Weekly Foreign Exchange Wrap Up for Jan 22 - 26, 2024

January 31, 2024

The USD had a mixed performance this week with the trade-weighted index initially gaining 0.5% before losing 1% only to recover and close the week marginally higher. The CAD was the worst performing currency after the Bank of Canada left interest rates unchanged at 5.00%. The CAD weakened towards multi week lows vs the USD, EUR, and GBP. The trend abruptly changed Thursday with the CAD retracing its losses as oil prices surged 8% on the week. Most currency pairings closed the week largely unchanged from Monday’s opening levels. Although U.S. 10 year yields held near 5 week highs between 4.08% and 4.19%, generally positive U.S. economic data combined with falling inflation had markets pricing in increased odds of a soft landing. U.S. equity indices made 4 consecutive record highs before stalling on Friday. Market expectations for interest rate cuts are now closely split between March and May. There is a 47.2% probability of a March rate cut while there is a 50.7% chance of a rate cut to 5.25% in May. There is a 50% chance of a 2nd rate cut in June to 5%. A 3rd rate cut in July is priced in at 46.2% while there a 44.3% chance of a 4th rate cut to 4.50% in September. A 5th rate cut to 4.25% in November is priced in at 38.4%. Year-end expectations have a 33.1% chance of a 6th cut to 4.00%.

USDCAD initially traded below the 200 day moving average near 1.3483 (and broken support level from last week) within a 1.3415 – 1.3492 range. The pairing dropped from 1.3478 down to 1.3430 heading into the Bank of Canada interest rate decision as U.S. yields moved lower. The USD broadly weakened towards a 1 week low during Wednesday’s early NA session after trading near 5 week highs Tuesday. The CAD was the worst performing currency Wednesday after the Bank of Canada held interest rates at 5.00%. They did not signal an immediate need to cut interest rates despite acknowledging a slowing economy and concern over high wage inflation. USDCAD climbed to 1.3534 (just shy of the Jan. 17th / 5 week high @ 1.3542) before reversing lower to 1.3468 on Thursday. U.S. 4th quarter GDP came in better than expected while price pressures eased substantially (GDP price index dropped from 3.3% down to 1.5%) – a perfect scenario for a “soft landing”. Equity markets responded in kind posting 4 consecutive record daily highs. Oil prices climbed as much as 8% towards a 2 month high and the CAD was the best performing currency through Thursday and Friday. The USD index tested 5 week highs early Friday before falling 0.50% to a 3 day low. The U.S. Fed’s preferred inflation measure (Core PCE price index) dropped more than expected from 3.2% down to 2.9%. USDCAD tested two week lows @ 1.3414 before climbing to hold within a 1.3436/67 range for the balance of the session.

Key Events: *USDCAD climbs towards a 5 week high before falling to a 2 week low *EURCAD climbs towards a 5 week high before falling towards a 3 month low *GBPCAD climbs towards a 5 month high before falling towards a 1 week low *JPYCAD falls from 1 week high towards 16 year low *AUDCAD climbs to a 1 week high before falling to a 10 week low *Oil climbs nearly 8% towards a 2 month high (range $72.57 - $78.23) *USD trade-weighted index trades between 5 wk highs and 1 wk lows (102.77– 103.81) *U.S. 10 yr yield holds near 5 week highs (range 4.08% - 4.19%) *Bank of China interest rate: 3.45% prev 3.45% *Bank of Japan interest rate: -0.10% exp -0.10% prev -0.10% *Germany HCOB manufacturing PMI: 45.4 exp 43.7 prev 43.3 *Germany HCOB services PMI: 47.6 exp 49.5 prev 49.3 *Eurozone HCOB manufacturing PMI: 46.6 exp 44.8 prev 44.4 *Eurozone HCOB services PMI: 48.4 exp 49 prev 48.8 *UK global manufacturing PMI: 47.3 exp 46.7 prev 46.2 *UK services PMI: 53.8 exp 53.2 prev 53.4 *Bank of Canada interest rate: 5.00% exp 5.00% prev 5.00% *U.S. S&P global manufacturing PMI: 50.3 exp 47.9 prev 47.9 *U.S. S&P global services PMI: 52.9 exp 51 prev 51.4 *ECB interest rate: 4.50% exp 4.50% prev 4.50% *U.S. nondefense capital goods orders ex aircraft: 0.3% exp 0.1% prev 1% *U.S. GDP Q4 price index: 1.5% prev 3.3% *U.S. GDP Q4 annualized: 3.3% exp 2% prev 4.9% *Japan Tokyo CPI y/y: 1.6% prev 2.4% ex food/energy: 3.1% prev 3.5% *U.S. PCE price index m/m: 0.2% exp 0.2% prev -0.1% y/y: 2.6% exp 2.6% prev 2.6% *U.S. Core PCE price index m/m: 0.2% exp 0.2% prev 0.1% y/y: 2.9% exp 3% prev 3.2% *U.S. personal income: 0.3% exp 0.3% prev 0.4% *U.S. personal spending: 0.7% exp 0.4% prev 0.4%

