VBCE Weekly Foreign Exchange Wrap Up for February 27 - March 3, 2017

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

The USD enjoyed a breakout week gaining ground vs. all major currencies. Despite lackluster economic data, most U.S. Fed members were engaged in "hawkish" commentary throughout the week, effectively driving up the odds of a March 15^th interest rate hike from about 20% at the beginning of the week to nearly 100% after Fed Chairman Yellen's speech on Friday. Once USDCAD broke above the 1.3200 resistance level, the uptrend continued towards the 2017 high of 1.3435 with no significant downside corrections along the way. The Bank of Canada highlighted the diverging economies of Canada and the U.S. while noting that recent higher than expected inflation was temporary. Even a surprisingly strong 4^th quarter GDP result for Canada (2.6% vs exp 2.0%) had little effect on the overall bullish USD trend. Also putting pressure on the CAD was the fact that oil prices deteriorated to a 1 month low after several failures at the $55 level last week.

Themes for the week:

*USD surges across the board as March rate hike probability nears 100% *USDCAD climbs from 1.3080 up to 1.3435, 2017 high

*Oil (WTI) sinks from $54.59 to $52.53 (1 month low) before closing week near $53.20

*U.S. GDP Q4: 1.9% (exp 2.1% / prev 1.9%)

*Bank of Canada interest rate decision: unchanged @ 0.50% - dovish rhetoric noted:

- effects of higher Jan. inflation (2.1%) temporary / core measures point to material excess capacity in economy

- exports continue to face ongoing competitiveness challenges

- subdued growth in wages and hours worked continue to reflect persistent economic slack in Canada, in contrast to the United States

*Canada GDP(Dec):0.3%(exp 0.3%/prev 0.5%)Q4 annualized:2.6%(exp 2.0%/prev3.8%)

*U.S. Fed Yellen: a March rate hike "would likely be appropriate" should "economic data continue to come in about as we expect."

On Tap for Next week:

Tuesday, Mar. 7: Canadian trade balance: exp $0.70 billion / prev $0.92 billion

U.S. trade balance: exp -$48.50 billion / prev -$44.30 billion

Wednesday, Mar. 8: U.S. ADP employment change: exp 190,000 / prev 246,000

Thursday, Mar. 9: European Central Bank interest rate: exp unchanged @ 0.0%

Friday, Mar. 10: Canada net employment change: exp 2,500 / prev 48,300

Canada unemployment rate: exp 6.8% / prev 6.8%

U.S. non-farm payrolls: exp 190,000 / prev 227,000

U.S. unemployment rate: exp 4.7% / prev 4.8%

Technically, the bullish USD trend is strong having gained momentum on the sustained break above the 1.3200 level. A key signal of a strong trend is the ability to shrug off disappointing data. The USD did just that last week as the majority of U.S. data points disappointed while Canada saw strong 4th quarter GDP data. Next week, the broad USD up trend should resume although recent gains may be consolidated as the Fed March rate hike is nearly priced in and the market awaits Friday's U.S. job numbers.

Topside targets to consider: 1.3435, 1.3460, 1.3510, 1.3600

Downside targets to consider: 1.3320, 1.3213, 1.3150, 1.3080

2016 CAD Summary