VBCE Weekly Foreign Exchange Wrap Up for Jan. 8 – Jan. 12, 2018

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

The CAD performance was mixed this week. Despite opening the week on a strong note (USDCAD tested 1.2377), the CAD broadly weakened on NAFTA related comments mid-week. After several failed attempts to break beyond the 1.2550/90 zone, the broader USD downtrend prevailed sending USDCAD down to finish the week near 1.2460. U.S. inflation data out Thursday and Friday was fairly soft sending the broader USD index down to a 3 year low. The EUR outperformed on a combination of strong data, hawkish central bank minutes, and news of a German coalition. Oil prices topped the $64 level nearing the highest level in 3 years as commodity markets performed well (gold reached a 4 month high) and world equity indices surged higher. The markets will now turn focus to the Bank of Canada interest rate announcement due Wednesday @ 7:00am. The probability of a rate hike (from 1.00% up to 1.25%) is approximately 85%. Last month, BOC Governor Poloz offered up some hawkish comments on the economy noting that he'd like to see the economy run hot for awhile.

Themes for the week:

*The EUR & GBP lead while the USD lags

*USDCAD holds near 3 month lows, EURCAD, GBPCAD, and JPYCAD near 1 month highs, and AUDCAD near 4 month highs

*WTI crude oil gains 4.5% towards 3 year highs (from $61.80 up to $64.48)

*EUR retail sales m/m: 1.5% (exp 1.3% / prev -1.1%)

*EUR unemployment rate: 8.7% (exp 8.7% / prev 8.8%)

*Australia retail sales m/m: 1.2% (exp 0.4% / prev 0.5%)

*U.S. producer price m/m:-0.1% (exp 0.2%/prev 0.4%) y/y:2.6% (exp 3.0%/prev 3.1%)

*China exports y/y: 10.9% (exp 9.1% / prev 12.3%)

*U.S. retail sales: 0.4% (exp 0.4% / prev 0.9%)

*U.S. CPI m/m: 0.1% (exp 0.2% / prev 0.4%) y/y: 2.1% (exp 2.1% / prev 2.2%)

On Tap for Next week:

Wed Jan 17: EURO CPI m/m: exp 0.4% / prev 0.1% y/y: exp 1.4% / prev 1.4%

U.S. industrial production: exp 0.4% / prev 0.2%

Bank of Canada interest rate decision: exp 1.25% / prev 1.00%

Bank of Canada monetary policy report and press conference

Thur Jan 18: Australia employment: exp 24,900 / prev 61,600

Australia unemployment rate: exp 5.4% / prev 5.4%

China retail sales y/y: exp 10.1% / prev 10.2%

China GDP (Q4): exp 6.7% / prev 6.8%

Fri Jan 19: UK retail sales m/m: exp 0.3% / prev 1.1% y/y: exp 2.1% / prev 1.6%

Canada manufacturing sales: prev -0.4%

Technically, USDCAD is neutral. After the last failed test of 1.2900 on Dec. 19^th, the USDCAD downtrend stalled at 1.2355 on Jan. 5^th. The pairing corrected higher this week to 1.2590 before falling during Thursday and Friday's sessions to close the week near 1.2460. A sustained break below 1.2400 or above 1.2600 will be required for a change in trend.

Topside targets to consider: 1.2495, 1.2550, 1.2590, 1.2625