USD/CAD - Dollar hits fresh 2018 high

Having spent the whole European morning on a $1.25 ‘big figure’, USD/CAD then spent the whole of the North American day on $1.26 after a disappointing set of wholesale trade numbers and as nerves begin to grow ahead of next Tuesday’s Federal Budget. By the end of the day, it was a close-run thing at the bottom of the one-day table, and only a few pips on the CAD/EUR exchange rate kept the Canadian dollar off bottom spot. This morning in Europe, USD/CAD traded as high as $1.2666; a fresh high for 2018 and the best level since December 27 last year.

Statistics Canada yesterday reported the value of Canadian wholesale trade dipped 0.5% in December, compared to consensus expectations in a Reuters poll for a monthly increase of 0.4%. Lower sales were recorded in five of the seven sub-sectors, representing 65% of wholesale trade in December, while volumes declined 0.9%. The personal and household goods subsector dropped 3.3% to its lowest level since April 2017 while sales in the miscellaneous sub-sector fell 2.4% on weakness in the agricultural supplies industry. Taking the calendar year as a whole, wholesale trade in 2017 rose for the eighth year in a row, jumping 9.4%to a new record. The year-over-year increase was the biggest advance since the 13.7% jump in 1997.

For the rest of this week, we have official data on retail sales on Thursday then on Friday it’s earnings, hours worked and the Consumer Price Index numbers. The Canadian dollar opened in North America at USD/CAD $1.2660, AUD/CAD $0.9945 and GBP/CAD $1.7655.

USD/CAD: Expected Range $1.258-- $1.273

The U.S. dollar had another pretty good day on Tuesday, its movements largely mirroring those of the main U.S. equity indices. At times when stock markets are rallying, the greenback has had an observable tendency to sell off, while any sign of stress in equities has had the opposite effect, leading to something of a safe-haven bid. It would be a huge exaggeration to suggest that yesterday’s stock market moves were on the scale of those seen a couple of weeks ago, but that is what currency traders were largely focused on. The U.S. index against a basket of major currencies rose half a point from 88.90 to an intra-day best level of 89.40 and it opens this morning at a one-week high of 89.50.

The main attention in U.S. markets was in rates and fixed-income as the U.S. has to sell a record amount of debt this week with three days of auctions of T-bills and notes totaling $258 billion. The three- and six-month bill auctions, came at record amounts of $51 billion and $45 billion, respectively, but the market had no problems absorbing the massive supply: the three-month yielded 1.63%, and the six-month yielded 1.82%. The two-year auction, meantime, priced at 2.255%; the highest yield since August 2008, one month before the Lehman bankruptcy. Fed funds futures are fully pricing three 25-basis-point rate hikes and put the probability of the Fed raising rates four times this year at 25% versus just 17% immediately before last week’s U.S. CPI release. U.S. 10-year treasuries begin the day yielding 2.89%.

The highlight today will be the release of the Minutes of the January 31 Federal Open Market Committee; just two days before the 666-point drop for the Dow Jones Industrial Average and the subsequent surge in volatility. It was one of the four meetings per year at which no updated economic forecasts or 'dot points' are available but the Minutes will be scrutinized for signs the Fed is now leaning more to four, rather than three rate hikes in 2018. The U.S. dollar index opened this morning around 89.50; more than a full point above its recent three-year low of 87.95.

CAD/EUR: Expected Range $0.6395 -- $0.6435

The euro made a rare 2018 appearance at the bottom of our one-day performance table on Tuesday as investors began to note the German political concerns we first highlighted here yesterday. EUR/USD opened in the low $1.24’s but it was a one-way street all the way down to a low around lunchtime in Europe of $1.2325; the weakest since Wednesday last week. The EUR has failed to rally overnight and after a generally disappointing set of 'flash' Purchasing Managers' Index numbers, is now nervously eyeing support from the spike low after U.S. CPI around $1.2285.

In economic data, euro-zone business activity continued to rise at a decent pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January. Price pressures and employment growth also remained elevated, though likewise, saw rates of increase ease slightly. Business optimism about the coming year meanwhile ticked higher. The headline Markit euro-zone PMI fell from 58.8 in January to 57.5 in February, according to the flash estimate, which is based on approximately 85% of usual final replies. Markit noted that, "By country, growth in Germany came in at a three-month low, while in France the composite PMI moderated to the weakest for four months. However, in both cases the PMI readings remained at levels indicative of strong growth, close to recent seven-year highs. Business activity growth, meanwhile, also slowed across the rest of the euro-zone, though still registered the second-largest expansion in nearly 12 years… At the euro-zone level, the goods-producing sector continued to record a faster pace of expansion than the service sector, though growth of output and new orders slowed in both cases. However, both sectors continued to enjoy the best periods of expansion seen for seven years."

In a very hard-hitting article for Handelsblatt, former European Central Bank Executive Board Member Jurgen Stark writes that, "the ECB’s policy interest rate has lost its steering and signaling functions. Another is that risks are no longer appropriately priced, leading to the misallocation of resources and zombification of banks and companies, which has delayed deleveraging. Yet another is that bond markets are completely distorted, and fiscal consolidation in highly indebted countries has been postponed. So, the benefits of the ECB’s policy are questionable, and its costs indisputable. The current ECB policy is thus simply irresponsible, as is the utter lack of any plan for changing it”. The euro opened in North America this morning at USD $1.2325 and EUR/CAD $1.5600.

