The USD held near a 2 month high and Treasuries slid as traders await minutes of the Federal Reserve's latest policy meeting that may provide clues on the path of the U.S. interest rates. Recent economic data beating forecasts and comments by Fed officials have fueled bets that the central bank is on path to increase rates this year. Investors currently assign about a two-thirds chance of a December rate increase, based on prices in federal fund futures contracts, and a less than 20% chance of a move next month. Sterling lost significant ground yesterday but recovered a good deal of those losses so far today.
Sadly, up until Thursday's flash crash in the GBP, the biggest news of the week was that Kim Kardashian was robbed of $6.7 Million at gunpoint by fake cops in a luxury Paris hotel. The GBP finished the week nearly 600 pips of its flash crash lows after it collapsed by 6% in less than 5 minutes at around 7 pm EST on Thursday. The GBP fell to a low of 1.1841 from the 1.26 level, while one electronic trading platform reportedly recorded 1.1378 (performance against
World shares tapped the brakes on Tuesday as oil prices eased back from their highest level of the year, while Britain's sterling took another dive as UK and EU ministers traded fresh Brexit blows. The US dollar was on the rise again as growing expectations of a U.S. rate hike before the end of the year pushed up Treasury yields to the highest level since early June.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca
It was a very illogical week for the CAD. After closing last week on a positive note helped by strong oil and GDP data (USDCAD fell from a 1.3280 high to close the week at 1.3125), the CAD lost ground vs. the USD this week. USDCAD climbed from 1.3067 (Tuesday's low) to a 7 month high of 1.3314 on Friday. Positive market sentiment, higher energy prices, and solid economic data theoretically should have driven the CAD higher this week after another 6% jump in oil prices, a narrowing of the trade deficit, and the strongest month in 4 years for Canadian employment gains. The USD enjoyed broad strength this week despite jobs data missing estimates and lowered growth forecasts. The USD was the best performing currency this week while the GBP was the worst performing currency on economic fears relating to a "hard Brexit".
Yesterday, USDCAD climbed from 1.3177 up to 1.3249 only to fall back to 1.3196. The pairing then bounced to hold near 1.3210 – 1.3220 for the balance of the day. USDCAD then jumped to 1.3248 in early Asian trade as the GBP mysteriously plunged 9.5 cents to three year lows within 3 minutes. The USD continued higher overnight taking USDCAD up towards a 7 month high of 1.3306, making marginal gains above last week's 1.3281 high. Canada's jobs data was exceptionally strong – the best month for job gains in 4 years. USDCAD dropped from 1.3297 down to 1.3186 on the news. U.S. data missed estimates but was deemed strong enough for the Fed to warrant a December interest rate hike.
Overnight, USDCAD climbed back to 1.3210 and the pairing has extended up to 1.3249 this morning as the USD broadly gains for the 3rd consecutive day. Despite the fact that oil prices have gained 13% over the past week, the USDCAD rate has actually moved higher to trade near the upper end of its recent 1.30 – 1.3280 range. Over the past few days, there have been several U.S. Fed members offering up hawkish commentary and the probability of a December interest rate hike now sits at 55%.
CAD is soft trading at the lower end of its one week range and threatening a break through its 200 day MA. The CAD appears vulnerable and may see considerable downside in the event of a turn in oil prices. Venezuelan Oil Minister Eulogio Del Pino said an agreement to limit production among OPEC & non-OPEC states could add $15 to crude oil prices Chicago Fed President Charles Evens said today that the central bank will probably increase borrowing costs by the end of the year, joining calls this week from Cleveland Fed President Loretta Mester and her counterpart from Richmond, Jeffery Lacker, to raise rates sooner rather than later. Traders are placing odds for a December move at nearly 64%, while the probability of a November hike moved to almost 24% from 21% earlier. Gold holders have been on a good ride this year, as bullion posted its best first half performance in almost 4 decades, but Deutsche Bank Chief Strategist Binky Chadha has commented that he feels gold looks to be 20 to 25% overvalued.
Britain's pound slumped to a three-decade low on Tuesday as its Brexit worries were compounded by a revitalized US dollar, boosted by resurgent U.S. Interest rate hike expectations. Sterling dropped to its weakest since 1985, hit by a growing sense that the UK may be heading for a "hard" Brexit where it severs links to the EU's single market in favour of total control over immigration. Meanwhile futures markets are now pricing in more than a 60% chance the US Fed inches up U.S. interest rates before the end of the year.
OPEC members have agreed to hold production levels in a range of 32.5 – 33.0 million bbl/day. This hasn't yet been finalised – November is the likely date – and quotas haven't been assigned either, but the appearance of OPEC solidarity has galvanised the crude market. However, this production cap is right at the record level of oil shipments seen in 2008, so it's questionable just how effective this will be in terms of firming up oil prices. Moreover, if crude rallies very strongly, Canadian oil sands and American frackers stand ready to start pumping aggressively, which will act to depress prices. Much higher prices will also entice members to cheat on their quotas, long a problem at the cartel. The bottom line is that OPEC simply doesn't have the leverage it once had in the 70s and 80s.
Sterling dropped to the weakest level since July 6, the day is reached its 31 year low, and slipped against all but one of its 31 major peers. Hedge fund data showed speculators raised bets that the currency would fall. May told delegates at her Conservative Party's annual conference that she'll curb immigration, stoking speculation the nation is headed toward a so-called hard Brexit-with limited access to the EU's single market.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca
The CAD was under pressure early in the week with USDCAD hitting a 5 month high (1.3280) Monday evening after some dovish comments by Bank of Canada Governor Poloz. The weakness was short-lived as USDCAD dropped to 1.3164 within a few hours as markets scored a round 1 victory to Hilary Clinton in the first of three presidential debates. Volatility remained high over the next 4 days with USDCAD climbing back to 1.3280 on Tuesday before falling to 1.3048 Wednesday evening after a surprise OPEC announcement confirmed a production freeze agreement for November. The CAD gave up the bulk of its gains Thursday as global equity markets sold off sharply on fears surrounding Deutsche Bank's ability to survive a $14 billion fine. On Friday, markets reversed course yet again on reports the fine would be just $5.4 billion. Oil remained well bid, while Canadian July GDP beat expectations. The CAD rallied sharply on Friday to close the week with gains vs. USD, EUR, GBP, and JPY.