VBCE Weekly Foreign Exchange Wrap Up and Forecast for Jan -14 -18, 2019

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

The CAD enjoyed another good week posting gains against the EUR, JPY, and AUD while closing the week with little change against the USD and the GBP. USDCAD initially weakened on Monday from 1.3250 up to 1.3298 as global equity markets were under pressure amidst poor economic data out of China. Tuesday saw USDCAD dip briefly to 1.3226 as equity markets and oil prices received a boost from China stimulus measures (to combat slowing growth). The USD broadly gained taking USDCAD up to 1.3295 as the Brexit parliamentary results were released before falling back to 1.3260. The GBP had lost significant ground leading up to the results on concerns the Brexit vote would not pass. GBPCAD dropped from 1.7140 down to 1.6837 accordingly as PM May's European Union withdrawal plan was defeated 432 – 202. It was also announced that a "no confidence" vote would be held the next day. Ironically, the GBP roared back (in anticipation that May would win the "no confidence" vote) erasing earlier losses and posting a weekly high of 1.7276 on Thursday. After testing 1.3235 on Wednesday, USDCAD climbed towards a two-week high Thursday morning reaching 1.3319 on upbeat U.S. economic data. U.S. 10 year yields climbed for the 4^th consecutive day after having opened the week near 1 year lows. Reports that the U.S. may be willing to lift tariffs on China as trade negotiations have stalled in recent weeks saw the USD broadly decline Thursday afternoon taking USDCAD down to 1.3248. Equity markets and oil prices responded positively to the report with the latter gaining 6% over the final two trading days. On Friday, Canadian inflation was higher than expected sending USDCAD from 1.3280 down to 1.3232. The pairing would bounce back to test 1.3280 before closing the week relatively unchanged at 1.3252. The EUR and the JPY broadly weakened given the positive market sentiment / improved risk outlook on the week.

Key Events for the week:

*USDCAD climbs to two week high before falling back towards 6 week lows

*EUR falls to 6 week low after opening 2019 near 8 month high

*GBP unchanged despite Brexit vote failing to pass UK parliament

*JPY falls to 1 month low after opening 2019 near 2 year high

*AUD holds near 2 month lows

*WTI oil climbs as much as 7% to 6 week high (range $50.65 - $54.17)

*USD index (DXY) climbs towards 2 week high – from 95.47 up to 96.40

*China trade balance: $57.06 billion (exp $51.53 billion / prev $44.71 billion)

*China exports y/y: -4.4% (exp 3.0% / prev 5.4%)

*China imports y/y: -7.6% (exp 5.0% / prev 3.0%)
*Eurozone industrial production m/m: -1.7% (exp -1.5% / prev 0.1%)

*US producer price index m: -0.2% (exp -0.1%/prev 0.1%) y: 2.5% exp 2.5%/prev 2.5%

*UK parliamentary vote on Brexit: 403 – 202 opposed

*Germany CPI harmonized y/y: 1.7% (exp 1.7% / prev 1.7%)

*UK CPI y/y: 2.1% (exp 2.1% / prev 2.3%)

*Eurozone CPI y/y: 1.6% (exp 1.6% / prev 1.6%)

*Japan national CPI ex fresh food y/y: 0.7% (exp 0.8% / prev 0.9%)

*UK retail sales m/m: -0.9% (exp -0.8% / prev 1.3%) y/y: 3.0% (exp 3.6% / prev 3.4%)

*Canada CPI m/m: -0.1% (exp -0.4% / prev -0.4%) y/y: 2.0% (exp 1.7% / prev 1.7%)

*U.S. industrial production: 0.3% (exp 0.2% / prev 0.4%)

*U.S. 10 year Treasury yields bounce from 1 year lows (2.66% - 2.80%)

On Tap for Next week:

Mon Jan 21: Martin Luther King Day – U.S. markets closed

China retail sales y/y: exp 8.2% / prev 8.1%

China GDP Q4 y/y: exp 6.4% / prev 6.5%

Tue Jan 22: UK average earnings including bonus: exp 3.0% / prev 3.3%

Canada manufacturing shipments: exp 0.4% / prev -0.1%

Japan merchandise trade balance: exp -¥600 billion / prev -¥737.3 billion

Japan exports y/y: exp 1.8% / prev 0.1%

Wed Jan 23: Bank of Japan interest rate decision: exp -0.1% / prev -0.1%

Canada retail sales m/m: exp 0.4% / prev 0.3% ex autos: 0.2% / prev 0%

Thur Jan 24: Australian employment change: exp 20k / prev 37k

ECB interest rate decision: exp 0% / prev 0%

Fri Jan 25: U.S. durable goods orders: exp 2.3% / prev 0.8%

Technically, USDCAD is neutral / bearish. The pairing broke below a key trendline near 1.3300 early last week with subsequent declines stalling at 1.3182. On Thursday, USDCAD tested last week's corrective high of 1.3323 (high was 1.3319) but subsequently declined to 1.3232 – just shy of the weekly low.

Topside targets to consider: 1.3280, 1.3320, 1.3370, 1.3420

Downside targets to consider: 1.3235, 1.3182, 1.3130, 1.3050

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada.S. Federal Reserve, CNBC, Forexlive, CME Group