VBCE Weekly Foreign Exchange Wrap Up and Forecast for June 11-15. 18, 2018

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

The USD was the top performer this week as volatility remained elevated. The CAD looked poised to be the top-performer after the USD saw broad declines on Wednesday and the 1.3030 – 1.3050 levels continued to stall USD advances. However the trend abruptly changed and the CAD was the worst performing currency behind the EURO over Thursday and Friday. Although USDCAD closed last week near 1.2920, the pairing gapped higher to open this week near 1.30 after trade tensions escalated between Canada and U.S. over the weekend. The pairing tested the 1.3040 level on Monday, Tuesday, and again on Wednesday after the U.S. Fed raised its key interest rate to 2.00% as was widely expected. The Fed's projections and accompanying statement were a bit more optimistic or hawkish, and that sent the USD broadly higher from 1.2970 up to 1.3050. The move was short-lived and USDCAD fell right back towards 1.2980 as the broad USD gains quickly evaporated. Early Thursday morning, the European Central bank (ECB) issued its policy announcement. Although rates were expected to remain at 0%, there was speculation that they would announce the end of the asset purchase / quantitative easing program (a more hawkish tone). EURCAD spiked to 1.5360 before tumbling to 1.5120 as the accompanying statement and press conference painted a different picture. The ECB was far more dovish than expected catching the market off-guard. There were concerns over the economic outlook while the elimination of the QE program was not a 100% given - it would be tied to incoming data. The USD was broadly bid on the news and better than expected U.S. retail sales data lifted the USD further. USDCAD effectively broke above the 1.3050 level and extended gains just beyond 1.3100. On Friday, the combined escalation of U.S. and China trade tensions along with a 4% decline in oil prices (from a weekly high to a weekly low) saw USDCAD move up towards 1.3209 – a 1 year high.

Themes for the week:

*USDCAD climbs from 1.2949 up to 1.3209 – 1 year high

*EUR and GBP hold near 6 week highs, AUD and JPY hold near 2 month highs

*WTI crude oil volatile in a $64.30 - $67.09 range / holds near 2 month lows

*UK industrial production m/m: -0.8% (exp 0.2% / prev 0.1%)

*UK manufacturing production m/m: -1.4% (exp 0.3% / prev -0.1%)

*UK average earnings excl. bonus: 2.8% (exp 2.9% / prev 2.9%)

*U.S. CPI m/m: 0.2% (exp 0.2% / prev 0.2%) y/y: 2.8% (exp 2.7% / prev 2.5%)

*U.S. CPI ex food & energy m:0.2%(exp 0.2%/prev 0.1%) y/:2.2%(exp 2.2%/prev 2.1%)

*UK CPI m/m: 0.4% (exp 0.4% / prev 0.4%) y/y: 2.4% (exp 2.5% / prev 2.4%)

*U.S. producer price index m:0.5%(exp 0.3% /prev 0.1%)y/y: 3.1%(exp 2.8%/prev 2.6%)

*U.S. Fed interest rate decision: exp 2.00% / prev 1.75%

*U.S. FOMC economic projections / press conference – indicate 2 more hikes this year

*Australia employment change: 12,000 (exp 18,000 / prev 18,300)

*Australia unemployment rate: 5.4% (exp 5.5% / prev 5.6%)

*China retail sales y/y: 8.5% (exp 9.6% / prev 9.4%)

*German harmonized CPI y/y: 2.2% (exp 2.2% / prev 2.2%)

*UK retail sales m/m: 1.3% (exp 0.5% / prev 1.8%) y/y: 3.9% (exp 2.4% / prev 1.4%)

*ECB interest rate decision: exp 0% / prev 0% - dovish statement / press conference

*U.S. retail sales: 0.8% (exp 0.4% / prev 0.4%) ex autos: 0.9% (exp 0.5% / prev 0.4%)

*Bank of Japan interest rate: -0.1% (exp -0.1% / prev -0.1%)

*Eurozone CPI core m/m: 0.3% (exp 0.3% / prev 0.2%) y/y: 1.1% (exp 1.1% /prev 1.1%)

*U.S. industrial production: -0.1% (exp 0.2% / prev 0.9%)

*Canada manufacturing shipments: -1.3% (exp 0.6% / prev 1.4%)

*U.S. 10 year Treasuries flat: climbs from 2.94% up to 3.00% before falling to 2.90%

On Tap for Next week:

Tues June 19: Reserve Bank of Australia (RBA) meeting minutes

European Central Bank (ECB) Draghi speech

Bank of Japan (BOJ) policy meeting minutes

Wed June 20: U.S. Fed Powell speech

Thur June 21: OPEC meeting

Bank of England (BOE) interest rate decision: exp 0.5% / prev 0.5%

Canada ADP employment change: prev. 30,200

Canada wholesale sales: exp 0.7% / prev 1.1%

Fri June 22: Canada retail sales" exp 0% / prev 0.6% ex autos: exp 0.2% / prev -0.2%

Canada CPI m/m: 0.1% / prev 0.3% y/y: exp 2.1% / prev 2.2%

Technically, USDCAD is bullish. Although the 1.3020 – 1.3050 resistance zone held up Mon, Tues, and Wed, (these levels had contained USD rallies over the previous 3 weeks), the 1.2950 level held firm on dips. The 1.3050 level was broken on Thursday and the pairing continued higher closing the week near 1.3200 – close to a 1 year high. There were also very few pull-backs or corrections once the 1.3050 level was broken.

Topside targets to consider: 1.3210, 1.3270, 1.3310, 1.3350