VBCE Weekly Market Dispatch - October 13-17 2014

October 13-17 2014

 

Plop-Plop Fizz-Fizz

 

Traders around the world, in every market, were probably reaching for  Alka  Seltzer  last  week  in order  to calm  their  upset  stomachs caused by the market turmoil. Fears about a global slowdown, deflation in the Eurozone, and the threat of Ebola all took their turns at roiling the markets last week. Global stock indices were rocked, yields  on government  paper  plunged,  and  the  price  of  oil  tested multi-year lows. The volatility index, also known as the “fear index”, reached levels it hasn’t seen in almost three years. Traders were pleased to see markets finish on a positive note on Friday and happy to see the end of a stressful week.

 

 

It’s no secret that when markets are in turmoil that the safe haven of the Swiss Franc gathers the most flows which is why it held the yellow jersey by Friday’s close. The US dollar also benefits from safe haven flows during volatile times, and that was the case early in the week, but that changed as the week progressed. On Wednesday, the 10-year Treasury yield fell as low as 1.873%, its lowest level in intraday trading since May 2013, after two disappointing readings on the U.S. economy. U.S. retail sales in September declined by a bigger-than-expected 0.3% and a reading of the business outlook for the New York region slowed sharply. With the backdrop of a slowing global economy, these latest economic readings in the U.S. caused a rethink in the belief that the Federal Reserve’s monetary tightening will occur at a markedly slower pace than previously anticipated

 

On the very next day, St. Louis Fed President James Bullard suggested a taper of the taper. No, you didn’t misread that. Bullard actually told Bloomberg TV that the Fed should consider delaying the end of quantitative easing in response to tumbling inflation expectations. This caused business news division’s world-wide to introduce the notion of a possible QE4. With Bullard raising the ire of deflation with his comments, he has cast an element of uncertainty on the Fed’s intentions. This along with the loss of yield support should sideline the USD for the week or so until the next FOMC announcement on October 29^th 2014.

 

The State of Monetary Policy in Every Major Economy

About a year ago, at the Global Economics & Strategy Day conference in Frankfurt held by Morgan Stanley, MG’s Chief Global Economist, and Joachim Fels presented a very telling graph of the state of monetary policy of every major central bank and economy in the world.  In 2013, Mr. Fels’ key points were:

• The Fed will likely start to wind down QE before the end of 2013 and should end purchases by mid-2014, and we could see the first rate hike by mid-2015;
• The Bank of Japan will probably have to extend its qualitative and quantitative easing beyond 2014;
• The ECB should cut rates one more time; and The Bank of England will push back their first rate hike and likely extend their quantitative easing program.

 

Color corresponds to monetary bias, where ‘red’ stands for

tightening bias, ‘orange’ for no bias and ‘green’ for easing.

One year later, Morgan Stanley has

updated the graph and highlighted these key points:

In the U.S., expect the first rate hike some time during the first quarter of Q1 as dollar strength and overseas economic weakness could feed disinflation back to the U.S., lowering need for imminent rate hike from the Fed;

 

Over in the Eurozone, you can expect lower rates for a longer timeframe, but no quantitative easing.   Based on language from key figures within the EU, the chances of QE has increased significantly, however, if the ABSPP (Asset-Backed Securities Purchase Programme) is sizeable and successful, the need for QE will be reduced;

 

Expect further easing from the Bank of Japan because of poor economic data and aggressive structural reforms;

 

In the United Kingdom, you can expect a rate hike during Q1 in 2015 only if the economy sees higher pay growth; and

 

Expect  China  to  maintain  the  loosening  bias  in  monetary  policy  in  view  of  strong  growth headwinds.

Color corresponds to monetary bias, where ‘red’ stands for
tightening bias, ‘orange’ for no bias and ‘green’ for easing

 

 

 

VBCE Daily Foreign Exchange Update for Wednesday, Oct. 22nd, 2014 

USDCAD spot rate: 1.1210 - 1.1215 (AS AT 8:25AM PST)

RANGES:	Asia:	1.1216	to	1.1232
	Europe:	1.1216	to	1.1245
	North America:	1.1185	to	1.1292

Technical Support / Resistance:

S2	S1	R1	R2
1.1070	1.1185	1.1294	1.1360

Key Economic Data Releases:

Canada retail sales: -0.3% (exp. 0.0%) ex autos: -0.3% (exp.0.2%)
U.S. consumer price index m/m: 0.1% (exp. 0.0%) y/y: 1.7% (exp. 1.6%)
U.S. CPI ex food & energy m/m: 0.1% 9exp. 0.2%) y/y: 1.7% (exp. 1.7%)
Bank of Canada interest rate announcement: unchanged @ 1.0%

http://www.bankofcanada.ca/2014/10/fad-press-release-2014-10-22/

Key Event Calendar:

DATE	CANADA	U.S.A.
Oct. 23		Jobless claims, Markit manufacturing
		housing price index, leading indicators
Oct. 24		New home sales

Yesterday, USDCAD traded from 1.1271 down to 1.1202 before bouncing to 1.1228 where it remained for the balance of the day. Markets and commodity prices continued to reverse losses from last week and the CAD was the best performing currency on the day while the JPY was the worst performer. Overnight, the CAD was sold off with USDCAD climbing to 1.1245. The pairing continued higher to 1.1292 on slightly stronger U.S. inflation data and weak Canadian retail sales. USDCAD suddenly dropped to 1.1240 after the 7:00am release of the Bank of Canada statement and extended lower to 1.1185, a one week low.

The statement appears to be slightly more hawkish than the market had expected:

-removal of the “neutral” reference
-core inflation rising more rapidly
-exports beginning to rebound

USDCAD has since bounced to 1.1230 followed by a decline to 1.1205 as the accompanying press conference was postponed due to a shooting incident and lockdown at Parliament Hill in Ottawa. Currently, the TSX is down 0.53% while the DJIA is up 0.08%. EURCAD is down 0.60% trading between 1.4162 and 1.4304. GBPCAD is down 0.50% trading between 1.7941 and 1.8109. JPYCAD is down 0.40% trading between 0.01044 and 0.01052. Gold is down 0.62% trading at $1,244USD/oz, silver down 2.16% trading at $17.17USD/oz, while oil is down 0.30%, trading at $82.25.

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

Please contact the VBCE trading desk at 604-685-1016 for more information on our corporate foreign exchange and wire payment services. Updates by stevebrown@vbce.ca