VBCE Weekly Market FX Update - December 8-12 2014

December 8-12 2014

 

The economic calendar for the U.S. was very light last week, thus currency movements were caused by other factors. Position adjustments ahead of the Japanese election and a $5 slide in the price  of  crude  helped  the  yen  to  its  biggest  weekly  gain  in  16- months. CHF was spurred higher by the inaction of the Swiss central bank as it declined to administer more easing even though the EUR/CHF rate was dangerously close to the 1.20 floor. The euro moved higher after the disappointing Targeted Long-Term Refinancing Operations only injected €130B into the euro zone’s banking system. Thus, just like the Swiss situation, less monetary accommodation led to a higher currency. And we can also place the central bank of New Zealand in this category as it refused to sound dovish by stating that further rate hikes are needed. On the other side of the monetary spectrum lay the AUD and CAD. Reserve Bank of Australia Governor, Glenn Stevens, said the AUD needed to fall to 75 U.S. cents in order to help the national economy. The Bank of Canada continues to retain its neutral bias because of high consumer debt loads and imbalances in the housing market remain a concern. The price of crude at $58 is also weighing on the currency.

As you can see from the one week relative performance chart, the USD experienced a correction/consolidation last week after three straight weeks of gain. This was only the fourth down week in the dollar index over the past twenty-two weeks. As always, the question is how long it will last?  Will it be a short consolidation like the previous three or will it turn into a more prolonged correction?

Currently, the market is convinced that the divergence in economic growth and monetary policy are in the USD’s favor. This position will be tested this upcoming week with the FOMC announcement on December 17th. Speculation is rife that the FOMC statement will either delete or dilute the reference to "considerable period" as the next step towards preparing the markets for a rate hike next year. If the Fed does this and does not indicate that it is not meant to convey an expectation of an earlier liftoff than previously communicated, either in the statement itself or in Chair Ellen’s press conference than the USD will charge higher putting an end to last week’s consolidation.

 

Alternatively, the USD’s consolidation could turn into a more prolonged correction if the Fed listens to what the bond market is saying and to the state of the global economy. US 5-year breakeven inflation rate printed at 1.20% last week, which means that over the next five years investors expect inflation to average around 1.2%, the lowest since September 2010. Add to this the following factors: 1. Europe’s deflationary pressures, 2. Japan’s struggles with its exit from deflation, 3. China’s opting for structural reforms over stimulus, and 4. the deflationary effects caused by a precipitous decline in oil prices. With

All four considered, you will get a very different picture. The question is with all of this going on can the U.S. push on by itself? Therefore, the big surprise this week may be that the Federal Reserve actually listens.

VBCE Daily Foreign Exchange Update for Wednesday, Dec. 17th, 2014

USDCAD spot rate: 1.1645 - 1.1650 (AS AT 8:16AM PST)

RANGES:	Asia:	1.1623	to	1.1646
	Europe:	1.1636	to	1.1660
	North America:	1.1629	to	1.1672

Technical Support / Resistance:

S2	S1	R1	R2
1.1465	1.1600	1.1667	1.1700

Key Economic Data Releases:

-Canada wholesale sales: 0.1% (exp. 0.1%)

-U.S. consumer price index m/m: -0.3% (exp. -0.1%) y/y: 1.3% (exp. 1.4%)

-U.S. CPI ex food and energy m/m: 0.1% (exp. 0.1%) y/y: 1.7% (exp. 1.8%)

-U.S. current account (Q3): -$100.26 billion (exp. -$100 billion)

-U.S. Fed interest rate decision / FOMC statement: TBA ~ 11:00am

Key Event Calendar:

DATE	CANADA	U.S.A.
Dec. 18		Jobless claims, Markit services PMI
Dec. 19	CPI, retail sales

Yesterday, USDCAD traded from a 5 and a half year high of 1.1673 down to 1.1607 before bouncing to hold near 1.1636 for the remainder of the session. Volatility levels were high as markets swung from losses to gains, and then back to losses. (DJIA saw nearly a 400 pt range) After trading down to a 5 year low of $53.64, oil rebounded to $57. Overnight, global markets remained on edge with USDCAD holding a 1.1623 – 1.1660 range. U.S. inflation data came in lower than expected this morning and markets are trending higher. The USD and CAD are the best performing currencies this morning as the market awaits the 11:00am U.S. Fed announcement. USDCAD opened this morning at 1.1640, dipped to 1.1629, and then climbed to test yesterday’s high of 1.1672. This move up was short-lived with USDCAD falling back towards 1.1620 as oil gains to $58. Currently, the TSX and the DJIA are up 1.75% and 0.53% respectively. EURCAD is down 0.60% trading between 1.4430 and 1.4559. GBPCAD is down 0.50% trading between 1.8208 and 1.8337. JPYCAD is down 0.70% trading between 0.00992 and 0.0100. Gold is up 0.21% trading between $1,191 and $1,203USD/oz, silver is up 0.78% trading between $15.63 and $15.96USD/oz, while oil is up 0.72%, trading between $54.24 and $56.64.

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