USD/CAD lower after Trump makes no direct reference to Canada or NAFTA

Although still in the $1.2280-$1.2390 range where it has been for almost a week, USD/CAD has dipped overnight back on to a $1.22 ‘big figure’ and has been probing the bottom of the trading band. Earlier in the week, there had been little incentive or desire to push the Canadian dollar one way or another until investors saw what tone President Trump would strike in his State of The Union address, but the absence of anything inflammatory on trade in general or the North American Free Trade Agreement, in particular, has helped the loonie overnight.

President Trump’s speech didn’t once mention Canada directly. The passage on trade said, “America has also finally turned the page on decades of unfair trade deals that sacrificed our prosperity and shipped away our companies, our jobs, and our nation’s wealth. The era of economic surrender is over. From now on, we expect trading relationships to be fair and to be reciprocal. We will work to fix bad trade deals and negotiate new ones. And we will protect American workers and American intellectual property, through strong enforcement of our trade rules.” Cue some sighs of relief from north of the border.

Currency traders and investors can now turn to domestic economic data in Canada. We have the monthly Gross Domestic Product and industrial production numbers later today and the manufacturing Purchasing Managers’ Index survey on Thursday. In October, Canadian GDP unexpectedly showed zero growth versus expectations for a +0.2% m/m increase. Statistics Canada said the gains in the wholesale trade and retail sectors were offset by declines in the oil and gas extraction sector. For November, consensus looks for GDP to rise +0.4% m/m which would leave the year-on-year growth rate seen unchanged at 3.4%. The Canadian dollar opened this morning in North America at USD/CAD $1.2285, AUD/CAD $0.9945 and GBP/CAD $1.7370.

USD/CAD: Expected Range $1.218 -- $1.234

After a rare top spot on our one-day performance table Monday, the U.S. dollar very marginally extended its gains early on Tuesday before quickly shedding nearly three-quarters of a point to 88.60 as the euro and pound rallied. Overnight in Asia and in the European morning today, it has been a story of further euro strength which has pressured the U.S. dollar index to 88.55; its lowest point this week.

The main focus of the day so far has been on President Trump’s State of the Union address. Instead of the bleak vision of his inaugural speech, which warned of “American carnage”, Trump boasted of the extraordinary success of his first year in office and offered a more optimistic vision. “This is our new American moment… There has never been a better time to start living the American dream… Tonight, I call upon all of us to set aside our differences, to seek out common ground, and to summon the unity we need to deliver for the people we were elected to serve.” There were no signs of the elected representatives setting aside differences or summoning unity, but the emerging consensus worldwide appears to be that it was a less belligerent speech than many observers had feared.

For the day ahead, attention now switches to the economy and the statement to be released after Dr. Janet Yellen’s last Federal Open Market Committee meeting as chair of the Federal Reserve Bank. The market is ascribing only a 3% probability to a hike in interest rates today, with the accepted wisdom being that the next 25-basis-point rate hike will be left for her successor Jerome Powell to deliver on March 21. The U.S. dollar index opened in North America this morning at 88.75 as 10-year bond yields are 3bp easier at 2.69%.

CAD/EUR: Expected Range $0.6510-$0.6565

The euro did not escape the volatility which was the feature of all the major currencies on Tuesday in the Northern Hemisphere, though its swings were less dramatic than the pound’s. Early in the European morning, it very briefly broke below Monday’s $1.2345 low and just as it looked as though the market was set for a technically-driven drop, the pair reversed to be 110 pips higher at 1.2450 by lunchtime.

Over the past 24 hours, EUR/USD has been up and down in a series of reversals which have been very frustrating even for the most experienced foreign exchange traders but which leave the euro at $1.2445; within just a few pips of its best levels of the week.

After Germany’s softer than expected Consumer Price Index yesterday, France came to the rescue this morning with an above-consensus 1.5% y/y increase in inflation, largely driven by an increase in service sector prices. This meant that the euro-zone aggregate numbers showed a very small drop to 1.3% which was higher than the median estimate of 1.2%.

The core rate of inflation excluding food and energy rose from 0.9% to 1.0% and though it’s still some way below where the European Central Bank would like, it is at least now moving in the right direction. Speaking in Dublin earlier today, ECB Board member Benoit Coure seemed quite relaxed. “Market participants globally consider upside risks to future inflation to be limited at present… While this might be a natural corollary of the protracted period of low inflation, it may also be a matter of concern if it indicates complacency over future adjustments… However, we see no such risks in the euro area today.”

With the inflation numbers now behind us, attention at the start of the new month tomorrow will be on the manufacturing PMI’s across the Eurozone. The ‘surprise factor’ is limited by the pre-release of flash estimates in France and Germany but we’ll get fresh information on how other Eurozone countries are faring at the start of 2018. For today, the euro opened in North America at $1.2445 U.S. and EUR/CAD $1.5285.

