USD/CAD - Economy, Bank Rate Statement Set Tone for Loonie

We warned here yesterday that while, "there are plenty of opportunities for USD/CAD to move on to a new 1.30 'big figure'… one word of caution is the large number of investors who are now expecting it, suggesting that the market is already heavily positioned that way.” Since we wrote that, USD/CAD has not only failed to break on to $1.30 but has been back on $1.28; inflicting losses on those traders who came very late to the bearish CAD party and who chose the wrong currency to sell it against. AUD/CAD is at $1.01 for the first time since June last year while GBP/CAD overnight hit $1.80 for the first time in 20 months.

Ahead of today’s Bank of Canada meeting, a really excellent article in the Financial Post says that, "Governor Stephen Poloz’s narrative boils down to something like this: There is more uncertainty in the world today. This heightened uncertainty is the sort you can’t measure or estimate. Geopolitics is an important factor, but so is growing uncertainty about the reliability of models to prescribe policy. Because of this, policy makers are injecting more 'realism' and judgment into the narrative and nudging the decision-making process toward something that looks less like a mechanical exercise akin to engineering and more like risk management. More art, less science.' The BoC governor traveled to London last week to accept an award as 'Central Banker of the Year', something with which your author fully concurs. His acceptance speech said, "we have learned that it is far better to be open and honest about the uncertainty we face, as well as how we deal with it, rather than to just assume the uncertainty away and project a false sense of confidence."

Before the Bank of Canada policy announcement at 10 a.m. local time, we had the housing starts and labour productivity data. The Canadian dollar opened in North America at USD/CAD $1.2930, AUD/CAD $1.0100 and GBP/CAD $1.7925.

USD/CAD: Expected Range $1.2875 -- $1.30

U.S. stocks and its currency have been out of favour ever since President Trump’s proposed steel tariffs announced last week. The Dow Jones Industrial Average had already fallen 700 points in a couple of days but then fell another 400 points on Thursday and almost 300 more to Friday’s low around 24,270. A 750-point rally off the lows took the index back on to a 25,000 handle yesterday but it is now back down 500 points in less than 24 hours. The U.S. dollar index, meantime, peaked last Thursday morning at 90.50 but it has been downhill all the way since then; back down to 89.00 and its lowest level in just over two weeks.

The trigger for the most recent simultaneous drop in stocks and the dollar was a report that former Goldman Sachs COO Gary Cohn would leave his White House job if Trump decided to go forward with tariffs on imported steel and aluminum. This departure was confirmed late on Tuesday evening. In a statement issued by the White House, he said that it had been "an honour to serve my country and enact pro-growth economic policies to benefit the American people, in particular the passage of historic tax reform." In his reply, President Trump said: "Gary has been my chief economic adviser and did a superb job in driving our agenda, helping to deliver historic tax cuts and reforms and unleashing the American economy once again. He is a rare talent, and I thank him for his dedicated service to the American people."

The Atlanta Fed will update its Gross Domestic Product forecast after the international trade numbers are released today. Currently, its forecast for Q1 growth is an annualized pace of 3.5%; which comfortably keeps the Fed on track for three or possibly four rate hikes this year. Federal Open Market Committee members Dudley, Kaplan and Bostic are all scheduled to give speeches today and we’ll also have the ADP employment report which may serve to remind traders that on Friday it’s the official BLS labour market report. With stock markets very nervous, remember that it was last month’s average earnings numbers that sent the Dow tumbling 666 points on February 2 before the spectacular declines of the following week. The U.S. dollar index opened this morning in North America around 89.00.

CAD/EUR: Expected Range $0.619 -- $0.626

On Monday, the euro was unsure whether to focus on the diminution of political risk in Germany or the uncertainties of the Italian general election. On Tuesday, the Single European Currency put the Italian concerns firmly behind it, breaking above Monday’s high to be back to a $1.24 big figure for the first time in two weeks. Overnight in Asia and this morning in Europe, EUR/USD has extended gains to almost $1.2440 and though we’re only halfway through the day, the euro is up against all the major currencies we follow closely here.

The heads of the two populist parties which won most votes in Sunday’s election still both claim the right to form the next government. According to The Times, The Five Star Movement signaled last night that it was ready for an alliance with the left-wing Democratic Party. "It’s clear that the right is trying to create a majority so the logical external support for us would be the Democratic Party,' a Five Star source said. "We are saying to everyone, tell us what you want." For his part, the outgoing leader of the Democrats, Matteo Renzi, moved quickly to veto any such approaches. "The Democratic Party must be in the opposition in the next few years against extremists… Five Star and the right have insulted us for years and stand for the opposite of our values. They are anti-European, anti-politics and use the language of hate."

For the currency and stock markets, the worst possible outcome still remains a coalition between the Five Star Movement and the Northern League. It is feared that a government formed by the two populist parties would lead to a surge in public spending, adding to Italy’s record public debt and violating deficit rules set down by the European Union. The markets are also worried by the League’s threats to pull the country out of the euro. For the moment, these two parties are busy trading insults with each other so it seems an unlikely outcome. Keep an eye on it though, as any change in sentiment could quickly turn into a negative for the euro which opened in North America today at USD $1.2430 and EUR/CAD $1.6070.

