VBCE Weekly Foreign Exchange Wrap Up and Forecast for May. 14 – May. 18, 2018

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

The CAD was on pace to be the best performing currency for the 2^nd straight week until broad losses over Thursday's and Friday's sessions saw the CAD finish the week in the middle of the pack. With oil prices hitting new highs and hopes for a NAFTA deal mid-week, the CAD enjoyed broad gains with EURCAD and GBPCAD falling to new 4-month lows, JPYCAD falling to new 3-month lows, and AUDCAD holding steady near 2 year lows. The USD saw some strength on Tuesday after 10-year Treasury yields broke above the 3% level – nearing the highest levels since 2011. Also, a Mexican trade official commented that he did not anticipate a NAFTA agreement before May 17^th. USDCAD climbed from 1.2790 up to 1.2924 only to fall back to 1.2850. Broad-based strength in the commodity bloc on Wednesday saw further USD declines taking USDCAD from 1.2875 down to 1.2773. The pairing bounced from 1.2747 up to 1.2821 on Thursday before comments from U.S. trade official Lighthizer that NAFTA countries were "nowhere near" reaching a deal saw USDCAD jump from 1.2800 up to 1.2848 late in the day. USDCAD would fall back to 1.2789 in early North American trade Friday before weaker than expected Canadian retail sales (March) and inflation (April CPI) data saw USDCAD climb to 1.2910 with pull-backs limited to 1.2865/70. Despite the CAD weakness into week-end, the CAD still managed to close the week with gains vs. the EUR and JPY and only marginal losses vs. the GBP and AUD.

Themes for the week:

*USDCAD choppy in a 1.2747 – 1.2924 range

*EUR, GBP, and JPY declines continue – GBP & EUR near 4 month lows, JPY near 3 month lows, AUD holds steady near 2 year lows

*WTI oil gains 2.5% to trade at highest level since Nov. 2014 (range $70.28 to $72.30)

*China retail sales y/y: 9.4% (exp 10.0% / prev 10.1%)

*Germany GDP Q1(qoq): 0.3% (exp 0.4%/prev 0.6%) y/y: 1.6% (exp 1.8%/prev 2.3%)

*Eurozone GDP Q1(qoq): 0.4% (exp 0.4%/prev 0.4%) y/y: 2.5% (exp 2.5%/prev 2.5%)

*U.S. retail sales: 0.3% (exp 0.3%/prev 0.8%) ex autos: 0.3% (exp 0.5%/prev 0.4%)

*Germany harmonized CPI y/y: 1.4% (exp 1.4% / prev 1.4%)

*Eurozone CPI y/y: 1.2% (exp 1.2% / prev 1.2%) Core y/y: 0.7% (exp 0.7% / prev 0.7%)

*U.S. industrial production: 0.7% (exp 0.6% / prev 0.7%)

*Australia employment change: 22,600 (exp 20,000 / prev -700)

*Australia unemployment rate: 5.6% (exp 5.5% / prev 5.5%)

*Canada ADP employment: 30,200 (prev 42,800* revised to 59,300)

*Japan National CPI ex food/energy: 0.4% (exp 0.4% / prev 0.5%)

Canada retail sales: 0.6% (exp 0.3% / prev 0.5%) ex autos: -0.2% (exp 0.5% / prev 0%)

*Canada CPI m/m: 0.3% (exp 0.4% / prev 0.3%) y/y: 2.2% (exp 2.3% / prev 2.3%)

*U.S. 10 year Treasury yield re-tests 7 year highs: climbs from 2.95% up to 3.12% before falling back to 3.06%

On Tap for Next week:

Mon May 21: Victoria Day

Tue May 22: Canada wholesale sales exp 0.7% / prev -0.8%

Wed May 23: UK core CPI y/y: exp 2.3% / prev 2.3%

Germany GDP Q1: exp 0.4% / prev 0.4%

U.S. FOMC minutes

Thur May 24: UK retail sales m/m: exp -0.1% / prev -1.2% y/y: 1.4% / prev 1.1%

Fri May 25: Japan Tokyo CPI ex fresh food y/y: exp 0.6% / prev 0.6%

UK GDP Q1(QoQ): exp 0.2% / prev 0.1% y/y: exp 1.3% / prev 1.2%

U.S. durable goods orders: exp -1.4% / prev 2.6%

Technically, USDCAD is neutral. Trading was choppy with a break above 1.2820 pushing the pair up to 1.2924 briefly on Tuesday. Unable to hold above 1.2900, USDCAD dropped to 1.2775 on Wednesday. New weekly lows of 1.2747 in early trade Thursday failed to hold and USDCAD climbed back to test the 1.2820 level. USDCAD pushed higher on Friday after weaker than expected Canadian retail sales and inflation data although the pairing was again unable to hold the 1.2900 level. A sustained break back above 1.2924 would target the May high of 1.2998 while a break below 1.2750 would increase downward momentum.

Topside targets to consider: 1.2900, 1.2924, 1.2985, 1.3010