​VBCE Weekly Foreign Exchange Wrap Up for Jan. 16 – Jan. 20, 2017

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

The CAD was the worst performing currency this week after a surprisingly strong performance over the past two weeks. Warnings by Bank of Canada Governor Poloz about the strength of the CAD hampering Canada's competitiveness, negative effects of U.S. policies on Canada's exports, and that an "interest rate cut remains on the table" were the catalyst for the Canadian dollar's weakness. The USD also received a boost from positive comments by Fed Chairman Yellen along with firm inflation readings. Canada's inflation and retail sales data were both soft, missing expectations. The AUD continues to perform well while the GBP had its strongest week in nearly a decade after a speech by PM May reduced several uncertainties surrounding BREXIT.

Themes for the week:

*USDCAD swift reversal – significant bounce from 3 month low @ 1.3018 nearly wipes clean CAD 2017 gains (USDCAD climbs from 1.3018 up to 1.3388)

*CAD broadly declines – EUR recovers from 18 month lows to 6 week highs, JPY recovers from 1 year lows towards 6 week highs, AUD recovers from 7 month lows towards 2 month highs

*Bank of Canada offers up dovish commentary – sees downside risk to exports from U.S. policies / "rate cut remains on the table"

*Bank of Canada holds key interest rate at 0.50% - sees 2017, 2018 GDP @ 2.1% / output gap to close mid 2018

*Oil (WTI) stable in narrow $51.24 - $53.50 range

*Canada retail sales: 0.2% (exp 0.5% / prev 1.2%) core: 0.1% (exp 0.2% / prev 1.4%)

*Canada CPI core m/m: -0.3% (exp -0.2%/prev -0.5%) y/y: 1.6% (exp 1.7% / prev 1.5%)

*U.S. CPI core m/m: 0.2% (exp 0.2% / prev 0.2%) y/y: 2.2% (exp 2.2% / prev 2.1%)

*GBP best performing currency after PM Teresa May signals a clean Brexit (GBPCAD climbs from 1.5739 - a 3.5 year low towards 2017 high near 1.65)

*European Central Bank interest rate: unchanged @ 0% (exp 0% / prev 0%) – stimulus program unchanged (EURUSD falls from 1.0680 to 1.0590 but recovers to 1.0670)

On Tap for Next week:

Friday, Jan. 27: U.S. durable goods: exp 2.6% / prev -4.5% core: exp 0.5% / prev 0.6%

U.S. GDP Q4: exp 2.2% / prev 3.5%

U.S. GDP price index: exp 2.1% / prev 1.4%

The CAD finished the week as the worst performing currency and looks poised to lose further ground. The reversal since Wednesday has been rather swift and in the absence of any key data out of Canada next week, the trend will likely continue. Given that USDCAD has cleared and stayed above several technical levels, I expect USDCAD to trend higher in the near term.

Topside targets to consider: 1.3388, 1.3460, 1.3510, 1.3600

Downside targets to consider: 1.3285, 1.3250, 1.3190, 1.3120

2016 CAD Summary