USD/CAD - Will Lower Oil Prices Weigh on Loonie?

On each of the last four 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, however, 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 a fresh low for 2018 of $58.60 today. The Canadian dollar may need support from higher oil prices if USD/CAD is not to break more decisively above the year-to-date range.

CBC news reports today that according to Canada's chief negotiator Steve Verheul, the ongoing effort to rescue and revamp the North American Free Trade Agreement has made only limited progress because U.S. officials at the table find themselves hamstrung by the demands of the Trump White House and the talks are taking place too quickly. Verheul described the current NAFTA talks as the most unusual negotiation he's ever been involved in.

"They do not come to the table - our counterparts - with a lot of flexibility. This is being driven to a large extent from the top, from the administration, and there's not a lot of flexibility," the veteran negotiator told the Canadian Global Affairs Institute. Canada will stay at the negotiating table for as long as it takes, Verheul said, but it's impossible to predict the next move of a notoriously unpredictable president. Even though three chapters have been closed, the pace has amounted to "fairly limited progress overall because there hasn't been enough time between rounds to re-evaluate positions… The pace has been a bit too fast to do a lot of the kind of homework that needs to be done domestically to allow further progress to be made." The seventh round of NAFTA talks is set to begin later this month in Mexico City.

Today, we’ll get to see the always excellent monthly house price data from Teranet which breaks down the figures by 11 metropolitan areas, as well as nationally. In December, house prices rose 0.2% m/m to take the annual rate of growth to 9.1% nationwide. The loonie opened in North America at USD/CAD $1.2580, AUD/CAD $0.9895 and GBP/CAD $1.7435.

USD/CAD: Expected Range $1.225 -- $1.265

Tuesday was the first day for while that the Dow Jones Industrial Average didn’t move at least 500 points from peak to trough. It’s a reflection of just how much volatility we’ve seen recently that a 250-point high-low range seems very quiet indeed. Although stock index futures remained in the red through most of the European and North American trading sessions – moving only into the green in the last couple of hours - it was a poor day for the U.S. dollar whose index against a basket of major currencies fell more than half a point to 89.30; its lowest level since last Wednesday. Nearly all the losses were accounted for by the movements in the euro and the pound sterling, while the U.S. dollar actually eked out a small gain versus the Canadian dollar. Overnight in Asia and in the European morning, the DJIA extended yesterday’s gains with futures indicated another 130 points higher whilst the U.S. dollar index is at 89.35.

Everyone is obviously waiting for the Consumer Price Index numbers, but not enough attention seems to have been paid to yesterday’s NFIB small business survey whose optimism index jumped a further two points to 106.9 in January. "Main Street is roaring," said NFIB President and CEO Juanita Duggan. "Small business owners are not only reporting better profits, but they’re also ready to grow and expand. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses. Amongst the various sub-indices, 'Now Is a Good Time to Expand' registered at 32%, the highest level in the history of the NFIB survey, which began in 1973. 'Actual Earnings' climbed up 11 points from December, the highest level reported since 1988. 'Plans to make Capital Outlays' jumped up two points, and 'Plans to Increase Inventories' gained four points."

Also in the survey, reports of higher worker compensation rose four percentage points to a net 31%, the highest reading since 2000 and among the highest in survey history. 22% (up three points) selected "finding qualified labor" as their top business problem, the highest reading since 2000, the peak of the last expansion. Plans to raise compensation rose one point in frequency to a net 24% in response to tighter labour markets, the highest reading since 1989. Small firms are raising compensation to attract and keep the employees they need. For today’s CPI data, the headline figure is expected to be up +0.3% m/m to take the annual rate down from 2.1% to 1.9%. The U.S. dollar index opens this morning around 89.35.

CAD/EUR: Expected Range $0.641 -- $0.6495

EUR/USD moved decisively off a $1.22 'big figure' yesterday and overnight in Asia has been up almost to $1.2390 before slipping back almost half a cent to the mid $1.23’s during the European morning.

Figures released earlier today from Eurostat confirmed the January 30 preliminary estimate that Gross Domestic Product in the euro-zone rose rose 0.6% in Q4 last year. Growth slowed a little in Germany and Italy, while the pace of expansion accelerated in the Netherlands and Portugal. Germany’s upswing - despite a slowdown in quarterly output - continues to be a key ingredient for growth in the euro area. Momentum at the end of last year was driven by a strong increase in exports, according to a national report. Government consumption and equipment investment increased, while private spending remained largely unchanged and construction slipped. The Dutch economy also benefited from buoyant global trade. GDP increased 0.8% in the fourth quarter, exceeding consensus estimates. Italian growth slowed to 0.3%, leaving it lagging behind France and Germany and providing a note of caution ahead of general elections next month. GDP increased 0.7% in Portugal.

A Bundesbank study published today shows that cash no longer makes up most of the money spent in Germany. Cash accounted for 47.6% of German transactions by volume last year, down from 53.2% three years earlier and below the 50% mark for the first time since polling started in 2008. Cards grabbed a 39.4% market share last year compared to 33.4% in 2014, mirroring a global trend that has long taken hold in many other countries including Sweden and Britain. Internet payments also grew but still accounted for a modest 3.7% of total volume. Germans and Austrians are the biggest users of cash among countries in the euro-zone’s richer "core", according to a recent study by the European Central Bank (ECB). Today’s Bundesbank survey found most Germans thought that cash was useful to teach children about the use of money and to ensure a better control of one’s personal finances. The vast majority also believed the abolition of notes and coins would cause problems to parts of the population, such as the elderly, while only just over a third saw it as a way to fight tax evasion and money laundering. The euro opened in North America this morning at USD $1.2350 and EUR/CAD $1.5530.

