Ok CAD!

The CAD turned in another strong performance after leading the pack the previous week, however, caution is warranted after last Friday’s employment report. Like all currencies, the CAD has benefited from the US Fed’s dovish September hold. Another driver of the CAD’s advance has been the rebound in the economy. Back-to-back monthly GDP growth in June and July after five sequential months of negative or zero growth has help to cement expectations that the economy may have turned the corner and would not need any additional easing by the Bank of Canada. Of course, a discussion on the performance of the CAD would not be complete without any mention of the price of crude. Crude oil has managed to rally about 34% of its recent low in August and also managed to rise over the $50 level this past week before giving up some of its gains. Having said this, the way forward for Canada remains bumpy as evidenced by Friday’s jobs data. Canada added 12.1k jobs in the month of September, which was slightly better than expected. However, all of those gains were in part-time jobs since there was a loss of 61.9k full-time jobs, the largest amount since October 2011. That brings the loss in full-time jobs to 25K for Q3 alone. In addition, the unemployment rate rose to 7.1%, a 2-year high. This type of data warns that the rally in the CAD may sputter soon.

For the second consecutive week the USD has been the underperformer against the majors as the release of the FOMC minutes from the September meeting reinforced the dovish impression. The leaders of the pack, AUD and NZD, each managed to turn in a 4% increase on the week, powered by its own unique driver. The AUD surged higher after the Reserve Bank of Australia kept rates on hold as expected but it suggested that the bar was high for another rate cut this year. For the NZD, the story continued to be milk. Milk prices increased for the fourth auction in a row, fanning expectations that prices for New Zealand’s most important export have bottomed, which in turn takes the pressure off the Reserve Bank of New Zealand to ease again.

We had no less than six FOMC members speaking last week and even though all 6 members are considered doves, they all went out of their way to impress upon us that an interest rate hike is coming soon and that they really, really, really mean it this time. Oh really?! They’re not the only ones trying to sell us this line. Apparently 64% of the economists surveyed by the Wall Street Journal expect a hike in December. To be a little fair, some of these economists have wavered from their original position because back in August, 82% expected a hike in September. The survey also found that 23% expect the first hike will be delivered in March 2016; do we hear anyone for 2017? We wonder if any of these economists are also employed at the IMF because they just downgraded global growth to 3.1% this year from its previous forecast of 3.3%. By the way, it was the fourth time this year that they changed their forecast. Are you kidding me? Why do we even listen to these people? Apparently, we are not the only ones with this opinion. Joris Luyendijk of the Guardian wrote an eloquent piece on the science of economics, or rather the lack thereof, this weekend titled, “Don’t let the Nobel prize fool you, Economics is not a science.”

We have our doubts. We don’t see a hike at all this year or next, which falls in line with many forecasters and analysts. But hey… what do we know? We’re not going to let the fact that for the first time since 2009, all six major Fed regional activity surveys are in contraction territory. We’re also going to ignore the fact that 3-month bills sold at a yield of zero for the first time in history. That’s right, at last Monday’s Treasury auction investors decided to buy $21 billion in 3-month Treasury bills at a yield of zero. If that didn’t astonish you, demand was the strongest in over three months, as the bid-to-cover ratio, which is a widely used measure of demand, was the highest since late June, according to data from Jefferies. Don’t worry folks, interest rates can’t go much lower than zero, or can they?

The USD has been the worst performing currency since the Fed decided to leave interest rate on hold at its September policy meeting. This weakening in the USD combined with the global slowdown in growth and lower inflation due to lower commodity prices is starting to undermine the current quantitative easing (QE) programs of the ECB and the BOJ. What we mean by undermine is that the euro and yen are rising against the USD. This may cause these central banks along with other foreign central banks to ease policy even further causing the USD to rise again. If this transpires, then the Fed may have to respond in kind in order to keep the USD in check (The ECB and BOJ can’t have this, there is a currency war going on after all). Many of the bloggers in cyberspace that are calling for QE4 have it all wrong. The fact that we have had more than one QE program from the Fed only tells us that they have all failed. We think the Fed’s next move will be not a hike in rates or another QE program, but a cut in interest rates to negative. Don’t think it’s possible? Well, let’s consider that the Swiss national bank is at negative 0.75%, the ECB is at negative 0.20%, and Sweden and Denmark are also in negative territory. Also, remember the September dot plot, which showed that one FOMC member wanted negative rates at the end of 2015 and 2016. We’re guessing that was Minneapolis Fed chief Narayana Kocherlakota because in a speech last Thursday he made these following points that were summarized by Bloomberg:

