USD/CAD - Can Dollar Hold 81-U.S.-cent Level?

The Canadian Dollar began last week around USD/CAD $1.2325 and the pair initially moved higher to 1.2375 on Tuesday on concerns about the North American Free Trade Agreement and what might be said in the State of the Union speech. President Trump’s speech didn’t once mention Canada directly, however, and there were plenty of sighs of relief north of the border that NAFTA talks didn’t completely collapse. Trade ministers from Canada, Mexico and the United States ended the sixth round of NAFTA negotiations in Montreal, agreeing some progress had been made. On Thursday evening, after a good set of monthly Gross Domestic Product numbers and a particularly strong manufacturing Purchasing Managers' Index report, USD/CAD was down at $1.2260; its lowest level since September 19. Immediately prior to the U.S. employment report on Friday, the pair was at $1.2310. Yet, by the end of a pretty wild week across asset classes around the globe, USD/CAD was at $1.2435; its highest level in 10 days.

Prime Minister Justin Trudeau warned the United States on Friday that Canada "will not be pushed around" on trade negotiations and Reuters reports that Trudeau again warned U.S. negotiators that Canada could walk away from the agreement if its terms are not met. "The negotiations are complex and challenging ... I’ve said many times, we are not going to take any old deal. Canada is willing to walk away from NAFTA if the United States proposes a bad deal."

We’ve already had a really strong Canadian manufacturing PMI report last Thursday but the service sector number is not due out until Tuesday. A quick look at the Statistics Canada website shows we only have "stocks of principal field crops" today and it is a confident call that these will not be market-moving! The Canadian dollar opened in North America at USD/CAD $1.2425, AUD/CAD $0.9860 and GBP/CAD $1.7525.

CAD/USD: Expected Range $1.2325 -- $1.2475

What a dramatic week that was for the U.S. dollar. It opened last Monday with its index against a basket of major currencies at 88.75, hit a best level of 89.25, but by Thursday evening was down at just 88.27; only a tiny fraction above its Davos low. In the first four days of the week, neither President Trump’s State of the Union Address, strong incoming economic data, nor a somewhat more hawkish Federal Open Market Committee Statement could offer any support to the currency.

Having spent all week completely ignoring very strong incoming economic data and being totally unmoved by higher U.S. bond yields, it was not until Friday that the U.S. dollar finally snapped higher after the employment report showed that average earnings growth had risen to 2.9%; the highest since 2009. Non-farm payrolls were only around the average of the previous 12 months at 200,000 and the average work week actually fell. But, with the bond market acutely sensitive to signs of inflationary pressure, the earnings number sent 10-year Treasuries up to 2.84%; a huge rise in yields of 38 basis points since the beginning of the month. The U.S. dollar index against a basket of major currencies was already a couple of 10ths higher on Friday morning in Europe, but after the employment report was published, it jumped to a high of 89.00 before settling into the New York close around 88.90.

As well as a new Governor of the Federal Reserve Bank, there are plenty of his colleagues scheduled to speak later this week. Even arch-dove Neil Kashkari on Friday noted that he saw inflationary signs in the labour data and it will be interesting to see if the speakers have soothing words for stock market investors or focus, instead, on the continued normalization of U.S. monetary policy. This morning in the U.S., we’ll have the Institute of Supply Management services index which consensus estimates at 56.5 after 55.9 in December. Ahead of that, the U.S. dollar index opened in North America at 88.85 with 10-year U.S. bond yields at 2.85%.

CAD/EUR: Expected $0.643 -- $0.65

Most of the major FX pairs have been struggling for direction this Monday morning as they try to asses the implications of the big changes in stock and bond prices throughout last week and especially on Friday. EUR/USD traded in a range as low as $1.2345 and as high as $1.2515 last week and finished at $1.2455 as it withstood the U.S. dollar surge better than most of the other major global currencies we follow closely here. For the first 12 hours of trading in Asia and Europe today, it has been stuck between $1.2440 and $1.2475 as both the Dow Jones Industrial Average and Germany’s DAX have moved in tandem and there has been no change in the yield differential between the two blocs.

The final Markit Composite PMI Index posted 58.8 in January, its highest level since June 2006 and above the earlier flash estimate of 58.6. The headline index has signalled expansion for 55 successive months. There was a better than expected services PMI in Germany (57.3) which offset a marginal French services PMI of 59.2 which was a touch lower than the initial estimate. Growth of manufacturing production continued to outpace that of service sector activity in January. Although easing over the month, the rate of expansion in manufacturing output stayed close to December’s near-record high. The performance of the service sector continued to strengthen, with business activity growth accelerating to its best since August 2007. Whilst German services activity is at an impressive 81-month high, Italy is the highest for 139 months.

