Weak earnings trumped strong economic data for European stocks on Tuesday, as investors took their cue from banking giant HSBC's surprise slump in profits rather than stellar reports on the euro zone economy.
The U.S. dollar gained ground on the world's major currencies, in line with a tentative move back up in U.S. bond yields ahead of minutes from the Federal Reserve's latest meeting which could offer signals on the future pace of interest rate hikes. Economic news out of Europe on Tuesday was surprisingly strong. Growth in Germany's private sector reached its highest level in nearly three years, while French business activity surged past expectations to near a six-year high.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.caThe main theme this week was the inability of the USD to hold its gains or sustain any sort of rally after strong results for inflation and retail sales data in addition to hawkish U.S. Fed rhetoric from Janet Yellen. Odds of a March interest rate hike climbed while equity markets eased back from historical levels during the latter part of the week. Markets generally appear to be sidelined ahead of specifics from Trump's highly anticipated Tax Reform Plan. The CAD was largely unchanged on the week although it enjoyed some modest strength vs. the EUR and the JPY early in the week only to have the gains erased into Friday's session. The EURCAD rate came close to 1.3800 – the lowest level since June of 2015 while the JPYCAD rate came close to a 1 year low, driven by positive market sentiment as global markets pushed historical highs. Over Thursday and Friday, the AUD and the CAD were the worst performing currencies given the mild pull-back in global equity and commodity indices.
The pound rose against all Group of 10 peers, leading gains versus the dollar and paring most of Friday's losses, even as flows were thin and liquidity below average due to the holiday in the U.S. The positive impact on the dollar from comments by Federal Reserve's Loretta Mester that delaying policy tightening will create risks faded as the Asian session progressed and focus turned to technical factors amid lack of fresh catalysts. Sterling rallied the most in a week against the yen as the trendline support since Jan. 16 held. Both the pound and euro rebounded from technical supports at 55 day moving averages while the dollar-yen pair is failing to extend gains above resistance at its 21 daily moving averages.
Yesterday, USDCAD initially fell from 1.3080 down to 1.3010 heading into several key U.S. data releases. Retail sales and inflation data beat expectations sending the USD initially higher. In familiar fashion, the USD rally could not be sustained on the "good news" and the USD weakened over the course of the North American session as equity markets moved lower after the Trump speech. The exception was the commodity bloc currencies as both the AUD and the CAD weakened across the board and by late afternoon, USDCAD was back up near 1.3080. After a brief move down to 1.3060 overnight, USDCAD has rallied back above the 1.3100 level this morning in the absence of any key news. Equity markets look soft for the 2nd straight day while commodities are also lower on the day.
World stocks hit an all time high on Thursday as the latest round of robust global data matched hopes that major economies like the United States will soon be serving up large helpings of fiscal stimulus. MSCI's All Country World index, which spans 46 countries, notched the milestone as Wall Street hit its latest record and Asia and Europe consolidated the roughly 10 per cent gains both have made since mid-December. There were surges in exports from Indonesia and Taiwan, falls in unemployment in Europe from Sweden to the Netherlands while stronger U.S. retail sales and inflation data on Wednesday came as Donald Trump again promised mass tax cuts.
Federal Reserve Chair Janet Yellen sounds like she's on a mission to raise interest rates this year, no matter what President Donald Trump does on tax cuts and spending. In a clarifying point during Senate questioning on Tuesday, Yellen said the central bank doesn't need to wait for fiscal stimulus in order to hike rates. U.S. Treasuries sold off on her testimony, with the yield on the government 10 year note rising to 2.48% from 2.43% the previous day. Probabilities for a March rate hike jumped to 24%, but some are still worrying that the Fed will have to move faster than the market currently expects.
Stocks stalled and the dollar dipped on Tuesday as caution set in before testimony from Federal Reserve chief Janet Yellen that may offer clues to the timing of the next U.S. interest rate rise. Adding to pressure on the dollar was the resignation of President Donald Trump's national security adviser Michael Flynn, who quit over revelations he had discussed U.S. sanctions against Moscow with the Russian ambassador to the United States before Trump took office, and misled Vice President Mike Pence about the conversations.
The prospect of Trump-led economic stimulus in the United States has underpinned the dollar and stocks in recent days, powering U.S. equity markets to record highs on Monday and helping Asian shares to eke out 19-month peaks on Tuesday. But the buoyant mood in global markets was tempered somewhat as attention turned to semi-annual testimony by Yellen on Tuesday and Wednesday that could highlight the likelihood of two or more U.S. interest rate hikes this year. Dallas Fed President Robert Kaplan on Monday argued the Fed should move soon to avoid falling behind the curve, especially as fiscal policy could drive faster growth and inflation.