On Tap for next week: Mon Jan. 29: Japan unemployment rate: exp 2.5% prev 2.5% Tue Jan 30: Australia retail sales: exp -0.7% prev 2% Germany GDP (YoY Q4): exp -0.2% prev -0.4% Eurozone GDP (YoY Q4): exp 0% prev 0% U.S. JOLTS Job Openings: exp 8.75 million prev 8.79 million Japan retail trade y/y: exp 4.7% prev 5.3% Wed Jan 31: Australia monthly CPI y/y: exp 3.7% prev 4.3% RBA Trimmed Mean CPI (YoY Q4): exp 4.4% prev 5.2% China NBS non-manufacturing PMI: exp prev 50.4% China NBS manufacturing PMI: exp 49.3 prev 49 Germany retail sales y/y: prev -2.4% Germany harmonized CPI y/y: exp 3.4% prev 3.8% Canada GDP (Nov): exp 0.1% prev 0% U.S. ADP employment change: exp 135,000 prev 164,000 U.S. Fed interest rate decision: exp 5.50% prev 5.50% Thur Feb 1: China Caixin manufacturing PMI: exp 50.5 prev 50.8 Eurozone harmonized CPI y/y: exp 2.8% prev 2.9% Core: exp 3.2% prev 3.4% Bank of England interest rate: exp 5.25% prev 5.25% Canada S&P global manufacturing PMI: exp prev 45.2 U.S. ISM manufacturing PMI: exp 47.3 prev 47.4 U.S. ISM manufacturing employment index: exp prev 48.1 U.S. ISM manufacturing prices paid: exp prev 45.2 Fri Feb 2: U.S. non-farm payrolls: exp 173,000 prev 216,000 U.S. unemployment rate: exp 3.8% prev 3.7% U.S. avg hourly earnings m/m: exp 0.3% prev 0.4% y/y: exp 4.1% prev 4.1% U.S. Michigan consumer sentiment index: exp 78.8 prev 78.8 U.S. UoM 5 year consumer inflation expectations: prev 2.8%

Technically, USDCAD is neutral / bearish. USDCAD has largely held within a 1.3415 – 1.3492 range before breaking above the 200 day moving average @ 1.3483 during Wednesday’s NA session. Although the rate did extend to 1.3534 in early trade Thursday, the pairing fell short of the Jan. 17th high @ 1.3541 and closed Thursday’s session below the 200 day moving average at 1.3468. Friday’s session saw a re-test of Monday’s lows @ 1.3415 before a rally stalled @ 1.3467 – shy of Thursday’s close and the 1.3483 technical level. A sustained move below 1.3415 should target 1.3350 followed by 1.3300. A sustained break above 1.3483 should shift the bias to bullish and target 1.3540 followed by 1.3620.

Topside targets to consider: 1.3483, 1.3520, 1.3540, 1.3620 Downside targets to consider: 1.3414, 1.3380, 1.3340, 1.3290