After yesterday's Bank of Canada's DOVISH rate hike the CAD dollar has settled into a quiet half cent trading range so far this morning. European stocks pared an earlier advance, struggling to stay in the green as the euro shrugged off ECB attempts to talk it down earlier this week. West Texas oil fell on signs U.S. crude stockpiles continued to move up, and base metals advanced following strong Chinese growth data.
The Bank of Canada pushed forward with another quarter-point interest rate increase and said more hikes are likely coming, even as it cautioned it isn't in any rush to return rates to more normal levels. Policy makers led by Governor Stephen Poloz increased the benchmark overnight rate to 1.25%, the highest since the global recession and their 3rd hike sine July. The move is a nod to a red-hot economy running up against capacity with a jobless rate at the lowest in more than 4 decades. However, uncertainty surrounding the future of NAFTA is clouding the economic outlook. Central bank officials repeated their dovish language about moving ahead cautiously and warned they expect the economy will require continued stimulus to remain at capacity. The Bank of Canada press conference is coming up this morning at 8:15am.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca
The CAD performance was mixed this week. Despite opening the week on a strong note (USDCAD tested 1.2377), the CAD broadly weakened on NAFTA related comments mid-week. After several failed attempts to break beyond the 1.2550/90 zone, the broader USD downtrend prevailed sending USDCAD down to finish the week near 1.2460. U.S. inflation data out Thursday and Friday was fairly soft sending the broader USD index down to a 3 year low. The EUR outperformed on a combination of strong data, hawkish central bank minutes, and news of a German coalition. Oil prices topped the $64 level nearing the highest level in 3 years as commodity markets performed well (gold reached a 4 month high) and world equity indices surged higher. The markets will now turn focus to the Bank of Canada interest rate announcement due Wednesday @ 7:00am. The probability of a rate hike (from 1.00% up to 1.25%) is approximately 85%. Last month, BOC Governor Poloz offered up some hawkish comments on the economy noting that he'd like to see the economy run hot for awhile.
The U.S. stocks jumped to records with the Dow Jones Industrial Average crossing 26,000 and S&P 500 Index surpassing 2,800, both for the first time, as Citigroup Inc. discussed possible significant investor payouts from the bank's windfall stemming from a major tax cut. All major U.S. equity gauges opened higher. The dollar strengthened after its lowest close in three years, rising alongside Treasuries as Congress tries to avert a government shutdown Friday. Meanwhile in Canada all eyes are on tomorrows Bank of Canada interest rate announcement. The euro came under pressure as prospects for a German coalition government were dealt an early blow, and on reports the European Central Bank will maintain a bond-buying pledge when it meets next week.
The Bank of Canada is already well into the process of raising interest rates to more normal levels and another increase is expected on Wednesday, after the economy's stellar performance last year. The big questions are how quickly do they continue moving up from here, how closely will they follow U.S. increases and where will rates settle. Markets are pricing in at least three more increases this year, which would bring the benchmark rate to 1.75 percent.
Yesterday, the weekly uptrend in USDCAD continued with a move from 1.2530 up to 1.2590. A 2nd attempt stalled at 1.2585 and the pairing declined to 1.2515 in late trade. U.S. inflation data missed estimates leading to broad USD weakness in yesterday's North American session. U.S. retail sales data and CPI inflation data out this morning were close to expectations. USDCAD quickly climbed from session lows near 1.2510 up to 1.2557 before falling right back down to the 1.2500 level. The pairing has since fallen to 1.2492 followed by a bounce to 1.2530. The EUR is the best performing currency for the 2nd straight day on the back of yesterday's hawkish central bank meeting minutes and today's news about a coalition deal for Germany.
U.S. stocks rebounded from the first retreat of the year, as energy shares surged with the price of crude at a three-year high. Treasuries held steady and the dollar fell versus the euro after wholesale-price data cooled inflation expectations. Meanwhile US initial jobless claims reached its highest level in 3 months.
Traders are bracing for what might be the end of a 3-decade bond bull run, with former fixed-income king Bill Gross saying Treasuries have entered a bear market after the U.S. 10-year yield passed 2.5%. The pressure on government obligations has only been increased this morning with the news that Chinese officials have recommended slowing or halting purchases of U.S. securities. The yen climbed for a second days as traders unwound short position in the wake of the Bank of Japan paring back purchases of ultra-long dated bonds. China's central bank weakened its daily fixing on the yuan by the most since September, one day after a report showed it has adjusted its currency-fixing mechanism, a move interpreted as an embrace of greater fluctuation in the exchange rate. Two U.K. ministers warned that the EU risks sparking another global financial crisis if it doesn't give London's banks a good deal on access to the single market after Brexit, while research published by Bloomberg Economics show the British economy will be hurt for more than a decade by a bad divorce deal.
