USD/CAD - Loonie falls below 80 U.S. cents ahead of Canadian trade figures

The Canadian dollar gave up its hold on 81 cents U.S. on Friday immediately upon publication of the U.S. employment report and by early afternoon in North America yesterday, it had lost its hold on 80 cents, too. With the U.S. dollar generally well-bid, and as WTI crude oil is more than $1.50 per barrel down over the last three days, so enthusiasm for the loonie has faded noticeably. From its low point on Friday in Asia of $1.2260, USD/CAD has risen almost exactly three cents.

There were no Canadian economic statistics on Monday and very little in the way of political news either. Trade data for December was due this morning and might be a reminder for some that Canada runs a surplus with the United States between €3-4 billion per month, exporting roughly $35 billion and importing around $31 billion of goods. The former U.S. ambassador to Ottawa made a very good point on Sunday that, "The term NAFTA is a toxic term, and I would leave that term and put it aside and not talk about it. I think that unfortunately it’s become a political punching bag of sorts and if we can replace that name with something else that we wouldn’t get stuck on it". Now we just need to find a friendly new acronym that won’t upset President Trump…

The consensus for the trade numbers today is for a monthly deficit around $2.2 billion. About 90 minutes after that, we’ll see if the service sector began the year as buoyant as manufacturing. December’s PMI was 49.3 though there’s no published consensus for the January report. The Canadian Dollar opened in North America at USD/CAD $1.2535, AUD/CAD $0.9850 and GBP/CAD $1.7475.

CAD/USD: Expected Range $1.24 -- $1.2585

After Friday’s 666-point drop for the Dow Jones Industrial Average, Monday was a day of utter carnage in the U.S. equity market. An initial 300-point decline in the DJIA was almost fully reversed by lunchtime but in the last few hours of trading the index went into freefall, losing well over 1,000 points to end the day down 1,175; the biggest ever points drop, albeit in percentage terms only the 112th largest drop in the 122 years since inception. The VIX index of volatility, meantime, had its biggest ever daily jump and will go down in the history books along with Lehman, the 'flash crash' and the U.S. downgrade. Amidst the turmoil, the U.S. dollar was steadily bid throughout the day and its index against a basket of currencies is now more than a full point above last Thursday’s low. It still hasn’t recovered all the losses from Davos but it looks in technically better shape than it did just a few days ago with the U.S. dollar index this morning at 89.35.

The big fear for today is that further selling pressure will be seen in U.S. equity markets as programme traders and algorithm-driven investment strategies are forced to cover short volatility positions, which in turn will add to the technical pressure on stocks. The price action Monday afternoon was so wild that literally anything seems possible today. An equity market which can drop 700 points in under half an hour with no fundamental trigger is obviously a much scarier place than one in which a 2% daily correction hadn’t been seen in over a year.

New Federal Reserve Bank Governor Jerome Powell was sworn in yesterday and there was no shortage of analysts pointing out comparisons between the situation today and when new Chairman Alan Greenspan took office on August 11, 1987; barely two months from the stock market crash of Black Monday, October 19, that year. There are plenty of Powell’s colleagues set to give speeches this week; Messrs. Bullard, Evans, Dudley, Kaplan and Harker will all be offering their views on the economy. 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. Ahead of that, the U.S. dollar index opens in North America at 89.35 with 10-year U.S. bond yields down 15 basis points from Friday’s high at 2.70%.

CAD/EUR: Expected Range $0.645 -- $0.647

EUR/USD began the week quite well, but from a best level in the high $1.24’s during the European morning, it then turned lower throughout the rest of the Northern Hemisphere day and amidst the turmoil across asset classes in New York, it finished the day on a $1.23 handle. European Central Bank President Mario Draghi remarked on Monday that recent volatility in the single currency was a potential cause for concern, requiring "close monitoring" of the implications for price stability but in truth, there was nothing new whatsoever in these comments. This morning in Europe, EUR/USD has clawed its way back on to $1.24 and the euro is higher against all the major currencies apart from the New Zealand dollar.

Draghi addressed the European Parliament in Strasbourg saying, "Our confidence that inflation will converge towards our aim of below, but close to, 2% has strengthened, but… we cannot yet declare victory despite little indication that generalized imbalances are emerging”. Monetary policy has been famously described as like pulling on a brick with a piece of elastic. You pull and pull and nothing happens, then suddenly it hits you in the face. It seems a particularly good time to recall this analogy after this morning’s German Construction Purchasing Managers' Index which rose sharply from 53.7 in December to 59.8, its highest reading since March 2011 (and the joint-fourth best seen since the survey began in late-1999). A warmer-than-usual January resulted in a sharp and accelerated increase in total industry activity across Germany’s constructor sector and housing and commercial activity rose at some of the fastest rates seen in the survey’s 18 ½ year history, while growth in new orders was at a record-high.

