VBCE Foreign Exchange Wrap Up for Dec. 2 – Dec. 6, 2019

Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca

The CAD improved mid-week to trade near its strongest level in a month against most currencies with the exception of the GBP which was an all-around out-performer. Unfortunately, the bulk of the gains were erased on Friday after the Canadian employment data surprised to the downside. By the end of the week, the CAD was the 2nd worst performing currency just behind the USD (The USD DXY index dropped towards a 2 month low). Initially, USDCAD climbed from 1.3280 up to 1.3322 – near a 7 week high before falling back to 1.3283. On Wednesday, USDCAD tested the 1.3300 level again before falling to 1.3180. The catalyst for the sudden CAD strength was the Bank of Canada interest rate decision / monetary policy statement. Given recent speeches by BOC members and the fact that other central banks around the world have been cutting interest rates / maintain dovish policies, the market was expecting the BOC to signal an interest rate cut for January. Instead, the BOC remained firmly neutral if not a touch hawkish with its statement. The Bank sees the global economy stabilizing and growth edging higher the next couple of years. In Canada, "investment spending unexpectedly showed strong growth" while inflation "remains at target". Also, BOC member Lane stated that there was "no reason for the Bank of Canada to move in step with the U.S. Federal Reserve." The U.S. Fed has cut interest rates 3 times this year while the BOC has held steady – Canada has the highest interest rate of the G7 countries. Also aiding the CAD was an 8% surge higher in oil prices – completely erasing the 5% sell-off that occurred on Friday, Nov. 29. Oil prices neared 6 month highs after comments from the OPEC meeting suggested deeper than expected oil production cuts by Saudi Arabia. USDCAD briefly declined to 1.3159 – a 1 month low before holding a 1.3170 – 1.3188 range ahead of Friday's employment reports. There was a strong divergence in employment reports – Canada's report much weaker than expected while the U.S. headline data was surprisingly strong. Canada shed 32,800 fulltime and 38,400 part-time jobs in November while the unemployment rate surged to 5.9% - the highest in over 1 year. U.S. ADP employment data out Wednesday suggested a downside miss – an addition of just 67,000 jobs vs exp 140,000. The U.S. added 266,000 jobs in November while the unemployment rate ticked down towards a new multi-decade low. The net result was a move from 1.3170 up to 1.3270 – almost completely erasing the post-Bank of Canada move lower earlier in the week.

Weekly Open

Low

High

Weekly Close

USDCAD

1.3278

1.3159

1.3322

1.3255

EURCAD

1.4638

1.4598

1.4760

1.4652

GBPCAD

1.7139

1.7131

1.7429

1.7412

JPYCAD

0.01212

0.01208

0.01226

0.01220

AUDCAD

0.8988

0.8979

0.9121

0.9056

Key Events for the week:

*USDCAD falls from 7 week highs to 1 month lows before rebounding

*EURCAD falls from 3 month highs to 1 month lows before rebounding

*EURUSD climbs from 2 month low towards 1 month high

*GBPCAD and GBPUSD climb to 7 month highs

*JPYCAD falls from 2 month high to 1 month low before rebounding

*JPYUSD climbs from 6 month lows towards 1 month high

*AUDCAD climbs from 1 month low towards 4 month high

*AUDUSD climbs from 6 week low to 1 month high

*Crude oil (WTI) surges 8% towards 6 month highs (range $55.41 - $59.90)

*USD index (DXY) falls to 2 month low (range 97.36 – 98.38)

*U.S. 10 yr Treasuries fall to 2m lows before climbing to 1m high: range 1.69% to 1.86%

*China Caixin manufacturing PMI: 51.8 (exp 51.4 prev 51.7)

*Germany Markit manufacturing PMI: 44.1 (exp 43.8 prev 43.8)

*Eurozone Markit manufacturing PMI: 46.9 (exp 45.7 prev 46.6)

*UK Markit manufacturing PMI: 48.9 (exp 48.3 / prev 48.3)

*Canada Markit manufacturing PMI: 51.4 (exp 52.6 prev 51.2)

*U.S. Markit manufacturing PMI: 52.6 (exp 52.2 prev 52.2)

*U.S. ISM manufacturing PMI: 48.1 (exp 49.4 prev 48.3)

*Australia central bank interest rate decision: 0.75% (exp 0.75% prev 0.75%)

*Australia GDP Q3 qoq: 0.4% (exp 0.5% prev 0.6%)