CAD/GBP: Expected Range $0.572 -- $0.5775

Tuesday saw some large intra-day swings in both directions for all the major currencies, but the pound was the most volatile of all. GBP/USD fell 85 pips then surged over 1½ cents to end the day around $1.4160 and finish at the top of our one-day performance table. Overnight and in Europe this morning, it initially extended these gains to $1.4210 but has subsequently lost more than half a cent from its early peak.

Bank of England Governor Mark Carney yesterday repeated his view that the 2016 Brexit vote had, so far, effectively knocked 1% of GDP off the U.K., relative to where it would otherwise have been, through weaker corporate investment and damage to household consumption due to higher inflation. He also hinted that the Bank is actually preparing to upgrade its forecasts at its Inflation Report next month. “I would expect that in 2019 we will see a pickup in this economy all things being equal – strong global growth, greater certainty... A disorderly Brexit, not a likely scenario at all, is less likely than at the time we did the assessment in the fall.”

For today, U.K. Prime Minister Theresa May said in Beijing that she is committed to deepening Britain’s relationship with China in light of Brexit and would explore all options for a future trade relationship. She might well need them as European Commission officials are said to have rejected the City of London’s proposal to strike a post-Brexit free trade deal on financial services, a major blow to Britain’s hopes of keeping full access to EU markets.

According to Bloomberg, while the British government is aiming for a wide-ranging agreement to give financial institutions full EU access, a restricted approach similar to that which Canada enjoys is the only viable option, Commission officials said in a presentation to representatives of the 27 remaining nations on Tuesday. After a volatile 24 hours, the GBP opened in North America today at $1.4150 U.S., GBP/CAD $1.7375 and GBP/AUD $1.7455.

CAD/AUD: Expected Range $1.00 - $1.008

In the 24-hour period from lunchtime in Sydney on Monday to the same time on Tuesday, AUD/USD was trapped in just a quarter-cent range from 0.8078 to 0.8103. Over the past 24 hours, though, it has been much livelier; the high-low range has widened to nearly three-quarters of a cent ($0.8045 to $0.8110) and there have been several reversals within this range as traders shift their focus from the U.S. dollar to domestic economic news in Australia.

The big news in Australia today was the quarterly inflation numbers. To an outsider it always seems a very strange use of professional resources to not produce monthly data but then to produce three different quarterly measures all calculated to three decimal places: headline CPI, the core trimmed mean and the core weighted mean. Without getting too bogged down in the details, all three measures were a bit softer than consensus expectations; albeit not as big a ‘miss’ as we saw in New Zealand last week.

In terms of what the CPI data mean for Reserve Bank of Australia monetary policy, there’s still a split of views amongst the Australian banks. CBA say, “We expect the RBA will be comfortable with today's outcome as it broadly lines up with their projections for both headline and underlying inflation. All in all, there is nothing in today's outcome or the recent economic data to change our view that the cash rate is on hold until late this year”.

ANZ are a bit more hawkish, saying “We continue to look for the first of two rate hikes in May, although this is based on our forecast that the wage price index prints a 0.5% quarterly rise for Q4 [when released in late February].”

Writing in the Herald Sun newspaper, veteran RBA-watcher Terry McCrann said, “the RBA will leave its official interest rate unchanged at 1.5% and, more importantly, indicate it has absolutely no intention of changing the rate anytime soon; or indeed even beginning to think about changing it. The Australian Dollar started in North America this morning at $0.8105 U.S., with AUD/NZD at $1.0950 and AUD/CAD $0.9955.

CAD/NZD: Expected Range $1.0905 -- $1.1045

Having fallen after last week’s very soft CPI figures, the New Zealand dollar has staged quite an impressive comeback; not just against a generally weak U.S. dollar but also against its Aussie cousin. NZD/USD is back on a 74-cent ‘big figure’ whilst the AUD/NZD cross (which on Monday hit a seven-week high of 110.70) is down at $1.0945.

After a boost from overseas trade figures on Tuesday, the latest news to help the NZD is an update from credit ratings agency Standard and Poor’s, which reaffirmed its existing high-level sovereign rating for New Zealand, which is AA when borrowing in foreign currency, and AA+ in local currency.

S&P said, "The economy is wealthy and resilient, reflecting decades of structural reforms” and that it had incorporated the new Government's ‘more expansionary’ plans into its forecasts, which now have New Zealand growing at an average rate of 2.8% each year over the next three years.

"Our ratings reflect solid fiscal performance and our expectation that higher government spending will not materially weaken the country's fiscal profile," S&P said. "New spending measures, including more generous welfare, education, and housing policies, are partly funded through the cancellation of the previous government's proposed personal income tax cuts… As such, we do not expect the measures to materially affect the Government's fiscal position” X`

Not surprisingly, New Zealand Finance Minister Grant Robertson welcomed the S&P statement. "This decision effectively gives a tick to the policy agenda outlined in the Government's Budget policy statement in December, which confirmed our commitment to the budget responsibility rules, together with the fiscal forecasts presented in the half-year economic and fiscal update." The New Zealand Dollar opened this morning in North America at $0.7405 U.S. and NZD/CAD $0.9095.

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