USD/CAD - Dollar Hits Year-Long High on Data

The Canadian dollar has spent most of the last 24 hours on a USD/CAD $1.26 'big figure' on the combination of Tuesday’s disappointing wholesale trade numbers and a generally stronger US Dollar. The only move off $1.26 has been on to $1.27; a fresh high for 2018 and the best level since December 26 last year.

Away from the regular round of incoming economic statistics, some of which sometimes seem to generate more noise than genuine insight, Statistics Canada has released the preliminary year-end tourism figures for 2017. The results show last year was the best-ever year on record for international visitors to Canada. During the year of Canada 150 celebrations, international tourists made 20.8 million trips of one or more nights to Canada, up 4.4% from 2016 and a new annual record, surpassing the previous record of 20.1 million set in 2002. The number of U.S. tourists rose 3.1% in 2017 to reach 14.3 million, the highest figure since 2005. There were also a record 6.5 million tourists from overseas countries, up 7.2% from 2016. Compared with the previous 2002 record, a greater share of tourists to Canada in 2017 were from countries other than the United States, the result both of declines in tourism from the United States and an increase in the number of tourists from overseas.

According to an official press release, "The Government of Canada is committed to growing Canadian tourism. This includes making key investments through Budget 2017 and launching Canada's New Tourism Vision. The Vision aims to increase the number of international tourists to Canada by 30% by 2021, double the number of Chinese visitors by the same year, and position Canada to compete for a top 10 destination ranking by 2025." This morning brings retail sales for December and though no one expects the previous month’s 1.6% gain to be repeated, it would be a disappointment if sales didn’t match the consensus estimate of +0.2% m/m. The Canadian dollar opened in North America at USD/CAD $1.2680, AUD/CAD $0.9910 and GBP/CAD $1.7610.

USD/CAD: Expected Range $1.263 -- $1.275

Ahead of yesterday evening’s Federal Open Market Committee Minutes, the most commonly watched U.S. equity index – the Dow Jones Industrial Average – was trading up around 150 points. When fears of a more aggressive path for U.S. rate rises were not confirmed by the Minutes, the index added another 100 points to a high of 25,250. By the close of business in New York, however, the market had fallen over 400 points to close down 166 and earlier this morning it shed another 100 points from that level. The U.S. dollar continues to trade pretty much inversely to stock markets and has thus extended its winning streak into a fourth day. Back on Friday, the dollar’s index against a basket of major currencies stood at a three-year low of 87.95. It closed last night at 89.75 and overnight in Asia has traded up to 89.85; its highest in almost 10 days. The DJIA is down almost 700 points over the same period, while U.S. 10-year bond yields have risen to a fresh four-year high of 2.94%.

There had been some talk that the minutes might be used to steer the market towards expecting four rate hikes this year, rather than the median of three which had been signaled in the December 'dot-points' and the 2.82 hikes which were reflected in interest rate pricing. This didn’t really happen. For sure, "A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate" and FOMC voters agreed to add word "further'' in front of gradual increases because of the stronger economic outlook.

A number of FOMC participants indicated that they had raised their forecasts for economic growth in the near-term vs their December estimates and the impact of recent tax cuts "might be somewhat larger in the near term than previously thought''. Nevertheless, "Participants generally noted few signs of a broad-based pickup in wage growth in available data" and some participants saw “an appreciable risk that inflation would continue to fall short of the committee's objective'' and judged the FOMC "could afford to be patient".

Having spent three days eagerly awaiting the minutes, the reaction in equity markets suggests they were quickly dismissed as 'out of date' and didn’t properly reflect subsequent incoming data on wages and inflation. Indeed, Goldman Sachs' senior U.S. economist recorded a podcast last night saying, "let me consider our four-hike scenario as the baseline here: I would say that I see risks around our forecast as two-sided... I doubt that they would hike at a non-press conference meeting in the first half of this year; it just doesn’t seem necessary yet. But by later in the year, it's certainly possible that they wind up adding another one and do five hikes for the year." Yesterday afternoon, the market was pricing 2.8 rate hikes for 2018. If it now has to consider five, then it’s little wonder that stocks are lower and the U.S. dollar is firmer this morning; almost two points above its recent three-year low of 87.95.

CAD/EUR: Expected Range $0.64 -- $0.06435

Having been at the bottom of our one-day performance table on Tuesday, the euro edged further lower on Wednesday with EUR/USD falling to a one-week low just a few pips above $1.2300 ahead of the release of the FOMC Minutes. It then jumped to almost $1.2360 before falling almost three-quarters of a cent to a low of $1.2280. This morning in Europe, it extended losses to $1.2260 and its subsequent modest rally couldn’t lift it back on to a $1.23 'big figure'.

Investors have grown used to a steady stream of good and better than expected economic data in the euro-zone, There were the first cracks in this narrative with yesterday’s ZEW Survey and this morning’s Ifo survey was a genuine disappointment. The institute notes, "Germany’s very favourable business climate cooled down considerably this month. The Ifo Business Climate Index fell to 115.4 points in February from 117.6 points in January. Companies were less satisfied with their current business situation, but the indicator was at its second highest level since 1991. This signals economic growth of 0.7% in the first quarter. After the euphoria of recent months, companies’ assessments of the business outlook for the months ahead were also far less optimistic. In manufacturing the index fell considerably from last month’s record high. Assessments of the current business situation were slightly less favourable, although they remained at a high level. Manufacturers also downwardly revised their business expectations. They reported a marginal slowdown in demand and slightly lower order levels."

