of growth, and that builds more capacity, pulling that capacity out of the labour market and raising potential output…We’re watching those ingredients as they unfold, and we can see that it’s underway.”

For the week ahead, we get the monthly Gross Domestic Product and industrial production numbers on Wednesday and the manufacturing Purchasing Managers’ Index survey on Thursday. Officials from the United States, Canada and Mexico will wrap up the sixth of seven planned rounds of talks on the North American Free Trade Agreement in Montreal today, with little sign yet of agreement on U.S. proposals to overhaul the $1.2-trillion pact. On Sunday, Prime Minister Justin Trudeau told a televised meeting of Liberal legislators in Ottawa that the government was working hard to get a better NAFTA deal. Officials say that if the three chief negotiators decide the process should continue, an additional round of talks will start in Mexico on February 26. The Canadian dollar opened this morning in North America at USD/CAD $1.2340, AUD/CAD $0.9990and GBP/CAD $1.7360.

USD/CAD: Expected Range $1.2285 -- $1.2390

The U.S. dollar had a dramatic week which saw it fall a net 1.7% against a basket of major currencies. Its index opened last Monday morning around 90.25 but fell persistently to a fresh low on Thursday of 88.20; its weakest since December 2014. After President Donald Trump delivered his “America First but not Alone” speech to a packed conference hall in Davos on Friday, the U.S. dollar steadied somewhat to end a very dramatic week at 88.70. Overnight in Asia and this morning in Europe, the greenback has remained pretty stable, with the index two-10ths higher at 88.90.

The week ahead brings plenty of news on the U.S. economy as well as Dr. Janet Yellen’s last meeting as chairman of the Federal Reserve Bank. Market-derived probability estimates show just a 3% chance of a 25-basis-point hike in rates, with the overwhelming view being this will not come until the March 21 Federal Open Market Committee meeting. On Tuesday, we get the latest reading on consumer confidence, Wednesday it’s the Chicago NAPM then on Thursday the Institute for Supply Management manufacturing survey. The first Friday of the new month, as usual, is the labour market report where consensus estimates are for non-farm payrolls to have increased about 180k with the unemployment rate steady at 4.1%. Before all that, today we have the personal income and spending numbers as well as the very important Personal Consumption Expenditure deflators which will be watched very closely for signs of progress towards the Fed’s goals.

After President Trump’s sales pitch to world leaders in the Swiss Alps, tomorrow is his opportunity to pitch to a domestic audience. When the president delivered his first address to U.S. Congress last year, it was technically not termed a State of the Union speech because he had only been in office for five weeks. In a press briefing on Sunday, a senior administration official told reporters that when Trump speaks at 9 p.m. EST on Tuesday, laying out future plans and reflecting on his first year in office, he will be “speaking from the heart” to discuss jobs and the economy, infrastructure, immigration, trade and national security. The speech is titled, “Building a safe, strong and proud America”. The U.S. dollar index opened in North America this morning at 88.90 but keep a close eye on 10-year bond yields which this morning hit 2.72%; a fresh high for this cycle.

CAD/EUR: Expected Range $0.6505 -- $0.6555

All last week’s economic data in the euro-zone was without exception positive but for the foreign exchange market, none of it was really ‘new news’. Instead, investors were looking for clues on monetary policy from the European Central Bank: whether they would signal an earlier withdrawal of monetary accommodation or try to push back against the strength of the EUR/USD exchange rate. At the ECB Press Conference on Thursday afternoon, President Mario Draghi was clearly rattled and 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...” EUR/USD hit a high of $1.2530 during the ECB Press Conference before falling one and a half cents on President Trump’s comments about wanting a stronger dollar.

This morning in Europe, EUR/USD has been generally steady even as the U.S. dollar has gained ground against most of the other major currencies. Speaking in Brussels earlier today, ECB Chief Economist Peter Praet said European Central Bank will only stop pumping cash into the euro-zone economy when it is confident that inflation is heading towards its target without its extra help. Praet was one of the key supporters of the ECB’s €2.55-trillion bond-buying programme and was responding to calls by officials – notable in Germany and the Netherlands - to stop the scheme later this year. Despite these dovish remarks, German five-year bond yields have today moved back into positive territory for the first time since late-2015 while 10-years are up 5bp to 0.68% which is helping to support the euro.

The week ahead in the eurozone brings Q4 GDP figures on Tuesday where consensus estimates are for a +0.6% quarterly increase. Also tomorrow, we’ll get German Consumer Price Index figures which will then see analysts firming up their forecasts for the eurozone CPI numbers on Wednesday. Thursday brings the final Markit PMI numbers across Europe, whilst investors need to be prepared at any time for the usual anonymous post-ECB briefings and clarifications. After a relatively quiet but firm morning in Asia and Europe, the EUR opened today in North America at $1.2400 U.S., AUD/EUR 0.6530 and NZD/EUR 0.5910.