In other news today, Reuters reports that, "Industrial workers and employers in southwestern Germany struck a hard-fought deal on pay and working hours on Monday night, setting a benchmark for millions of workers across Europe’s largest economy". The agreement between labor union IG Metall and the Suedwestmetall employers’ federation foresees a 4.3% pay increase from April and other payments spread over 27 months. Analysts calculate it is equivalent to a 3.5% annual raise. The EUR opens in North America at $1.2405 U.S. and EUR/CAD $1.5550

CAD/GBP: Expected Range $0.57 -- $0.5755

The pound had a bad day on Monday as the combination of domestic political uncertainty, the resumption of formal Brexit negotiations and poor incoming economic data finally took its toll. From a high in the mid $1.41’s, by early afternoon it was down below $1.4000 U.S. and though it managed to find some support around last week’s low, the subsequent bounce was far from impressive. As the selloff in U.S. equities accelerated and the U.S. dollar was bid, GBP/USD closed in New York at a near two-week low of $1.3960 and finished firmly at the bottom of our one-day performance table. A bounce in Europe this morning couldn’t regain the 1.40 level and January’s enthusiasm for all things the sterling appears to be evaporating.

In a meeting at Downing Street between U.K. Brexit Minister David Davis and Chief European Union negotiator Michel Barnier yesterday, Davis claimed with a completely straight face that, "the U.K. government has published a great deal about what it wants. It wants a comprehensive free trade agreement, and a customs agreement, allowing trade to be as frictionless as possible. It is perfectly clear what the U.K. wants”. For his part, Barnier said, "Without the customs union, outside the single market, barriers to trade and goods and services are unavoidable… the time has come for the U.K. to make a choice”. This, of course, is the very opposite of what the prime minister wants. Any clear choice or hard decision will immediately inflame half her Cabinet and will heighten pressure for (Theresa May) to quit as prime minister. With growing threats from all sides of the ruling Conservative Party, it would be no great surprise to see international investors hedging some of their pound sterlingexposures after January’s sharp and generally unexpected rally.

As the U.K. government seems more intent on fighting between its own members in public than offering any concrete policy proposals, the British pound opened this morning in North America at $1.3940 U.S., GBP/AUD $1.7735 and GBP/CAD $1.7470.

CAD/AUD: Expected Range $1.01 -- $1.0225

The Australian dollar had a much better day than many people had feared on Monday, especially given the huge spike in volatility across asset classes. It was, nonetheless, the sixth consecutive day of declines for the AUD/USD pair which has dropped a total of 2.2% since the beginning of last week. Context Analysis point out that in the 737 trading days since April 2, 2015, the sequence of falls has extended to seven days only once; on December 23, 2016.

The highlight today was obviously the Statement released after first Reserve Bank of Australia Board meeting of the year. Overall it was pretty upbeat. “The Bank's central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3% over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved… Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected.” The currency comment was reframed to mention the trade-weighted value of the AUD, which "remains within the range that it has been in over the past two years."

Although the RBA made its usual reference that, "An appreciating exchange rate would be expected to result in a slower pickup in economic activity and inflation than currently forecast', there was no sense at all in which this was a deliberate attempt to talk down the Aussie. We’ll now have to wait for any further clues until Friday when it releases its latest Quarterly Statement of Monetary Policy. The Australian Dollar started in North America this morning at a near four-week low of $0.7860 U.S, with AUD/NZD at $1.0770 and AUD/CAD $0.9855.

CAD/NZD: Expected Range $1.085 -- $1.11

After the dramas of the last couple of weeks, the kiwi dollar had a relatively quiet Monday, with the entire range against the U.S. dollar from the low to high only slightly more than half a cent. For today, the kiwi has jumped to the top of the one-day performance table even as markets locally were closed for the national day holiday. The outperformance was driven by a sharp drop in the AUD/NZD cross rate which fell a full cent to a six-month low of $1.0760 on talk of stop-loss orders being triggered on the break down from technical support around 1.0850.

Today in New Zealand is the Waitangi Day national holiday which marks the signing on February 6, 1840 of a treaty whose effect was to secure British sovereignty over the islands of New Zealand, which was proclaimed on May 21 that year. Markets were closed locally and there were no economic statistics released, though the New Zealand dollar was of course traded elsewhere in the Asia-Pacific region.

The first Reserve Bank of New Zealand policy meeting of the year is on Thursday this week. Analysts are 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. Furthermore, ANZ note, "the spread between the New Zealand and U.S. 10-year bond yield, at just 12bps, is the narrowest it has been since 1994. The two-year swap differential has actually turned negative, with US 2-year bonds yielding 22bp more than their NZ equivalent.” The New Zealand Dollar opened this morning in North America at $0.7295 U.S. and NZD/CAD $0.9155.