VBCE Weekly Foreign Exchange Wrap Up for July 9 – July 13, 2018

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

The USD and the AUD were the best performing currencies this week while the Japanese yen lagged. The USD index (DXY) climbed from a 3 week low (93.71) to test a two week high (95.24) before finishing the week at 94.70. The AUD received a boost from the overall general positive market sentiment. Despite Tuesday's announcement that the U.S. was preparing another round of tariffs on Chinese goods - 10% duties on $200 billion – just days after the U.S. formally announced a 25% tariff on $34 billion worth of goods; China did not provide specific details on possible retaliatory measures. Global equity and commodity markets sold off heavily during Wednesday's session only to reverse course and put up sizeable gains through Thursday and Friday. The overall positive risk mood sent the JPY broadly lower – USDJPY approached the 113 level – near the 2018 high while CADJPY hit two month highs. The CAD was caught in the crossfire this week with USDCAD initially climbing from 1 month lows near 1.3070 up to 1.3175 on the U.S. tariff news. The pairing fell back towards 1 month lows @ 1.3063 after the Bank of Canada raised its key rate to 1.50%. Although this was widely expected, the market was caught off-guard by the surprisingly upbeat monetary policy statement. Many had expected a "dovish" hike given recent trade uncertainties. Right around the time the CAD was peaking early Wednesday morning, the crude oil inventory report was released. There was a surprise draw of 12,633,000 barrels – about three times what the market was expecting sending oil prices from $73 up to $74. However equity markets were selling off heavily because of the additional U.S. proposed tariffs. Oil prices plunged 5.5% to $70 within 3 hours effectively taking USDCAD up to 1.3221 – a 1 week high amidst broad-based USD strength. Global equity markets downplayed the trade concerns on Thursday and the USD broadly weakened after a softer than expected U.S. inflation report taking USDCAD back down to 1.3150. During the overnight session on Friday, the USD moved higher on reports that Trump wanted a "Hard" Brexit and that UK PM Theresa May's preference for a "Soft" Brexit would "affect trade with the United States, unfortunately in a negative way". USDCAD climbed to 1.3211 just shy of Wednesday's 1 week high of 1.3221 before the USD abruptly weakened and was the worst performing currency during the North American session. Trump confirmed the earlier reports were "fake news" and that he did not criticize PM May and that he did not want any trade restrictions. USDCAD returned back towards its opening levels and closed the week near 1.3150.

Weekly Open

Low

High

Weekly Close

USDCAD

1.3083

1.3063

1.3221

1.3158

EURCAD

1.5370

1.5320

1.5444

1.5371

GBPCAD

1.7390

1.7294

1.7479

1.7412

JPYCAD

0.01185

0.01167

0.01187

0.01170

AUDCAD

0.9720

0.9682

0.9814

0.9760

Themes for the week:

*USD broadly gains / USD index (DXY) climbs from 93.71 (3 week low) up to 95.24 (2 week high) before falling to 94.70

*USDCAD climbs from 1.3063 (1 month low) up to 1.3221 (1 week high) before falling to 1.3150

*EUR near 1 week low, JPY near 2 month low, GBP near 1 month low, AUD tests 2 week high

*WTI crude oil climbs from $73.85 up to $74.68 before plunging 7%+ to $69.22. Rebounds capped at $71.62 - closes week down 4%

*Germany trade balance: €20.3 billion (exp €20.0 billion / prev €19.4 billion)

*China CPI m/m: -0.1% (exp 0% / prev -0.2%) y/y: 1.9% (exp 1.9% / prev 1.8%)

*Bank of Canada interest rate decision: 1.50% (exp 1.50% / prev 1.25%)

*Bank of Canada monetary policy report and press conference – hawkish tilt

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

*U.S. PPI ex food & energy y/y: 2.8% (exp 2.6% / prev 2.4%)

*Germany harmonized CPI y/y: 2.1% (exp 2.1% / prev 2.1%)

*Eurozone industrial production m/m: 1.3% (exp 1.2% / prev -0.8%)

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

*China trade balance: $41.61 billion (exp $27.61 billion / prev $24.92)

*U.S. 10 year Treasuries climb to 2.87% before returning to 2.83%

On Tap for Next week:


Mon Jul 16: China retail sales: exp 9.0% / prev 8.5%

China GDP Q2 y/y: exp 6.7% / prev 6.8%

Trump – Putin meeting

U.S. retail sales ex autos: exp 0.4% / prev 0.9%

Tue July 17: UK avg earnings ex bonus: exp 2.7% / prev 2.8%

Canada manufacturing shipments: exp 0.6% / prev -1.3%

U.S. industrial production: exp 0.5% / prev -0.1%

Wed July 18: UK core CPI y/y: exp 2.2% / prev 2.1%

Eurozone core CPI y/y: exp 1% / prev 1%

Thur July 19: Australia employment change: exp 17,000 / prev 12,000

UK retail sales m/m: exp 0.5% / prev 1.3%

Fri July 20: Canada retail sales ex autos: exp 0.5% / prev -0.1%

Canada CPI m/m: exp 0.3% / prev 0.1% y/y: exp 2.5% / prev 2.2%

Technically, USDCAD is neutral. The pairing tested support at 1.3065 on Monday and again on Wednesday after the Bank of Canada raised interest rates. Resistance in the 1.3200 – 1.3225 area capped the USD rally on Thursday and Friday sending USDCAD to close the week right near the 1.3150 support level.

Topside targets to consider: 1.3180, 1.3225, 1.3270, 1.3330, 1.3385

Downside targets to consider: 1.3150, 1.3100, 1.3065, 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

1.30

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

1.3158

EURCAD

1.5100

1.4820

1.6140

1.5371

GBPCAD

1.6975

1.6761

1.8292

1.7412

JPYCAD

0.01116

0.01091

0.01239

0.01170

AUDCAD

0.9811

0.9549

1.0243

0.9760

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.