CAD/GBP: Expected Range $0.573 -- $0.58
Until last Friday, the British pound had a remarkable 11-day sequence in which it never tested the previous day’s low against the U.S. dollar. In doing so, it rose more than seven cents and at one point was almost nine cents higher having reached a best level on Thursday around $1.4330. Friday’s low was $1.4145 and this morning in London, the GBP has traded down to $1.4070, bringing that impressive run to an end. There’s still some time until close of business this evening but if it stays at current levels then we’ll be writing about a ‘down day’ for the GBP for the first time in 2 ½ weeks.

The first few weeks of the New Year have been mercifully free of Brexit news, but it is a subject which is now set to return with a vengeance; not least because as of today- January 29 – there are exactly 14 months left until the U.K. formally exits the European Union. Though the legislation has passed the House of Commons, this week it goes for debate to the House of Lords whose constitution committee has already said that the bill as it currently stands risked “undermining legal certainty” and should be substantially changed. The chair of the committee today said: “We acknowledge the scale, challenge and unprecedented nature of the task of converting existing European Union law into U.K. law, but as it stands, this bill is constitutionally unacceptable.”

In what will be a relatively quiet week for U.K. economic data – with Thursday’s manufacturing PMI probably the highlight – there’ll be plenty of time to focus instead on politics. Most newspapers at the weekend reported that Prime Minister Theresa May has cancelled plans to give another high-profile speech such as the one she gave in Florence last year. The reason for this is not just because, allegedly, she does not know what she wants herself, but that anything she says is likely to worsen divisions amongst her own cabinet and backbenchers. Amidst the political intrigue, the GBP opened in North America today at $1.4070 U.S., GBP/CAD $1.7360 and GBP/AUD $1.7380.

CAD/AUD: Expected Range $0.997 -- $1.008

After a slow start last week, a combination of decent local economic news and U.S. Treasury Secretary Mnuchin’s words on the benefits of a weaker dollar helped push the Australian dollar higher. On Friday it went on to reach a high against the U.S. dollar just below $0.8135; its best level since January 2015 when it was around three-quarters of the way through its multi-year decline from the all-time high in Summer 2011 around $1.10 U.S. to just 70 cents four years later. The first trading day of the week in Asia and Europe has so far seen AUD/USD give back around 40 pips of Friday’s gains.

As Australians head back to work at the end of the Summer holidays, so too economic news flow begins to pick up. On Tuesday, it’s the monthly NAB Business Survey but more important will be Wednesday’s quarterly CPI numbers. The official statisticians don’t produce monthly inflation numbers. It means the government and central bank have to rely on private sector estimates for a timely read on price pressures, then once a quarter have a whole series of official numbers (headline, trimmed mean, weighted median etc) which can sometimes be difficult to interpret. Anyhow, the general consensus is that headline CPI will rise around 0.7% q/q to take the annual rate up to 2%.

The Reserve Bank of Australia doesn’t have a Board meeting in January so its meeting on Tuesday February 6 will be its first chance for two months to review all the incoming data publicly. Whilst any comment they make on exchange rates will be seized on by analysts, it’s probably still the case that monetary policy in 2018 will be determined more by growth in wages than by what’s happening to the external value of the currency. The Australian dollar started in North America today at $0.8095 U.S., with AUD/NZD at 1.1040 and AUD/CAD $0.9990.

CAD/NZD: $1.10 -- $1.1095

The New Zealand dollar outperformed its Aussie cousin in the first part of last week before reversing all the gains and more in the final two days. On Wednesday, as the U.S. dollar slide accelerated and deepened after the Mnuchin comments in Davos, NZD/USD hit a high around $0.7430; the first time it had been on a 74-cent U.S. ‘big figure’ since early-August 2017. After a much weaker than expected set of CPI numbers, however, the kiwi went into reverse. NZD/USD immediately tumbled a full cent to around $0.7325 and then on to a low Thursday around $0.7290 with AUD/NZD back up to $1.09 then $1.10.

To recap, 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 to take the annual rate down to 1.6%. Local analysts pushed out their expectations for the next Reserve Bank of New Zealand rate hike to mid-2019, whilst amongst the offshore banks Morgan Stanley noted “the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency”.

There’s plenty of data to be released locally this coming week. December trade figures on Tuesday should rebound from a very poor performance in November whilst on the housing market, Friday brings building consents. On Thursday, we have the ANZ job advertising figures and at the end of the week, the always fascinating numbers on net migration and visitor arrivals. The New Zealand dollar opened in North America at $0.7335 U.S. and NZD/CAD $0.9050.