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VBCE Weekly Foreign Exchange Wrap Up and Forecast for July 2 – July 6, 2018

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

The USD was the worst performing currency this week with the broader USD index (DXY) falling to a 3 week low. The CAD lost ground early in the week but managed to regain its footing and make some gains vs. the USD and JPY. Monday's holiday session saw USDCAD climb from 1.3137 up to 1.3225 after a Trump tweet over the weekend suggested that Saudi Arabia would increase oil production as current oil prices were deemed to be too high. Oil prices had closed last week above $74 and the price gapped lower to $72.53 on Sunday. In addition, political uncertainties over the German coalition sent the EUR gapping lower as well, adding to risk aversion flows at the beginning of the week. Come Tuesday, Monday's flows reversed with global equity markets generally gaining ground over the rest of the week. Oil prices also bounced back as Saudi Arabia did not confirm Trump's request and oil prices surged to new highs @ $75.24. Oil flows remained choppy with a subsequent fall to weekly lows @ $72.12 Friday morning only to bounce back to $74 Friday afternoon. USDCAD trended lower accordingly reaching a 3 week low @ 1.3075 on Friday. Canada added 31,800 jobs in June after having shed 7,500 jobs in May. Wage inflation remains high at 3.5%. Headline U.S. data was good too however with all of the jobs gains and with unemployment at record lows, wage inflation missed estimates (2.7% vs 2.8%) sending the USD broadly lower on Friday. U.S. 10 year yields also declined towards 4 week lows with market second guessing the U.S. Fed's forecasted interest rate path. Last week's comments from Bank of Canada governor Poloz along with today's solid Canadian employment report will likely result in a Bank of Canada interest rate hike (from 1.25% up to 1.50%) at next Wednesday's announcement.

Weekly Open

Low

High

Weekly Close

USDCAD

1.3137

1.3075

1.3225

1.3082

EURCAD

1.5360

1.5288

1.5442

1.5366

GBPCAD

1.7350

1.7287

1.7443

1.7381

JPYCAD

0.01187

0.01183

0.01194

0.01185

AUDCAD

0.9730

0.9658

0.9743

0.9720

Themes for the week:

*USD broadly weakens/USD index (DXY) falls from 95.14 down to 93.92 – 3 week low

*USDCAD falls from 1.3225 down to 1.3075 – 3 week low

*EUR and JPY test 3 week lows, GBP near 1 month low, AUD near 6 week lows

*WTI crude oil holds near 4 year highs (range $72.12 to $75.24)

*China Caixin manufacturing PMI: 51.0 (exp 51.0 / prev 51.1)

*Eurozone unemployment rate: 8.4% (exp 8.5% / prev 8.4%)

*U.S. ISM manufacturing PMI: 60.2 (exp 58.4 / prev 58.7)

*Australian central bank interest rate: 1.50% (exp 1.5% / prev 1.5%)

*Australia retail sales: 0.4% (exp 0.3% / prev 0.5%)

*Australia trade balance: $827 million (exp $1.2 billion / prev $472m)

*Canada net employment change: 31,800 (exp 24,000 / prev -7,500)

*Canada unemployment rate: 6.0% (exp 5.8% / prev 5.8%)

*Canada hourly earnings y/y: 3.5% (prev 3.9%)

*Canada int'l merchandise trade: -$2.77 billion (exp -$2.05b / prev -$1.86b)

*U.S. non-farm payrolls: 213,000 (exp 195,000 / prev 244,000)

*U.S. unemployment rate: 4.0% (exp 3.8% / prev 3.8%)

*U.S. avg hourly earnings mm:0.2%(exp 0.3%/prev 0.3%)y/y:2.7%(exp 2.8%/prev 2.7%)

*U.S. trade balance: -$43.1 billion (exp -$43.70 billion / prev -$46.10)

*U.S. 10 year Treasuries ease lower from 2.88% - 2.82%

On Tap for Next week:

Mon July 9: Germany trade balance: exp €20.0 billion / prev €19.4 billion

Tues July 10: China CPI m/m: exp 0% / prev -0.2% y/y: exp 1.9% / prev 1.8%

UK GDP m/m:

Wed July 11: Bank of Canada interest rate decision: exp 1.50% / prev 1.25%

Bank of Canada monetary policy report and press conference

U.S. producer price index ex food & energy m/m: exp 0.2% / prev 0.3%

U.S. PPI ex food & energy y/y: exp 2.5% / prev 2.4%

Thur July 12: Germany harmonized CPI y/y: exp 2.1% / prev 2.1%

Eurozone industrial production m/m: exp 0.2% / prev -0.9%

U.S. CPI ex food & energy m/m: exp 0.2% / prev 0.2% y/y: 2.3% / prev 2.2%

Fri July 13: China trade balance: exp $27.00 billion / prev $24.92 billion

Technically, USDCAD is bearish. The pairing broke below the key 1.3125 level (former 2018 high that was broken last month followed by an extension up to 1.3380 double-top) while also closing this week near the weekly low for the 2nd consecutive week. Also, the broader USD index fell from 95.14 down to 93.92 – a 3 week low. The market now awaits next Wednesday's Bank of Canada interest rate decision, monetary policy statement, and press conference.

Topside targets to consider: 1.3150, 1.3180, 1.3225, 1.3270

Downside targets to consider: 1.3080, 1.3050, 1.3000, 1.2950

USDCAD 2018/2019 Forecast

Bank

2018 Q3

2018 Q4

2019 Q1

2019 Q2

TDCanada Trust

1.2820

1.2820

1.2658

1.2658

National Bank

1.33

1.28

1.28

1.27

RBC

1.28

1.28

1.26

1.26

CIBC

1.33

1.34

1.31

1.28

BMO

1.30

1.2810

1.2710

1.2650

Scotia Bank

1.28

1.28

1.25

1.22

2018 CAD Summary

2018Summary

2018Open

Low

High

2018 Last

USDCAD

1.2580

1.2253

1.3387

1.3082

EURCAD

1.5100

1.4820

1.6140

1.5366

GBPCAD

1.6975

1.6761

1.8292

1.7381

JPYCAD

0.01116

0.01091

0.01239

0.01185

AUDCAD

0.9811

0.9549

1.0243

0.9720

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive, CMEGroup, BNN

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The information and opinions contained herein are gathered from sources which are thought to be reliable but the reader should not assume that the information and opinions are official or final. VBCE makes no warranty concerning the accuracy of the information and opinions, and accepts no liability for the consequences of any actions taken on the basis of the information and opinions provided. The content is for general information only and does not constitute in anyway giving financial advice.