CAD/GBP: Expected Range $0.5555 -- $0.562

After Monday’s table-topping performance, Tuesday was a much poorer day for the pound sterling which fell against four of the five other currencies we follow closely here. The biggest fall (-0.7%) came against the New Zealand dollar but losses elsewhere came against the euro, Canadian, Australian and New Zealand dollars. The low point for GBP/USD was early in the London morning at $1.3820 and the pair rallied exactly one cent when the U.S. dollar came under pressure after the news North Korean was offering to 'de-nuclearize'. By the end of the day, however, the pound had fallen more than a quarter of a cent from its high, leaving it back on a $1.38 big figure which is where it has traded throughout the overnight session in Asia and this morning in Europe.

The Guardian newspaper has the full eight-page text of a leaked document from the General Secretariat of the Council of the European Union. This was issued to representative of all 27 EU States and covers the "Lines To Take" on Prime Minister Theresa May’s Brexit speech last Friday. It said May had promised clarity on Britain’s hopes for a future trading relationship, but described the model she proposed as unworkable and "double cherry-picking". It also claimed there had been "zero progress" when it came to ideas for customs cooperation. The paper concluded that, "Like with PM May’s previous speeches, she addressed more her domestic audience, trying to bridge the gaps between the two poles of the debate on Brexit in the U.K.. While the speech was long on aspirations, it was short on workable solutions that would respect the EU27 principles."

The last in a series of Brexit speeches by cabinet ministers is due to be made today by Chancellor Philip Hammond. According to the BBC, the Chancellor will refer to past attempts at forging a free trade agreement between the U.S. and Europe. He will argue that in 2014 the E.U. itself pursued ambitious financial services co-operation in its proposals for TTIP [the now aborted Trans-Atlantic Trade and Investment Partnership], which it described as a partnership that would be, 'more than a traditional free trade agreement'. Hammond’s argument, the BBC claims, is that if the E.U. was willing to include financial services in TTIP, it should be equally willing to include them in a Brexit deal for the U.K.. It’s a nice try, but goes against everything we have thus far heard from the EU over the last few months. The pound opened in North America at USD $1.3865, GBP/EUR $1.1155 and GBP/CAD $1.7930.

CAD/AUD: Expected Range $0.9805 -- $1.00

After Monday’s fairly quiet start to the week for the Australian dollar, Tuesday was quite a bit livelier – albeit some of the explanations for its movement look a little contradictory. As the U.S. dollar sold off on reports of talks with North Korea, the AUD rose but it held on to its gains even as the stock market fell and volatility rose. It was helped by a $15 rise in the gold price and went on to reach a best level around $0.7835; the highest in exactly a week. Overnight it has given back some of yesterday’s gains after weaker than expected GDP figures but is still holding on to a U.S. 78 cents big figure.

Figures out today showed Australia’s economy grew at a slower pace than expected in the fourth quarter of last year as a rebound in household consumption was offset by a fall in exports. Gross domestic product grew just 0.4% q/q in the three months through the end of December, slowing from 0.7% growth in the previous quarter, according to the Australian Bureau of Statistics. That was below a median of economists’ estimates, forecasting 0.6% growth. According to the analysts at Westpac, "Key surprises in these accounts were to the upside on consumer spending, including a significant upward revision to history, and a sharp 10.3% fall in private infrastructure… The drop in private infrastructure work is not cause for concern, it represents further progress in the mining investment wind-down. Consumer spending increased by 1.0% in the quarter, while Q3 was revised up from a very weak 0.1% to 0.5%. Annual consumer spending growth is now 2.9%. That moves the dial on spending momentum from 'lacklustre' to 'slightly below trend'."

Westpac’s fairly downbeat analysis went on to note, "The detail of this update will provide policy makers with some comfort. Consumer spending growth at close to 3.0% suggests that the economic expansion is more broadly based than previously assessed… That said, going forward, the household sector remains vulnerable at a time of relatively weak wages growth and high debt levels. A likely slowing in employment growth from the current hiring burst will act to reduce consumer spending power.” The Australian dollar opened in North America this morning at USD $0.7810, with AUD/NZD at $1.0720 and AUD/CAD $1.0100.

CAD/NZD: Expected Range $1.0525 -- $1.0675

Monday’s relative calm for the Kiwi dollar didn’t last long and Tuesday it was way out on top of the one-day leader board with NZD/USD printing on a 73 U.S. cents 'big figure' for the first time in eight days and NZD/CAD on a 94-cent handle for the first time since early July. To some extent, this price action was similar to the AUD/USD pair but the Kiwi’s moves were amplified; as evidenced by a fall in the AUD/NZD cross from $1.0740 to $1.0705.

In economic data, two of the 'partial data' which feed in to the calculation of the GDP numbers which are out next week were released overnight. The total sales value for wholesale trade rose 3.0% in the December 2017 quarter, after rising 1.4% in the September quarter. The December rise was the seventh-consecutive quarterly rise and the largest since the September 2010 quarter, when the value rose 3.8%. As for Building Work Put in Place, total building activity volume was up 1.4% in the quarter. The volume of activity for hospitals, storage, factories, and other non-residential building rose 4.1% in Q4, while for residential building activity, the volume fell 0.4% in the latest quarter, following a 4.1% rise in Q3.

Commenting on the two pieces of economic news, analysts at ANZ said, "Today’s figures have few implications for our views on Q4 GDP growth. Both the building work figures and separate Wholesale Trade figures were close to our expectations. There are a few partial indicators still to be released, but at this stage we are happy with our provisional Q4 GDP estimate of 0.7% q/q (3.1% y/y)." The Kiwi dollar opened this morning in North America at USD $0.7285 and NZD/CAD $0.9415.

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