VBCE Weekly Market FX Update - December 1-5 2014

December 1-5 2014

 

 

We would like to reiterate that the USD is in a powerful uptrend against all of the major currencies, and that it has not yet run its course and remains standing tall.  The  USD  is  at  a  2.5  year  high against the CAD, a 2.3 year high against the GBP, a 2.4 year high against the Euro, a 2.9 year high against the CHF, a 2.5 year high against the NZD, a 4.5 year high against the AUD, and a 7.5 year high against the yen. The US dollar index, which is a basket of the US’s trading partners, is at a 5.75 year high. Get the picture? We weren’t kidding when we framed the uptrend as powerful. Last week’s developments reinforced the divergence in economic growth and monetary policy between the U.S. and the rest. With 2014 winding down, it is difficult to foresee anything that will undermine this powerful uptrend in the USD.

 

 

Between now and the end of the year, we will be awaiting four key events which, quite possibly could kick this USD rally even higher. Firstly, China will release a slew of data this week which will reinforce that their domestic economy continues to slow down. This could clear the way for the central bank of China to ease monetary policy further by way of a cut in bank reserve requirements. Recall that just two weeks ago the central bank decided to cut interest rates, which was the first cut in China’s benchmark interest rates in two and a half years.

 

Second, the European Central Bank (ECB) failed to take fresh action last week fanning speculation that a deep rift exists between the doves, which are aligned with ECB President Mario Draghi, and the hawks, which are aligned with Jens Weidmann the President of Deutsche Bundesbank. The Germans are loath to do full scale QE which would involve buying the sovereign bonds of member countries. They see this has an impediment to structural reforms which will give politicians an out to do what is required. Mr. Draghi made it clear that the ECB can override Germany on bond purchases if necessary saying, “We don’t need to have unanimity”. This week the ECB will launch its second Targeted Long Term Repo Operation (TLTRO). The first one was very disappointing has European banks only borrowed 82.8 bln euro. If the second one also disappoints then the pressure on the ECB to act will be relentless. Several large investment banks, including UBS, have lowered their targets on the euro now calling for 1.1500 exchange rate on the prospect of massive QE program in the region expected to commence early next year.

Third, there is no compelling reason to give up the bearish yen story just yet as Japan heads to the polls on December 14th. The latest polls show that Prime Minister Abe will retain its super majority with its coalition partner, Komeito. The victory will allow Abe to fully implement the third arrow of Abenomics; a package of structural reforms to unleash growth.

Fourth, the FOMC meeting on December 17th. Last week, Fed Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, speaking at separate events, stressed the positive economic impact from the steepest decline in oil prices for five years and that the disinflationary effects were temporary. They also signaled that the Fed was comfortable with a mid-2015 rate hike. Their speeches also increased speculation that the "considerable period" phrases in the Fed's statement is likely to be watered down or dropped as early as this month. It goes without saying that these four events don’t look like they can harm the sentiment towards the USD.

 

5 Things You Need To Know Today
 

1. The Bank for International Settlements (BIS) released a study yesterday in which the Basel-based institution (considered the central bank for central banks) argues that USD’s dominance as the world’s most significant currency reserve stems chiefly from the extent to which many currencies are tied either formally or through trade links like a dependency on oil or other dollar-priced commodities. We hope they didn’t spend too much time studying the obvious. However, we think the key point in the study is their goal to eliminate any idea that a free floating renminbi will erode the dollar’s stature as the worlds most important currency reserve.

 

2. Next, we found out that Japan’s economic contraction from July to September was worse than initially thought. According to revised data, the annualized contraction was actually 1.9% rather than 1.6%, which justified Prime Minister Shinzo Abe’s decision to delay a second sales tax hike. Despite the bad news, the latest media polls demonstrate that Abe’s Liberal Democratic Party will likely win up to 320 or 475 seats in a snap election on December 14th. This is up from the 294 seats he won in 2012.

 

3. China provides some more sobering news for the global economy. The latest trade figures reveal that China’s imports fell unexpectedly by 6.7% in November while export growth slowed to 4.7%. The world’s second  largest  economy  is  likely  facing  a  sharper  downturn  than  initially  thought.  However, the Shanghai Composite is still white-hot showing a 47% improvement year to date.

 

4. On the flipside, Germany’s Industrial Production output rose 0.2% in October, which was less than market expectation, but at least it wasn’t negative. Factory orders were also up by 2.5% for the same month.

 

5. Finally, there is some good news out of Greece where its 2015 budget was passed during a midnight vote. The Greeks expect economic growth of 2.9% next year with a deficit of only 0.6% of GDP.

 

 

 

VBCE Daily Foreign Exchange Update for Wednesday, Dec. 10th, 2014

USDCAD spot rate: 1.1467 - 1.1472 (AS AT 8:12AM PST)

RANGES:	Asia:	1.1436	to	1.1458
	Europe:	1.1440	to	1.1469
	North America:	1.1462	to	1.1501

Technical Support / Resistance:

S2	S1	R1	R2
1.1315	1.1400	1.1500	1.1549

Key Economic Data Releases:

-No key data releases

Key Event Calendar:

DATE	CANADA	U.S.A.
Dec. 11	Capacity utilization, new house price	Retail sales, initial jobless claims
Dec. 12		Producer price index, consumer sentiment

Yesterday, USDCAD traded from 1.1480 up to 1.1501, a new high for 2014 and the highest level in nearly 5 years before falling to 1.1397 in early North American trade. The pairing subsequently climbed to hold a 1.1430-50 range for the balance of the session. Overnight, USDCAD maintained a 1.1436 – 1.1469 range and has climbed to test 1.1500 for the 2ND consecutive day. This level has held and the pairing has fallen to 1.1467/72. The main catalyst of broad-based CAD weakness today is another large drop in oil prices. We are now near a 5.5 year low with oil down 4% on the day after OPEC (Organization of Petroleum Exporting Countries) revised the 2015 non-OPEC supply of oil higher by 120,000 barrels/ day. The Bank of Canada Governor Poloz also made headlines today stating that Canadian homes prices are over-valued by 10% - 30% and that the effects of lower oil prices should largely be offset by the weak Canadian dollar and stronger non-energy exports. The JPY is the best performing currency for the 3rd straight day as global equity markets continue to move lower. Currently, the TSX and the DJIA are down 1.51% and 0.79% respectively. EURCAD is up 0.50% trading between 1.4159 and 1.4297. GBPCAD is up 0.50% trading between 1.7929 and 1.8070. JPYCAD is up 1% trading between 0.00956 and 0.00971. Gold is down 0.18% trading between $1,225 and $1,238USD/oz, silver is unchanged trading between $16.94 and $17.31USD/oz, while oil is down 4%, trading between $60.66 and $63.43.

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

 

Please contact the VBCE trading desk at 604-685-1008 for more information on our foreign exchange and wire payment services. Updates by stevebrown@vbce.ca 

The information contained in this report has been compiled by our VBCE traders from sources believed to be reliable, but no representation or warranty, express or implied, is made by VBCE as to its accuracy, completeness or correctness.  All opinions and estimates contained in this report constitute VBCE’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility.  Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.  This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it.  This report is not an offer to sell or a solicitation of an offer to buy any currency or precious metals.  Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.  To the full extent permitted by law neither VBCE nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein.  No matter contained in this document may be reproduced or copied by any means without the prior consent of VBCE.

 

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