Currency markets have historically never really been bothered with minutes of the European Central Bank Council Meetings but it was the last set of minutes published on January 11 which dropped the bombshell about the need to change the language around monetary policy. EUR/USD was trading down at $1.1950 at the time and it was this – rather than anything U.S. Treasury Secretary Steve Mnuchin said at Davos – which really sent the euro soaring. Today’s minutes of the January 24-25 meeting will be very closely watched ahead of Friday’s euro-zone Consumer Price Index numbers. The euro opened in North America this morning at USD $1.2290 and EUR/CAD $1.5590.

CAD/GBP: Expected Range $0.565 -- $0.5705

Thursday has been another poor day for the British pound. It very briefly regained USD $1.40 a few minutes after the FOMC Minutes were released but then began to fall sharply and couldn’t then hold on to a U.S. dollar $1.39 'big figure’' Indeed, it is down against all the major currencies overnight and for the third time this week takes bottom spot on our one-day performance table.

In economic news today, U.K. growth in the fourth quarter of last year has been revised down to 0.4%, from an initial estimate of 0.5% while annual growth for 2017 as a whole has also been revised down a little, from 1.8% to 1.7%. Details showed that business investment was flat in Q4 and household spending rose by just 0.3% during the quarter, which means it only grew by 1.8% last year. A 10th or so off the Gross Domestic Product numbers doesn’t sound much but in terms of presentation it is very important. It means the U.K. is at the bottom of the G7 pack with average growth in 2017 back below Japan and Italy (Canada doesn’t report Q4 figures until March 2).

Ahead of a Cabinet 'offsite' meeting on Brexit, details have been leaked of a so-called 'position paper' which the U.K. Government has shared with European Union member states. The document appears to leave open the possibility of an open-ended transition. "The U.K. believes the period’s duration should be determined simply by how long it will take to prepare and implement the new processes and new systems that will underpin the future relationship," the draft paper said.

"The U.K. agrees this points to a period of around two years, but wishes to discuss with the E.U. the assessment that supports its proposed end date". According to the Financial Times, "The paper contradicts some key E.U. negotiating principles and raises the risk of failing to reach a transition deal before a March summit of E.U. leaders… As the fortunes of the sterling are just as closely linked to Brexit as to incoming economic data, the intra-day swings in the pound look set to continue for some time to come. The pound opened in North America at USD $1.3880, GBP/EUR $1.1295 and GBP/CAD $1.7610.

CAD/AUD: Expected Range $1.002 -- $1.0205

Lower stock markets, a lower gold price, higher volatility and a dovish set of Reserve Bank of Australia Minutes have pulled the rug from under the Aussie dollar. AUD/USD has been below $0.7900 ever since lunchtime in New York on Tuesday and by the close of business in the Northern Hemisphere yesterday, the Aussie was the worst performer of all the major currencies we follow here. Overnight in Asia it traded briefly on to a U.S. 78-cent 'big figure’' and is looking at support from the U.S. CPI low around $0.7890.

National Australia Bank’s Quarterly Commercial Property Survey was out yesterday. The headlines were pretty good with sentiment around commercial property moderating a little in Q4 (down 1 to +17) but still well above the long-term average of +2. The bank said, "Positive sentiment likely reflected a steady economy, healthy employment growth and strong business conditions.” About 300 panelists participated in the Q4 2017 Survey, which showed retail sentiment fell quite sharply fell to -7 points from 12 points and turned negative for the first time since mid-2014. This is perhaps the key metric for the RBA as it aligns most closely with their focus on household consumption and wages.

According to the Sydney Morning Herald today, "Prime Minister Malcolm Turnbull will propose using a chunk of Australia's $2.53-trillion superannuation pool to help unlock funding for Trump's infrastructure push. "There's a very bold ambition to drive U.S. infrastructure and Australia should be front and centre in terms of project design, build, financing and management," Trade Minister Steven Ciobo said in an interview ahead of the visit. It is certainly an area in which Australia has proven expertise but if it raises concerns about capital outflows to finance overseas projects, it could end up being another short-term marginal negative for the currency. The Australian dollar opened in North America this morning at USD $0.7820, with AUD/NZD at $1.0665 and AUD/CAD $0.9920.

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

The NZD/USD pair continues to edge slightly lower and has now extended its decline from Friday’s $0.7434 high more than a full cent to $0.7330. 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 $1.0660; the lowest since early August last year.

Data from the Reserve Bank of New Zealand show total credit card spending in New Zealand decreased for the first time in five months in January. Credit card spending dropped 0.6% month-over-month in January, fully reversing a 0.6% rise in December. The numbers also showed that credit card balances increased at a slower pace of 0.2% in January, following a 0.4% rise in the preceding month. The good news is that credit card users are making much more of an effort to pay balances more promptly. As at December 2017, 60.4% of all balances incurred interest. That is the lowest level ever recorded since this data started in July 2000. Just one year ago it was 62.2%, and five years ago it was 64.8%. It peaked at 76.1% in January 2001.

Separate data from Stats NZ labour productivity rose 0.9% in the year ended March 2017. Setting aside for a moment the irony of publishing productivity figures 10 months after the quarter end, the statisticians press release was punchily titled, "More New Zealanders working, and working smarter" and the details showed that New Zealand workers could produce 133 units of goods or services each hour in 2017, compared with 100 an hour 20 years ago. In the long run, productivity is regarded as key to increasing standards of living – as workers share the fruits of their labour. By producing more for each hour worked, their incomes may rise and the country becomes wealthier; a topic which is just as current in New Zealand as it is in the U.K. The Kiwi dollar opened this morning in North America at USD $0.7330 and NZD/CAD $0.9305.

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