CAD/GBP: Expected Range $0.5705 -- $0.5775

The British pound was bottom of the table this morning as Brexit once again dominated interest rates as the key driver of the currency. GBP/USD has twice been on a $1.39 'big figure' over the past 24 hours but each time has failed to stay there and in Europe this morning the pair has traded down below $1.3850. GBP/EUR, meantime, threatened to make a fresh low for 2018 and will do so if it breaks below $1.1210.

U.K. Foreign Secretary Boris Johnson has been giving a major set-piece speech on Brexit this morning. He said there are three main branches to the opposition to Brexit: A geo-strategic concern that Britain is a relatively small nation that has made a mistake in choosing to leave such a major international alliance, a spiritual and aesthetic concern - that people feel we have pulled up a drawbridge - and an economic fear that Britain will be worse off outside the European Union. The foreign secretary said Brexit "need not be nationalist, but can be internationalist" and sought to allay those three concerns, acknowledging that he "runs the risk of causing further irritation" in making such an argument. More practically, Johnson warned against a second referendum, telling his audience, "I say in all candour that if there were to be a second vote, I believe that we would simply have another year of wrangling and turmoil and feuding in which the whole country would lose. So let’s not go there."

The problem with any U.K. ministerial speech is that is simply draws attention to the practical problems of Brexit without showing any detailed way forward. This problem begins at the very top of government, with Prime Minister Theresa May trying so hard to keep her divided cabinet together, that no concrete proposals are ever advanced, for fear of provoking rebellion. And, to the extent that Brexit itself then becomes the topic of the day, the pound struggles with the political fallout; exactly what has happened so far today. The British pound opens this morning in North America at USD $1.3850, GBP/EUR $1.1220 and GBP/CAD $1.7420.

CAD/AUD: Expected Range $1.008 -- $1.0185

The Australian dollar struggled to get much traction on Tuesday and on a day when the U.S. dollar performed quite poorly, AUD/USD ended pretty much where it had begun in Sydney around the mid-0.78’s. The AUD/NZD cross was again quite lively but in the opposite direction to Monday; falling more than half a cent from a best level just under $1.0840 to the $1.0770 area and has slipped a little further today. Overnight in Asia and Europe, the rally in U.S. stock index futures has helped AUD/USD extend gains into the high 0.78’s but there has been little enthusiasm to chase it much further ahead of the U.S. inflation numbers later this morning.

After Tuesday’s NAB business survey, today we’ve seen the Westpac survey on consumer confidence fell by 2.3% to 102.7 in February from 105.1 in January. The bank notes, "The survey was conducted over the week of February 5 – February 11. That week was marked by a wave of volatility in global share markets. The Australian market, which was more stable than most, still experienced some significant swings, being down a net 4.6% for the week while the U.S. market (S&P 500) was down by a net 7.2%... Extensive media coverage of these developments would have unnerved respondents on two fronts – the impact on their own financial position and concerns for general global stability. These concerns appear to have been acutely felt by retirees whose confidence fell by 13.5%".

Looking at the details, Westpac point out, "Developments in the components of the Index are consistent with the likely impact from last week’s market volatility. In particular respondents’ assessments of their own finances suffered, the 'finances vs a year ago' sub-index fell by 4.5%; and the 'finances, next 12 months' sub-index fell by 3.1%. We assume that these components have suffered temporary setbacks associated with market volatility. On face value the 'year ago' component is sending a very weak signal about likely spending prospects."

We noted earlier in the week that Commonwealth Bank of Australia have changed their interest rate forecasts to remove the two hikes they previously had penciled in for 2018. Westpac haven’t yet done this but note, "While we are less optimistic about the unemployment rate and the growth outlook, the Bank’s forecasts are not entirely out of line with our own view and, arguably, consistent with steady rates over the next few years." NAB, meantime, still has two 25-basis-point hikes in its forecast profile for H2 2018. The Australian dollar started in North America this morning at USD $0.7865, with AUD/NZD at $1.0755 and AUD/CAD $0.9890.

CAD/NZD: Expected Range $1.081 -- $1.093

The AUD/NZD cross still seems to be the main driver of the New Zealand Dollar more broadly. This pair is currently ranging between a six-month low of $1.0750 and Monday’s high of $1.0840 and this morning is again testing the lower boundary of this range after the Reserve Bank of New Zealand’s survey of inflation expectations. This has helped lift NZD/USD on to a 73-cent ‘big figure’ for the first time since last Wednesday.

The RBNZ's March quarter survey showed firms lifted their two-year inflation expectations to 2.11% from 2.02 % in the prior period, while one-year inflation expectations remained steady at 1.86%. Elsewhere in the survey, unemployment rate expectations are the lowest since September 2008. The unemployment rate in one year is expected to be 4.55% but then increase to 4.68% two years ahead. The official unemployment rate reported by Statistics New Zealand for the December 2017 quarter was 4.5% (this was released after the survey was completed). Official unemployment is now at a nine-year low. One year ahead expectations for annual growth in wages, meantime, have increased to 2.48% from 2.25% and two-year ahead expectations increases to 2.68% from 2.57%.

Tomorrow we’ll get to see data on home sales in New Zealand and on Friday its the manufacturing Purchasing Managers Index survey. The New Zealand dollar opened this morning in North America at USD $0.7310 and NZD/CAD $0.9190.

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