USD/CAD - Dollar Stability Under Threat From Plunging Oil Prices

The Canadian dollar seems to be off the radar as far as international investors are concerned. On each of the last three trading days, USD/CAD has briefly broken through the upper end of its 2018 trading range from the mid $1.22’s to the high $1.25’s but on each occasion the rally has faded and quickly reversed. As attention switches away from an almost exclusive focus on the stock market, investors are beginning to pay a bit more attention to oil prices. WTI crude is down from a recent high of $66.50 per barrel on January 25 to just under $59.15 today; having printed as low as $58.60 on Friday. This morning, with the U.S. dollar again on the back foot, USD/CAD is back on a $1.25 handle.

The Bloomberg Nanos Canadian Confidence Index showed continued negative pressure for the sixth week in succession. The BNCCI, a composite of a weekly measure of financial health and economic expectations, registered 58.59 compared with last week’s 58.98. The 12-month high stands at 62.17. "While household balance sheets remain better off than last year, consumers are factoring in expectations of slowing growth for the economy and real estate holdings, and slightly more risk to their employment situation. It’s likely that any additional financial stress will have a knock-on effect on household consumption", said the authors of the report.

Speaking at a White House event on his new infrastructure proposal yesterday evening, U.S. President Donald Trump complained about Canadian trade practices. "We lose a lot of money with Canada. Canada does not treat us right in terms of the farming and the crossing the borders… So, they’ll either treat us right or we’ll just have to do business really differently… We cannot continue to be taken advantage of by other countries." It was not at all clear what the President meant by "the crossing the borders" or by "the farming." On the North American Free Trade Agreement specifically, Trump said he is willing to give his negotiators time to work rather than quickly initiating a withdrawal from the agreement, though he then suggested immediately that he is not worried about the possible harm of a withdrawal. "Hopefully the renegotiation will be successful. And if it’s not, we’ll be more successful". No wonder currency traders are confused what to make of this. The Canadian dollar opens in North America at USD/CAD $1.2570, AUD/CAD $0.9895 and GBP/CAD $1.7495.

USD/CAD: Expected Range $1.255 -- $1.265

The big question for Monday was whether buyers would step into the equity market even after its sharp reversal higher on Friday afternoon in New York. The answer most definitely was ’yes’. The Dow Jones Industrial Average was up 200 points at the opening bell on Wall Street and then closed 410 points higher. Indeed, the Dow Jones is now up more than 1,500 points from last week’s low; having regained almost 50% of its entire peak-to-trough losses. A stronger stock market meant the U.S. dollar gave back around half a point of its recent gains but the dollar has continued to fall in Europe this morning even as equities have turned lower once more. The U.S. dollar index is down at 89.35; its lowest since last Wednesday.

U.S. total government debt today stands at $20.49 trillion. The White House Office of Management and Budget yesterday released proposals under which the debt is projected to rise almost 50% over the next decade to $29.9tn in 2028. The annual increases in total debt are sequentially lower but even in Year 10, are projected to add some $352 billion to the total stock of debt. The U.S. Government has abandoned all pretense at a balanced budget. Along with the borrowing proposals, the U.S. Administration also published its detailed infrastructure plans. According to Goldman Sachs, which has the resources, expertise and connections to know such things, "the low odds of enactment this year have not changed, in our view…in light of the need for 60 votes in the Senate, a lack of bipartisan consensus regarding the appropriate structure for federal infrastructure funds, and political considerations ahead of the upcoming midterm election". While the odds of enactment are low, the odds of a U.S. debt downgrade seem to be high and rising. Credit ratings agency Moody’s didn’t join S&P in downgrading the U.S. in August 2011 but it seems to be hinting very strongly that it will now do so. Whether or not it actually matters is another question.

Today in the United States, we have the NFIB small business survey which contains an important question on earnings. Last month’s press release breathlessly said that, "With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans… There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses… They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy." The earnings trends number in the December survey was down five points to -15. This could be the key data point to watch today, both for equity and currency investors. The U.S. dollar index opens in North America at 89.35 with 10-year U.S. bond yields down five basis points at 2.83%.

CAD/EUR: Expected Range $0.635 -- $0.647

Monday was another day when the DJIA moved at least 500 points but, once again, EUR/USD remained firmly on a $1.22 ‘big figure’, albeit the pair ended almost half a cent up from its opening level. By the close in New York, the euro had gained against every major currency except the Aussie Dollar and finished in second place on our one-day performance table. Overnight in Asia and during the European morning session, it has finally moved up to $1.23 and has outperformed all the other currencies we track closely here apart from the pound.

After all the criticism of the coalition agreement negotiation by Angela Merkel, in a prime-time ZDF television interview, she defiantly brushed aside any suggestion of quick change. "I ran for a four-year term. I promised those four years and I’m someone who keeps promises. I totally stand behind that decision." Giving Finance to the Social Democrats is "acceptable" and "European policy will be formulated jointly" within the government, limiting the SPD’s ability to set the agenda, Merkel said. According to the Financial Times this morning, even her allies are talking openly about the post-Merkel era. Speaking on German radio on Monday, Günther Oettinger, the European Union commissioner, said it was "clear to everyone" that Ms Merkel was entering her last term. He said she was too "smart and experienced" to repeat the mistakes of previous leaders such as Helmut Kohl, but will "over the next four years initiate the succession".