Yesterday, USDCAD eased from 1.3169 down to 1.3094 before bouncing back to 1.3150. A subsequent move to 1.3115 stalled and the pairing settled near 1.3135/50 for the balance of the day. China posted better than expected trade data (+$51.35 billion surplus / exp $47.90 billion / prev $40.71 billion) sparking a global rally in stocks. The USD enjoyed broad-based strength during the overnight session taking USDCAD up from an Asian session low of 1.3119 to a London session high of 1.3160. The pairing eased to 1.3130 ahead of the Canadian employment release. Another surprisingly strong result for the 3rd straight month saw USDCAD immediately dip to 1.3069. The pairing bounced to 1.3102 before a brief move to 1.3063. Given that North American markets are pushing historical highs, continued broad USD strength appears to have limited USDCAD downside today. Given a near 2% rise in oil prices and the tremendous job gains in Canada, USDCAD has only shown a marginal improvement on yesterday's low of 1.3094.
World Stocks rose on Thursday and yields fell on some of the euro zone's battered low-rated bonds as investors put aside the political risks that have dominated markets this week. In a difficult start to the year, investors are pondering the impact of a new U.S. president, an unpredictable European electoral calendar and a potential winding-down of the central bank stimulus that has lifted risky assets across the globe. Rising oil prices pushed energy company shares higher on a busy day of corporate earnings while Asian stocks hit their highest in more than 18 months. The pan-European STOXX 600 index rose 0.4 per cent. MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.3 per cent to their highest since July 2015 with Hong Kong, Taiwan and China among the region's best performing markets. US initial jobless claims were much lower than expected, adding to confidence that the labour market will soon experience more wage inflation.
Political uncertainty ahead of European elections prompted nervous investors to sell the euro and kept French government debt under pressure on Wednesday while the price of safe-haven gold hit three-month highs. Industrial companies' shares led the charge in Europe. Three months before the final round of France's presidential election, investors are concerned about the strong showing of far-right candidate Marine Le Pen, who has promised to take France out of the euro zone and to hold a referendum on European Union membership. While polls suggest Ms. Len Pen would not win, several other front runners' campaigns are in disarray. Apart from German debt, investors also bought gold, which is seen as a safe investment in uncertain times. Spot gold hit a three-month high of $1,240.40 an ounce. The euro currency weakened a further 0.2 per cent to $1.0653 after a sharp fall on Tuesday. Options markets show the biggest bias for euro weakness against the dollar since late June. The U.S. dollar, whose predicted path higher has been interrupted lately by uncertainty over U.S. President Donald Trump's economic policies, rose 0.2 percent against a basket of other major currencies. Investors are still waiting to see whether Mr. Trump makes good on his campaign pledges to cut taxes and boost spending.
European financial markets struggled with growing economic and political concerns on Tuesday as the euro neared its biggest fall this year and bond yield spreads over Germany reaching the widest in several years. The dollar sped higher toward its biggest gain in a month against a basket of major currencies after jumping against the offshore Chinese yuan on the fall in Beijing's foreign exchange reserves below $3-trillion for the first time in six years. European corporate earnings offered investors some cheer even though oil giant BP missed estimates, but failed to completely shrug off the unease fuelled by the growing unpredictability of the French presidential election race. Far-right National Front Leader Marine Le Pen has vowed to fight globalization and take France out of the euro zone, while conservative candidate Francois Fillon on Monday vowed to fight on for the presidency despite a damaging scandal involving taxpayer-funded payments to his wife. Earlier on Tuesday, Emmanuel Macron, the independent centrist candidate and favourite to win the election, knocked down rumours he has a gay relationship outside his marriage since 2007. Investors sought the safety of U.S. Treasury and German debt over French and other euro zone bonds, although the dollar's broad rise dulled the allure of gold, the traditional safe-haven asset in times of political and economic uncertainty.
On Friday, USDCAD traded from 1.3020 up to 1.3077 before falling to test the 1.30 level for the 4th time in as many days. The pairing would recover to 1.3035 before closing the week near 1.3020. There is no top tier economic news out today but the USDCAD rate has jumped a full cent this morning. The pairing opened this morning's session near the overnight high at 1.3030 and has climbed to a 1 week high of 1.3136. Pull –backs have been limited to 1.3115 thus far. The Japanese yen is the best performing currency while the CAD and the AUD are the worst performers. Asian equity markets were generally higher but most European indices are lower on the day. North American indexes are relatively flat.