 KOCHERLAKOTA SAYS FED SHOULD CONSIDER NEGATIVE RATES
 KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS
 KOCHERLAKOTA SAYS JOBS SLOWDOWN 'NOT SURPRISING' GIVEN POLICY
 KOCHERLAKOTA: TAPERING ASSET PURCHASES LED TO SLOWER JOB GAINS

We would be remised if we didn’t mention the China factor in all of this. China’s foreign exchange reserves fell another $43bn last month, suggesting continued intervention in the forex markets to support the renminbi. This was down from the $94bn they spent in August trying to shore up the renminbi after the August 11 devaluation. Should we expect the Chinese to continue to spend their reserves on stopping their currency from falling while their economy continues to sputter? Wouldn’t it help China’s economy if they allowed the currency to fall? We suspect that if the Chinese renminbi does fall it will force the Fed to react and that reaction may very well be in the form of negative interest rates.

Water on Mars

The Canadian Dollar was the best performer last week relative to the greenback despite only a moderately positive GDP month-over-month. The real reason for the appearance of loonie strength is the fact that you can’t have a winner without a loser, and last week the greenback and Pound Sterling took the booby prizes.

The recent surge of GBP sell-off is likely being driven by the widening gap between the expected timing of the Fed rate hike and BoE’s rate hike, rather than the gradual deterioration of the UK’s economic outlook.

Noteworthy events this week include the annual Conservative Party conference which may hint at a potential date for their EU referendum. For those of you that don’t know, the UK is set to have a referendum by the end of 2017 on whether or not to remain a member of the European Union. Generally, big businesses are showing support to remain in the EU because it makes it easier for them to move products, people and money around the world. Others disagree, suggesting that an EU exit would allow the UK to negotiate trade deals as one country and not just one of 28. The British Chambers of Commerce indicated that 55% of members are backing staying in a reformed EU.

Last week, virtually any data that could suggest a growing U.S. economy was negative, including non-farm employment which came in at a disappointing 142K in contrast to the forecast of 201,000. The unemployment rate came in at 5.1% - unchanged and, hourly earnings were no good at 0.0% month-over-month. Finally, the labour force participation rate dipped to 62.4%, the lowest level since October of 1977.

A slowdown in overseas markets, a stronger dollar and lower oil prices have been hampering exports and manufacturing may be the reason why employers are hesitating before hiring more staff. Companies across the U.S. are increasingly reporting fallout from the strong U.S. dollar and slowdown in Asia. Those concerns are expected to draw heightened attention as firms begin announcing third-quarter earnings.

From WSJ

Most markedly however, this has vindicated the FED’s decision to delay an interest-rate increase last month. The central bank, which hasn’t raised rates since 2006, held off in September mainly due to worries about global weakness dwindling the U.S. economy’s strength. But the fact remains, we know Yellen wants to raise rates and, we know she will, but this data says not just yet… Perhaps the Fed will raise rates before they find water on Mars. Oh wait, NASA found that last week – or something to that effect.

In fact, the economic slowdown suggests we may not see a rate hike until January (not in October or December), and since the FED alluded to a gradual raise in borrowing costs, the hikes could continue well into 2017.

Eurozone Growth is Waning

 Final Eurozone Composite Output Index September:
53.6 (Flash 53.9, August 54.3)

 Final Eurozone Services Business Activity Index September:
53.7 (Flash 54.0, August 54.4)

The Eurozone economy continued to make steady progress in September as solid gains in output and new orders supported further job growth. However, the rate of activity grew at its weakest pace at a 4-month low. The average rate of expansion over Q3 failed to accelerate and instead equalled Q2 4-yr high. On the bright side for the European Central Bank, service firms raised prices for the first time in 4 years. Overall, the Eurozone expanded only 0.4% in Q3.

European companies slowed their pace of hiring as new business orders cooled off in Q3. Several ECB policy-makers, led by ECB President Mario Draghi, have publicly suggested in the past that the trillion EUR stimulus programme could be extended if inflation targets of 2% are not achieved. Those voices got louder last week after official data showed that Eurozone inflation slipped below 0% in September.

According to Reuters, “A [Reuters] poll last month predicted the ECB would officially extend its asset purchase program beyond September 2016 in yet another attempt to drive up inflation and rekindle growth and those calls probably grew louder after official data showed euro zone inflation slipped below zero again in September.”