The calendar for the week ahead in the euro-zone is packed with European Central Bank speakers, while on Wednesday the European Commission will be releasing updated economic forecasts. Before then, the euro opened in North America at USD $1.2460 and EUR/CAD $1.5460.

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

Last week, GBP/USD traded as low as $1.3995 on Tuesday and as high as $1.4275 on Thursday but as the U.S. dollar surged after Friday’s U.S. employment report, the pound fell over a cent from its high to end at $1.4125. The pound initially this morning struggled to gain much traction in either direction but was then hit by a combination of political nerves and a weak services PMI report which have pushed GBP/USD down to $1.4050 and left the GBP so far at the bottom of the one-day performance table.

The U.K. service sector PMI fell from 54.2 in December to just 53.0 in January; the slowest upturn in services output for 16 months. Growth was reportedly curtailed by the loss of existing clients and lingering concerns surrounding the U.K.’s exit from the European Union. January data pointed to a slowdown in growth of services activity across the U.K., which stemmed from relatively weak gains in new work. Job creation nonetheless picked up as companies retained positive expectations surrounding the outlook. Although the latest results revealed an easing of inflationary pressures, rates of increase in both input costs and output charges remained above their long-run trends.

For the week ahead, there’s a Bank of England Monetary Policy Committee meeting on Thursday. In his appearance before a House of Lords Select Committee last Thursday, Bank of England Governor Mark Carney hinted that the Bank is preparing to upgrade the forecasts in its Inflation Report. "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.” Whether the Bank’s relative optimism will outweigh the growing political negatives in the U.K., however, remains to be seen. The pound opened this morning in North America at USD $1.4050, GBP/AUD $1.7725 and GBP/NZD $1.9270.

CAD/AUD: Expected Range $1.01 -- $1.018

The Australian dollar was the worst performer amongst the major currencies in what turned out to be a very volatile week across asset classes. AUD/USD was back below 80 cents on Friday morning and immediately before the latest U.S. employment report was trading around $0.7990. News of a 2.9% y/y increase in U.S. average earnings (the highest since 2009) pushed 10-year Treasuries to 2.84% and the U. S. dollar surged as analysts began to pencil in a fourth rate hike in the U.S. for 2018. By the end of the New York session, AUD/USD was down at $0.7930.

Australia was the first of 23 countries to report service sector PMI figures today. The sector registered 53.8 in January, down from 55.1 in December, to signal the slowest pace of expansion in Australian service sector output since last October. Both incoming new orders and employment increased to the weakest extents since data collection began 21 months ago. On the price front, output charges rose at the slowest rate since July 2017 amid a softer upturn in input costs. Despite the general weakness in the survey, confidence strengthened in January to a four-month high. Around two-thirds of monitored companies forecast output to rise over the next year, with positive sentiment attributed to planned expansion into foreign markets, organic business growth and new marketing initiatives.

We’ll see what the Reserve Bank of Australia has to say – if anything – about the value of the currency when it sits down to its first Board meeting of the new year next tomorrow and then on Friday when it releases its latest Quarterly Statement of Monetary Policy. The Australian dollar started in North America this morning at USD $0.7930, with AUD/NZD at $1.0860 and AUD/CAD $0.9860.

CAD/NZD: Expected Range $1.0905 -- $1.0995

The New Zealand dollar began last week very much on the back foot after the disappointments of the December quarter Consumer Price Index report. NZD/USD opened around $0.7350 and as a selloff gathered pace - eventually taking it down to $0.7283 - so the AUD/NZD cross hit 110.70; its highest level since December 5. From that point on, though, it was good news all the way for the kiwi, kicking off with the monthly trade numbers, then a Standard and Poor’s ratings affirmation and finally a very positive opinion poll for Prime Minister Jacinda Ardern, which helped push NZD/USD to its best level of the week at $0.7415.

Friday was a dramatic day for the U.S. dollar, as well as for stock and bond markets around the world. Immediately prior to the US labour market report, NZD/USD stood at $0.7360; pretty much in the middle of the week’s trading range. Just a few hours later it was testing 0.7300 as the U.S. dollar rebounded sharply. It would be wrong to conclude that this was a poor performance by the kiwi; if we look at the very important AUD/NZD cross, it moved down from a seven-week high last Monday of $1.1070 all the way to $1.0850; its lowest since the September Election.

The first Reserve Bank of New Zealand policy meeting of the year is on Thursday this week. Analysts are confident and unanimous that there will be no change in interest rates. Nor are they generally expecting much change to the Central Bank’s forecast track for interest rates, though the markets’ view on the timing of the first hike in early 2019 is a bit later than the RBNZ has so far penciled-in. The quarterly employment report is on Wednesday after the Waitangi Day national holiday on February 6. The New Zealand dollar opened this morning in North America at U.S $0.7305 and NZD/CAD $0.9080.

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