*China Caixin services PMI: 53.5 (exp 52.7 prev 51.1)

*U.S. ADP employment change: 67,000 (exp 140,000 / prev 121,000)

*U.S. ISM non-manufacturing PMI: 53.9 (exp 54.5 prev 54.7)

*Bank of Canada interest rate: 1.75% (exp 1.75% / prev 1.75%) https://www.bankofcanada.ca/2019/12/fad-press-release-2019-12-04/

*Eurozone retail sales y/y: 1.4% (exp 2.2% prev 2.7%)

*Eurozone GDP Q3 y/y: 1.2% (exp 1.2% prev 1.2%)

*U.S. Trade balance: -$47.2 billion (exp -$48.7 billion prev -$51.1 billion)

*Canada Int'l merchandise trade: -$1.08 billion (exp -$1.37 billion / prev -$1.23 billion)

*Canada Ivey PMI: 60 (exp 53.8 / prev 48.2)

*Germany industrial production m/m: -1.7% (exp 0.1% / prev -0.6%)

*OPEC Meeting

*Canada net employment change: -71,200 (exp 10,000 / prev -1,800)
*Canada unemployment rate: 5.9% (exp 5.5% / prev 5.5%)

*Canada average hourly wages y/y: 4.4% (prev 4.36%)

*U.S. non-farm payrolls: 266,000 (exp 180,000 / prev 156,000)

*U.S. unemployment rate: 3.5% (exp 3.6% / prev 3.6%)

*U.S. average hourly earnings y/y: 3.1% (exp 3% / prev 3.2%)

On Tap for This week:

Mon Dec 9: China exports y/y: -1.1% (exp 1% / prev -0.9%)

China trade balance (USD): $38.73 billion (exp $46.3 b / prev $42.81 b)

Japan GDP Q3 (qoq): 0.4% (exp 0.2% / prev 0.1%)

Germany trade balance: €20.6 billion (exp €19.0 b / prev €19.2 b)

Tue Dec 10: China CPI y/y: 4.5% (exp 4.2% / prev 3.8%)

UK industrial production m/m: 0.1% (exp 0.2% / prev -0.3%)

UK GDP m/m: 0% (exp 0.1% / prev -0.1%)

Germany ZEW survey – economic sentiment: 10.7 (exp 0 / prev -2.1)

Wed Dec. 11: U.S. CPI m/m: exp 0.2% / prev 0.4% y/y: exp 2% / prev 1.8%

U.S. Fed interest rate decision: exp 1.75% / prev 1.75%

Japan machinery orders y/y: exp -1.8% / prev 5.1%

Thur Dec. 12: UK parliamentary election

Germany CPI y/y: exp 1.2% / prev 1.2%

Eurozone industrial production m/m: exp -0.5% / prev 0.1%

European Central Bank interest rate decision: exp 0% / prev 0%

U.S. producer price index m/m: exp 0.2% / prev 0.4% y/y: exp 1.2% / prev 1.1%

Bank of Canada Poloz speech:

Japan Tankan large manufacturing outlook Q4: exp 3 / prev 2

Fri Dec 13: Japan industrial production y/y: exp -7.4% / prev -7.4%

U.S. retail sales: exp 0.5% / prev 0.3% ex autos: exp 0.4% / prev 0.2%

Technically, USDCAD is neutral. After repeated failures to hold the 1.33 level USDCAD dropped to 1.3159 – a 1 month low. However, the pairing also subsequently failed to hold below the 1.3200 level. Over the past 6 months, USDCAD has been confined to a 1.3017 – 1.3385 range with the bulk of trade happening within a narrow 1.3140 – 1.3300 range. A sustained move above 1.3328 should see a re-test of the 1.3340 – 1.3380 range while a sustained move below 1.3160 will likely lead to a move back into the 1.3050 – 1.3100 range.

Topside targets to consider: 1.3270, 1.3315, 1.3328, 1.3340, 1.3380

Downside targets to consider: 1.3230, 1.3210, 1.3160,1.3130, 1.3050

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada.S. Federal Reserve, CNBC, Forexlive, CME Group

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The information and opinions contained herein are gathered from sources which are thought to be reliable but the reader should not assume that the information and opinions are official or final. VBCE makes no warranty concerning the accuracy of the information and opinions, and accepts no liability for the consequences of any actions taken on the basis of the information and opinions provided. The content is for general information only and does not constitute in anyway giving financial advice.