The latest opinion polls show the declining popularity of the two main parties in Germany, with the CDU on 29.5%, down one point, and the SPD on a new low of 16.5%, down half a point and only 1.5% ahead of the nationalist Alternative for Germany. In September’s election the CDU received 32.9% and the SPD 20.5%, which means their combined share has fallen from 53.4% to just 46%. Merkel says she will name her six cabinet choices at a CDU conference on February 26 and answered accusations that she had not planned for the future by vowing they would be rising stars under the age of 60. The EUR opens in North America this morning at USD $1.2350 and EUR/CAD $1.5530.

CAD/GBP: Expected Range $0.566 -- $0.5745

The British pound had a pretty lackluster day on Monday, failing to capitalize on the softer U.S. dollar and losing ground against both the euro and Australian dollar. Today it has done much better and sits so far at the top of our one-day performance table with GBP/USD up on a $1.39 handle for the first time since Friday and GBP/CAD back up to $1.75.

U.K. inflation figures were released this morning, with the headline Consumer Price Index stuck at 3.0% rather than falling to 2.9% in line with consensus expectations. The Office for National Statistics noted that, "The largest downward contribution to change in the rate came from prices for motor fuels, which rose by less than they did a year ago. The main upward effect came from prices for a range of recreational and cultural goods and services, in particular, admissions to attractions such as zoos and gardens, for which prices fell by less than they did a year ago." It’s not often that the cost of looking at giraffes and penguins moves international foreign exchange markets, but the sterling got a lift from the fact that inflation didn’t fall as had been anticipated.

In separate figures out today, U.K. house price growth accelerated to 5.2% in the year to December, up from 5.0% in November. The house price index compiled by the Office for National Statistics and the Land Registry shows average UK house price hit £227,000 in December 2017, up £1,000 from the previous month and £12,000 higher than in December 2016. Scotland and the South West experienced the highest annual house price growth, registering 7.7% and 7.5% respectively. Average prices in England rose 5% in the year, to £244,000 while Wales saw house prices increase by 5.4% over the last 12 months to stand at £154,000. The British pound opened this morning in North America at USD $1.3905, GBP/EUR $1.1265 and GBP/CAD $1.7500.

CAD/AUD: Expected Range $1.006 -- $1.016

The Australian dollar finished top of our one-day performance table on Monday, though the scale of the absolute movements wasn’t very impressive. AUD/USD opened in Sydney a few pips above $0.7800 and closed in New York in the mid $0.78’s. With the stock market up over 400 points, volatility as measured by the VIX index fell back two points to 25 and US 10-year Treasury yields edged down around 3bp from their 2.89% intra-day high; both of which helped the Aussie a little. Overnight it hasn’t been able to hold on to its gains, with AUD/USD steady even as the U.S. dollar is down against the sterling, euro and Canadian dollar.

Overnight, the NAB monthly business survey was released. According to the details on their website, the business conditions index jumped 6pts to a strong +19 index points, which is well above the long-run average of +5 index points. The business confidence index also rose by
two pts to +12 index points, its highest level since April 2017. Business conditions are solid to strong across all major industry groups with the exception of retail. The construction industry in particular is performing well. "The improvement in construction conditions over the last 12 months is due to improved trading conditions, profitability and employment, and probably reflects the still elevated residential construction pipeline, infrastructure construction and the gains in non-residential building approvals last year. The lift in employment is particularly significant given the rising share of employment found within the construction industry.” With the Reserve Bank of Australia most especially focused on wage growth and household consumption, the softness of the retail sector should be watched carefully as a coincident indicator of consumer confidence. We noted yesterday that CBA had already changed its RBA forecast to no change in rates this year.

In her speech yesterday evening, RBA Assistant Governor Luci Ellis spoke of the three key issues confronting the economy: How much spare capacity it has; how much wage growth and inflation will pick up; and how resilient will consumption growth be if income growth remains weak. She said Australia has "had especially strong employment growth over the past year - more than double the rate of growth in the working-age population… But that hasn’t translated into strong consumption growth. Household income growth has been weak for a number of years, and that has weighed on consumption growth." As for the current situation, high levels of household debt – around 188% of income – are already weighing down on spending. Ms. Ellis noted there are already some signs of this in consumption data as "growth in spending on discretionary items, like travel and eating out, has slowed while growth in spending on essentials has held up." The Australian dollar starts in North America this morning at USD $0.7860, with AUD/NZD at $1.0785 and AUD/CAD $0.9890.

CAD/NZD: Expected Range $1.0825 -- $1.0955

Most of the movement in the New Zealand dollar is being driven by the AUD/NZD cross rather than by any great shift in sentiment or investor appetite elsewhere offshore. This pair is currently ranging between a six-month low of $1.0750 and Monday’s high of $1.0840. NZD/USD has recovered in to the high 72’s and is up almost a cent from last week’s one-month low.

In political news, New Zealand opposition leader Bill English is quitting after losing last year's election. The former prime minister said he was resigning as leader of the conservative National Party and leaving Parliament. English, a long-serving finance minister who took over as prime minister in late 2016 after the resignation of John Key, led the National party to win the biggest share of seats in parliament in last year’s September election but was then unable to form a government. His statement said, "Now is the right time for me to step aside and embark on new professional and personal challenges. I informed the National caucus this morning that I am resigning as leader of the National party… I believe this will give National’s new leader time to prepare the party for the 2020 election."

There was no economic data scheduled today but on Wednesday we have food price inflation and the Reserve Bank of New Zealand’s own quarterly survey of inflation expectations. In last month’s survey, the one- and two-year expectations were at 1.87% and 2.02% respectively. The New Zealand dollar opened this morning in North America at USD $0.7285 and NZD/CAD $0.9170.

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