Puzzled?

Earlier this month we speculated that the Bank of Canada could cut interest rates after the negative April GDP print; and in last week’s blog post we said that we would be shocked if the BOC didn’t cut because of the string of negative data point after the disappointing April GDP report. Faced with a firestorm of recession talk, the BOC had no choice but to cut interest rates by 25bp to 0.5%. The CAD was promptly sold hard to six years lows. The price action far exceeded our expectations especially after the BOC raised the possibility of QE, if necessary, indicating that this move may not be the end of its easing campaign.

Bank of Canada Governor Stephen Poloz refrained from using the R word by stating that "real GDP is now projected to have contracted modestly in the first half of the year." The BOC also lowered its 2015 growth forecast from 1.9% to 1.1%. For 2016, it expects the economy to grow by 2.3% versus a previous forecast of 2.5%. The economy is not expected to return to full capacity until 2017. As for inflation, the underlying estimate is now 1.5% instead of 1.7%. As you might imagine, the decline in the price of crude oil was the major culprit in the adjusted forecasts.

In the press conference after the policy announcement, Governor Poloz said two things that really
stand out and didn’t seem to receive enough press. He mentioned that he was puzzled that the weaker CAD failed to improve non-energy exports. This statement struck a chord with us because two other countries have had that similar experience. The weak yen has not caused a surge in Japanese exports. Similarly, the weak euro has also not caused an increase in exports as evidenced in the recent Eurozone May trade figures which showed that exports fell 1.5%. We are not sure why this would be puzzling – after all, central banks are engaged in a currency war and no country can gain an advantage if all central banks are counter acting other bank’s moves with matching simulative monetary policy measures.

The other thing that Poloz said was that he expected the Canadian economy to be less in sync with that of the U.S. Are the economic cycles of the two nations that much out of sync? Many economists certainly think so – according to a recent survey in the Wall Street Journal, 82% of economists expect a Fed hike in September. If that is the case, the CAD is in for way more downside that anyone currently expects.

Still the One

With Greece and the Chinese stock market off the front pages, safe haven flows subsided and the monetary divergence theme reasserted itself as the driving force in the currency markets. Last week, the GBP was the top performer as positive economic data, including accelerating employment earnings, and a chorus of Bank of England members sounding more hawkish about a rate hike. This caused the timing of a UK rate hike to move from Q2 2016 to Q1. Having said this, the U.S. is still the one. No, we are not referring to the 70s soft rock ballad by Orleans but rather the only major central bank that is on course to raise interest rates in 2015. Federal Reserve Chairwomen Janet Yellen was on Capitol Hill last week and she stuck with her script by reaffirming that the central bank was on track to raise interest rates this year. If you remember, this is the very same driving force that prevailed in January of this year as the rate hikers were the top performers while the rest of the countries were moving in the opposite direction.

Apart from the central banks of the US and UK, the other major central banks have either a neutral bias or are in easing mode. The ECB left its policy unchanged at last week’s meeting and reaffirmed that the conditions of low inflation remain. Thus, its policy of bond purchase will remain in place. The Bank of Japan also had its meeting last week and it adjusted its inflation forecast – it no longer expects to hit its inflation target until after 2018 which means that it may need to apply more stimuli in meetings to come.

China reported a slew of key economic indicators last week, including Q2 GDP. It announced that its quarterly GDP came in right on target at 7%, like it always does. However, this time the chorus of investors responding with disbelief was louder than ever. No one believes their data anymore. Leaving this aside, China will probably need to administer more stimulus but more importantly their economy is not growing like it was, which is putting tremendous pressure on commodity prices and the economies of the countries that produce them – Australia, New Zealand, and Canada. Australia was the best performer of the countries in easing mode mainly because their next central bank meeting isn’t until the beginning of August. New Zealand was the worst performer because their next central bank meeting is next Wednesday; and after last week’s disastrous dairy auction, the odds have increased dramatically that the RBNZ will cut rates by 50 bps instead of 25 bps.

Tony Valente
Fred Maurer

We have an Agreekment

Greece’s Bailout Deal Explained with a Euro-Parable

The following parable pretty much explains the bailout deal reached late Sunday night. This actually made the online rounds back in December 2011, but it still applies today and isn't that much of an exaggeration. Enjoy!

