VBCE Weekly Foreign Exchange Wrap Up and Forecast for June 25 – June 29, 2018

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

The CAD was the best performing currency this week while the JPY was the weakest – essentially a reversal from last week where the CAD was the laggard and the JPY was the top performer. After several consecutive days of losses, global equity markets found some traction this week and finished strongly on Friday buoyed by an overnight European agreement on migration. Oil continued to trend strongly this week trading above $74 / barrel (WTI crude) to the highest levels since 2014. Over the past 2 weeks, oil prices have gained 17% after having fallen to 3 month lows in mid-June. The CAD initially traded on a weaker note to start the week with USDCAD trading between 1.3260 and 1.3330. A prepared text by Bank of Canada Governor Poloz out Wednesday at noon was interpreted as dovish sending USDCAD from 1.3275 up to 1.3387 – retesting a key level from last week and also a 1 year high. Given trade uncertainties and recent weaker than expected Canadian data, market probabilities of a July 11^th Bank of Canada rate hike had fallen to 50% from around 80% earlier in the month. The CAD weakness was short-lived as a Poloz press conference Wednesday afternoon was deemed to be hawkish. Poloz basically signaled that a few economic data misses and speculation on trade uncertainties would not derail the broader economic outlook for Canada. This was the start of a large CAD move as market probabilities of a July 11^th interest rate hike jumped back up towards 75%. Between Wednesday afternoon and Friday's close, the CAD surged to multi-week highs vs. most major currencies. After falling to 1.3207 in early trade Friday, USDCAD climbed to 1.3270 ahead of the Canadian GDP data. The result was just marginally better than expected but the reaction by the CAD was immense. USDCAD plummeted from 1.3270 down to 1.3128 – a two week low. Corrective bounces were few and far between with USDCAD holding below 1.3170 for most of the NA session.

Themes for the week:

*USDCAD retests 1 year highs near 1.3380 before falling to 2 week lows @ 1.3128

*EUR and JPY falls towards 2 week lows, GBP and AUD fall near 1 month lows

*WTI crude oil surges ~10% towards 4 year highs (climbs from $67.86 up to $74.46)

*U.S. durable goods orders: -0.6% (exp -1.0% / prev -1.0%)

*Japan retail trade y/y: 0.6% (exp 0.9% / prev 1.5%)

*Eurozone business climate: 1.39 (exp 1.40 / prev 1.44)

*U.S. GDP (Q1 annualized): 2.0% (exp 2.2% / prev 2.2%)

*EIA crude oil stocks: -9.891 million barrels (exp. -2.572m / prev -5.914m)

*BOC Poloz speech / press conference

*Japan Tokyo CPI ex fresh food y/y: 0.7% (exp 0.6% / prev 0.5%)

*Germany retail sales m/m: -2.1% (exp -0.5% / prev 1.6%)

*Germany unemployment change: -15,000 ( exp -8,000 / prev -11,000)

*Germany unemployment rate: 5.2% (exp 5.2% / prev 5.2%)

*UK GDP (q1 y/y): 1.2% (exp 1.2% / prev 1.3%)

*Eurozone core CPI y/y: 1.0% (exp 1.0% / prev 1.1%)

*Canada GDP (April): 0.1% (exp 0.0% / prev 0.3%) y/y: 2.5% (exp 2.5%)

*U.S. 10 year Treasuries ease lower in a 2.82% - 2.90% range

On Tap for Next week:

Mon July 2: China Caixin manufacturing PMI: exp 50.9 / prev 51.1

Eurozone unemployment rate: exp 8.4% / prev 8.5%

U.S. ISM manufacturing PMI: exp 58.4 / prev 58.7

Tues July 3: Australian central bank interest rate: exp 1.5% / prev 1.5%

Wed July 4: Australia retail sales: prev 0.4%

Australia trade balance: exp $1 billion / prev $977m

Thur July 5: U.S. FOMC minutes

Fri July 6: Canada net employment change: exp 17,500 / prev -7,500

Canada unemployment rate: exp 5.8% / prev 5.8%

Canada int'l merchandise trade: prev -$1.9 billion

U.S. non-farm payrolls: exp 188,000 / prev 223,000

U.S. unemployment rate: exp 3.8% / prev 3.8%

U.S. average hourly earnings m/m: exp 0.3% / prev 0.3%

U.S. trade balance: exp -$46.20 billion / prev -$46.20 billion

Technically, USDCAD is bearish. The pairing was rejected for the 2^nd consecutive week at the 1.3380 level. The subsequent sell-off took the rate below two key support levels at 1.3240 and at 1.3160. Corrective bounces were limited and USDCAD closed Friday's session near the weekly low – also the lowest level since June 15^th. The market now awaits next Friday's Canadian and U.S. employment data.

Topside targets to consider: 1.3160, 1.3225, 1.3270, 1.3300