The Dow Jones Industrial average resumed its march higher to a new record this morning. European equities climbed a fifth day as unemployment in the region fell to the lowest since early 2009. China's yuan dropped after the central bank adjusted its currency-fixing mechanism. The 10-year Treasury yield hit 2.52 percent after Bank of Japan cut purchases of long-dated bonds. The pound fell as a reshuffle of senior U.K. government ministers descended into chaos.
Yesterday, the downtrend in USDCAD continued with a drop from 1.2557 down to 1.2481. Overnight, the pairing corrected up to 1.2515 before the combination of stronger than expected Canadian jobs data and weaker than expected U.S. data forced USDCAD down to 1.2354 – the lowest since Sept. 27th, 2017. The pairing has since bounced back to hold near 1.2400. With the Canadian unemployment rate down at the lowest level since 1976, chances of a Jan. 17th Bank of Canada interest rate hike have now risen.
Stocks rallied around the world on signs the global economic expansion that pushed benchmarks to records in 2017 remains intact. The dollar slipped and U.S. Treasuries extended declines as a private report showed U.S. employment strengthening. The Dow Jones Industrial Average surpassed 25,000 for the first time, while the Standard & Poor's 500 Index and the Nasdaq Composite Index also opened at record highs.
At 11am, the minutes from December's rate-hike Federal Reserve meeting will be published, with investors looking for hints of any increased hawkishness amid an uptick in market-derived inflation expectations. The biggest shakeup to European financial regulation in a decade comes into force today, a "Big Bang" that will transform the market landscape. This morning, European stock trading volumes are about 25% lower than the 30-day average with investors across a slew of asset classes cautious as the new rules take effect.
Light holiday trading is expected to continue into the end of the week with no high-risk events or data releases. Commodity currencies are the day's biggest gainers so far with the USD/CAD trading near session lows testing 1.2625. Currently, the TSX is up 0.21% and the DOW is up 0.13%. EURCAD is up 0.10% trading between 1.5010 and 1.5069. GBPCAD is unchanged trading between 1.6932 and 1.6985. JPYCAD is down 0.38% trading between 0.01114 and 0.01120. Gold is up 0.28% trading between $1,281 and $1,287USD/oz., silver is up 0.91% trading between $16.47 and $16.71USD/oz., while oil is down 0.50% trading between $59.34 and $59.92.
Yesterday, USDCAD dropped from 1.2840 down to 1.2700 before climbing back to 1.2745. U.S. GDP (Q3) missed estimates while Canadian retail sales and inflation data came in stronger than expected. Overnight, USDCAD eased lower to 1.2695 / 1.2700 before surging higher this morning after Canadian October GDP came in flat. The market was expecting a 0.2% increase while there was risk for an even stronger number given the recent string of better than expected Canadian data. USDCAD climbed to 1.2798 but has since pulled back to 1.2750.
The Canadian Economy jolted the markets with a number of better than expected reports this morning. Retail sales, Inflation as well as ADP jobs report were all better than expected. Meanwhile the US GDP numbers were unimpressive. This has all combined to cause the Canadian dollar to be THE star performer on the day.
In the early hours of the morning the Senate voted 51-48 to pass the Republican tax overhaul plan. Following a very last minute revision to comply with Senate chamber rules, the bill will go back to the House for another vote this morning before it's sent to President Donald Trump to sign. GOP lawmakers turning their attention to preventing a government shutdown before Friday's funding cut-off will have little time to celebrate the legislative victory. There's a regional election in Catalonia tomorrow where secessionist parties are seen unlikely to win a majority in the Barcelona assembly. A victory for federalist parties would raise market hopes for a recovery in the country's stocks which have underperformed their European peers this year. The bond market may not get such a ready boost from the outcome tomorrow is also the day the ECB suspends asset purchases for the year. Spain may also be about to throw a spanner in Brexit negotiations as the country wants clarity from the U.K. on the future of Gibraltar before it entertains second round talks.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca
The AUD was the best performing currency this week while the GBP lagged behind. The CAD was mixed gaining vs the EUR and the GBP while losing ground to the JPY and AUD. USDCAD was virtually unchanged this week although Thursday's session was extremely volatile with hawkish comments from Bank of Canada's Poloz sending USDCAD from 1.2860 down to 1.2713. The move lower was short-lived with USDCAD rebounding up to weekly highs Friday morning. The U.S. Fed raised interest rates as was widely expected and indicated another 3 rate hikes to follow in 2018. The USD broadly weakened after the announcement and the economic projections were released although the weakness was limited with the USD recovering during Friday's session. The EUR and the GBP were the worst performing currencies as interest rates were left unchanged by the ECB and the BOE.
U.S. stocks were set for a positive trading day on Tuesday, just a day after scoring records all around on rising expectations the highly anticipated tax bill will get its final signoff this week. There is word that the Senate could vote on the measures as early as tonight.