VBCE Weekly Foreign Exchange Wrap Up for July 10 – July 14, 2017

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

With the exception of the AUD, the CAD was the best preforming currency for the 3^rd consecutive week. USDCAD climbed to 1.2941 just ahead of Wednesday's Bank of Canada announcement and saw a swift decline towards 1.2725 after the BOC raised its key rate to 0.75% - the first increase since 2010. The BOC raised its 2017 growth forecast to 2.8% from 2.6% and Q2 growth to 3.0% from 2.5% noting that "recent data bolstered the Bank's confidence in its outlook for above potential growth." Also, the output gap is projected to close around the end of 2017 (previously expected to be the first half of 2018). The probability of a 2^nd rate hike (from 0.75% up to 1.00%) happening by October is now 60% / by December is now 70%. On Friday, U.S. retail sales and inflation data missed estimates (U.S. retail sales data has been negative for 3 straight months) driving the USD lower across the board. USDCAD dropped to 1.2644 and closed the week near a 13 month low.

Themes for the week:

*CAD outperforms for the 3rd straight week – trades at 1 year highs vs. the USD, 6 month highs vs. JPY, and 3 month highs vs. EUR & GBP

*WTI crude gains 7% from $43.68 up to $46.71 - noticeably larger than expected inventory draw (7.564 million barrels vs. exp 2.85 million / prev -6.299 million)

*Bank of Canada interest rate decision: +0.25bp to 0.75% (exp 0.75% / prev 0.50%)

*U.S. CPI m/m: 0.0% (exp 0.1% / prev -0.1%) y/y: 1.6% (exp 1.7% / prev 1.9%)

*U.S. core CPI m/m: 0.1% (exp 0.2% / prev 0.1%) y/y: 1.7% (exp 1.7% / prev 1.7%)

*U.S. retail sales: -0.2% (exp 0.1% / prev -0.1%) Core: -0.2% (exp 0.2% prev -0.3%)

*U.S. industrial production: 0.4% (exp 0.3% / prev 0.1%)

On Tap for Next week:

Friday July 21: Canada CPI m/m: exp -0.1% / prev 0.1% y/y: exp 1.0% / prev 1.3%

Canada retail sales: exp 0.2% / prev 0.8% core: exp 0.3% prev 1.5%

Technically, USDCAD is bearish. Many market participants had estimated that the Bank of Canada rate hike was effectively priced in with the recent slide lower in USDCAD from 1.3465 on June 12^th (the day BOC officials made hawkish comments indicating a July 12^th hike was in the works) down to 1.2860 in the days leading up to the July 12th announcement. After the rate hike was announced, USDCAD dropped from 1.2940, continuing lower into the weekly close - a 13 month low near 1.2650. Looking at the long-term charts, there is little support below 1.2650 and near the May 2016 low of 1.2450.

Topside targets to consider: 1.2770, 1.2860, 1.2940, 1.3000