Yesterday, USDCAD traded from 1.3052 down to 1.2983 (just shy of Tuesday's 3 month low of 1.2967) before climbing back towards 1.3030. Overnight and leading up to this morning's U.S. payroll report, the USD was the best performing currency taking USDCAD up to 1.3055. A better than expected headline (227k vs. 175k exp) sent USDCAD up to 1.3077 but the USD quickly reversed on the details within the report. The unemployment rate ticked higher while wage inflation pressures were benign. Within minutes, the USD went from session highs to session lows across the board. USDCAD continues to find support near the 1.30 level and is currently holding just shy of this week's lows of 1.2983 and 1.2967. Oil prices are back up near the $54 level after the U.S. announced sanctions on Iran after a missile test earlier this week.
The dollar slipped to a 12-week low on Thursday and stock and bonds markets both showed caution after the U.S. Federal Reserve stuck to its mildly upbeat view of the world but gave no hint on when it will next raise interest rates. With all the political uncertainties about, the big central banks appear to be lying low – or at least trying not to add to the volatility. The Fed decision and statement was a non-event, with the lack of any nod toward a possible further rate rise next month – not least because the latest U.S. economic numbers have been so strong. It sent the dollar to its lowest level since mid-November against a six-strong group of other top world currencies, to add to January's worst start to a year in three decades.
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At 11am the Federal Reserve Open Market Committee will announce its latest monetary policy decision, and with only 1 of 94 economists surveyed by Bloomberg expecting a rise in rates, investor attention will concentrate on the statement's language to gauge how the bank is reacting to the new administration. There is no press conference today, and current market-implied probabilities of a hike do not rise above 50% until the June meeting. Uncertainty continued as the main theme for Bank of Canada Governor Stephen Poloz, who in a speech Tuesday highlighted the challenges of economic modeling in times of disruptive change. In remarks to the University of Alberta School of Business, Poloz outlined how uncertainty means policy making is far from an exact science and judgment matters. Geopolitical risks for example could increase the central bank's tolerance of small shocks, he said. Uncertainty has been a central narrative for the Bank of Canada governor for months, but one that has taken a more pointed focus since President Donald Trump's election victory. Poloz cited the risk of disruptive US trade policies in a rate decision 2 weeks ago, even as he's downplayed any possible benefits.
The U.S. dollar headed for its worst start to a year since 2008 on Tuesday while world stock losses, already the biggest in six weeks, grew after widespread protests against President Donald Trump's stringent curbs on travel to the United States. Investors' hopes for a fiscal boost to the world's largest economy under Trump have been tempered by controversial and protectionist policies that have seen him suspend travel to the United States from seven Muslim-majority countries. Thousands took to the streets of major U.S. cities to oppose the travel ban, which also halts refugee arrivals, while marches in Britain added to pressure on Prime Minister Theresa May to cancel a planned state visit by Trump. A stream of U.S. policy makers and business executives have also slammed Trump's stance. The dollar edged down against a basket of six major currencies, on track for a 1.9 per cent fall this month – its worst start to the year since the financial crisis.
There was little doubt during the course of last week that the incoming administration of President Donald Trump means business. A large number of old issues were resolved with the stroke of a pen and Mr. Trump made clear, in remarks to the media and in meetings with business and union leaders, that the focus of his administration will be to put America back to work.
Among the many issues finally dealt with was the Keystone XL pipeline project, an issue of major importance to Canada and especially the province of Alberta. Obtaining a green light to move forward on this vast enterprise had been denied, largely for political reasons, by the outgoing Obama administration for many years. Clearing it in the first week of the new Trump administration is as strong a signal as any that there is a new sheriff in town. Investors bought CAD as a result; scoffing at remarks made in the previous week by Bank of Canada Stephen Poloz, implying the Bank wished to see a weaker loonie and might be prepared to cut rates to obtain that result. Given that there were no economic statistics of note released in the True North last week, the loonie's strength appears to be entirely oil-driven.
President Donald Trump's executive order to setting new barriers for US entry to people from seven mostly Islamic countries led to confusion and condemnation over the weekend. Homeland Security Secretary John Kelly has clarified that green card holders from those countries would not be stopped from returning to the US. While protests sprung up around the US on Sunday, the impact of the travel ban on financial markets remained unclear as major international companies said it threatened to strangle the free flow of workers and commerce. The move drew a rebuke from some Republican lawmaker and raised concern that he may follow through with isolationist policies touted on the campaign trail. Faster than expected price growth in Europe prompted a sell-off in bonds on bets inflation of more than 2% in some parts of Germany will give the European Central Bank leeway to brake monetary stimulus sooner. The first Federal Reserve Open Markets Committee meeting of the year begins tomorrow with policy decision due on Wednesday.