CAD/GBP: Expected Range $0.5645 -- $0.57

The pound sterling had a day of two halves on Tuesday; down in the morning on concerns about a speech from U.K. Brexit Minister David Davis, then recovering in the afternoon on unsubstantiated reports that the European parliament was pressing for a softer, associate membership status after the U.K. exits the European Union on March 29, 2019. GBP/USD fell to a low around $1.3940 before then reversing all the way up to $1.4020. Wednesday has thus far seen a repeat of yesterday morning’s price action: the pound is the worst performer of all the major currencies. Whether or not it can repeat yesterday’s turnaround looks more open to question, especially as GBP/USD has now broken down through the $1.3940 low.

Today saw a mixed bag of U.K. labour market news. The unemployment rate ticked up to 4.4% in the three months to December, up from 4.3% (a four-decade low) and the number of people out of work rose by 46,000 to 1.47 million. But, the number of people in work also rose, by 88,000 during the quarter, to 32.147 million. The one-10th rise in the unemployment rate was the first increase in two years but there was a 109,000 fall in the number of people classed as economically inactive, which helped lift the jobless rate. Only a couple of weeks ago, the Bank of England expectation was for an unemployment rate of 4.3%, a slight drop to "around 4.25%" up until Q3 and a further drop to 4.1% by the first quarter of 2021.

This morning’s slide in GBP/USD comes after publication of a letter to the prime minister from 60 Conservative MP’s forming the European Research Group (ERG) saying that they will no longer support her Brexit plans if members of the cabinet agree to keep Britain too closely aligned to the European Union. Although the letter states, "We are writing to reassure you of our continued strong backing for the clear vision of an internationally engaged, free trading global Britain which you laid out at Lancaster House," the ERG members now reject the "standstill" transition being negotiated by government if the trade deal is not complete by next March, something experts believe is all but impossible. If all this sounds pretty arcane and obscure (it is!), the key point is that the deep divisions in the Conservative Party have once again been very publicly exposed. Only 48 signatures are required to trigger a leadership election and there are 62 on this letter. The pound opened in North America at USD $1.3920, GBP/EUR $1.1295 and GBP/CAD $1.7620.

CAD/AUD: Expected Range $1.00 -- $1.012

Lower stocks, a lower gold price and higher volatility made for a difficult background for the Australian dollar even before we factor in the Reserve Bank of Australia’s very dovish set of Minutes yesterday. AUD/USD struggled to hold on to a U.S. 79-cent 'big figure' and has remained below this level ever since 6 p.m. on Tuesday evening. Overnight in Asia it has also broken through Friday’s $0.7895 low, which has also turned the technical picture much more negative and dragged the AUD/USD pair down to a one-week low of $0.7845.

The Australian Bureau of Statistics reported that its wage price index grew by 0.55% over the December quarter in seasonally-adjusted terms, leaving the change on a year earlier at 2.08%. Markets had been expecting a quarterly gain of 0.5%, seeing the year-on-year rate hold steady at 2.0%, so the data was marginally better than consensus. Most of the increase was due to increases in pay for government employees - mainly in the health industry and education - while private sector pay, which accounts for the majority of workers, remained weak at just over 1.9%. Rises through the year in the public sector ranged from 1.9% for professional, scientific and technical services to 2.9% for health care and social assistance and public sector pay has now outpaced that in the private sector for the past four years.

According to Capital Economics and widely quoted in local press, "We suspect that wage growth will creep ever so gradually higher as the unemployment rate edges lower and spare capacity is used up, but it may still just be around 2.2 to 2.3% by the end of this year and perhaps only 2.5% by the end of next year… Wage growth is unlikely to significantly boost household income growth or underlying inflation this year at least, [and] until that changes, the RBA isn’t going to raise interest rates." The Australian dollar opened in North America this morning at USD $0.7850, with AUD/NZD at $1.0695 and AUD/CAD $0.9940.

CAD/NZD: Expected Range $1.0695 -- $1.081

The New Zealand dollar continued to edge slightly weaker on Tuesday and at one point during today’s Asia session, NZD/USD extended its decline from Friday’s $0.7434 high to more than a full cent. However, the kiwi’s drop against a very strong U.S. dollar is not the main story. Instead, the big event is the continued decline in the AUD/NZD cross which has fallen below Friday’s six-month low of $1.0705, and has been down to $1.0685; the lowest since August 4 last year.

The New Zealand government today published a mammoth report on the economic impact of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). The 243-page National Interest Analysis (NIA) estimates the economy would grow between 0.3% and 1% more than if TPP had not existed, with exporters enjoying better access to new markets such as Japan, Canada and Mexico. The NIA estimates tariff savings of $222.4 million in savings annually once fully implemented, with $95.1 million of those savings starting as soon as the deal enters into force. The agreement would also help reduce non-tariff barriers, though the potential benefits are harder to quantify. The report estimates they could range between $363 million to $1.2 billion. Trade Minister David Parker said it supported New Zealanders' jobs and income and protected national sovereignty although National Party said it has yet to formally decide whether to support the newly renegotiated TPP trade deal.

According to the Ministry of Foreign Affairs and Trade's estimates, the less than snappily-named CPTPP is expected to produce between a $1.2-billion and $4-billion boost to New Zealand's real Gross Domestic Product. The dairy industry alone is expected to save nearly $86 million in tariffs and the country's exporters would save about $200 million in reduced tariffs to just Japan once the reductions are fully implemented. Coming after the latest Global Dairy Trade auction showed the first fall in prices this year, the government report is a reminder of the huge economic importance of that sector. The Kiwi dollar opened this morning in North America at USD $0.7340 and NZD/CAD $0.9295.

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