It’s a slow day in a little Greek Village. The rain is beating down and the streets are deserted. Times are tough. Everybody is in debt. Everybody lives on credit. On this particular day a rich German tourist is driving through the village. He stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.

The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer.

The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the local tavern.

The tavern owner slips the money along to the local bookie drinking at the bar, who has also been facing hard times and has had to offer him bets on the horses using.

The bookie then rushes to the hotel and pays off his room bill to the hotel owner (he drank too much one evening and couldn’t drive home) with the €100 note.

The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.

At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town. No one produced anything. No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism.

And that, dear readers, is how the bailout package will work!

Yes, we finally have a deal in Greece, but by many accounts it is not materially different from the deal(s) Greece rejected over the past few weeks. The fallout from the Greek street has been swift. Now Prime Minister Tsipras has to get to work convincing the Greek people that as difficult and long as the path ahead may be, it’s the only way out.

If you would like to read the Euro Summit statement, you can find it here. Its main points include:

 A "significantly scaled up privatization program with improved governance."

 "Ambitious pension reforms" and measures to make the system more affordable.

 General deregulation and liberalization of Greece's market economy, with areas such as pharmacies being opened up to more competition.

 A "rigorous review" of modernizing the Greek labor market.

 Depoliticizing the Greek governing establishment — it's a common criticism that Greece's government is riddled with cronies from whichever administration is in office at the time.

 Amending or rolling back some legislation that has been passed in Syriza's first six months in power, much of which ran against previous bailout deals.

Margin Call

Currencies were under a lot of pressure for the first three days of last week as safe haven flows into the yen and USD dominated due the continued uncertainty in Greece and China. By Thursday, safe haven flows subsided and gradually reversed as the slew of Chinese government measures utilized to stop the equity markets from falling finally took hold. For now, this helped to stabilize the market and allowed currencies to rebound against the yen and USD. Stability continued to take hold on Friday as a sense of optimism over a potential Greek deal emerged. Thus, the only two currencies that moved by more or less than 0.50% for the week were the AUD and CAD.

It’s not surprising to us that the two outliers for the week were the AUD and CAD because it’s become apparent that the turmoil in the Chinese equity markets, and the slower economic growth in China in general, have weighed heavily on commodity prices. The fall in energy (oil for Canada) and industrial commodities (iron ore and copper for Australia) show no sign of abating as of yet and will continue to cast a long shadow on the respective currencies.


New Zealand may be spared the brunt of the fallout as agricultural commodities are more insulated from economic downturns in general since people still need to eat. Having said this, the fall in the two currencies last week was all about monetary policy. In Australia, on Tuesday keeping interest rates on hold at 2% for the second-straight month. However, the Aussie fell anyway after Reserve Bank governor Glenn Stevens said "further depreciation (in the currency) seems both likely and necessary, particularly given the significant declines in key commodity prices”.

Meanwhile in Canada, the key driver in CAD weakness was the cumulative soft economic data on top of the prior week’s negative GDP growth for April. Speculation has risen that the Bank of Canada will deliver a rate cut at tomorrow's policy meeting. Frankly, we would be surprised if they choose to wait until their September meeting given the string of disappointing data and the characterization of its surprise January rate cut by Bank of Canada governor Stephen Poloz as an “insurance policy”.

As we pen this blog, we feel a sense of exhaustion over thinking about the deal between Greece and the Eurozone. After the last couple of weeks we think that everyone, including ourselves, is suffering from crisis fatigue – not just about Greece but the 30% drop in the Shanghai Composite index over the last 3 weeks and 20% drop in oil, just to name a few. All of this is resurrecting fears of deflation or disinflation again, which may kick off a new monetary easing race by central bank; like it did in January of this year. Therefore, central banks look to ease policy further or to leave rates lower for longer.

Whatever happens in Greece is critical for the week ahead in markets, but what transpires in China will matter for many more months. Why? Because it renews fears of downside risks to global growth. We mentioned last week that China’s array of policy measures to arrest the fall in their stock market reeked of desperation. Unfortunately, last week they had to deploy even more measures before the stock market was able to stabilize. This stability will only last a short while because the reason behind the plunge in stock is margin calls. Investment bank, Goldman Sachs, notes that China’s margin debt is the highest in history of global equity market and stands at 12% of the free float market cap of imaginable stocks. So when equity prices began to fall about 4 weeks ago, it set off a wave of forced selling of shares due to margin calls. And with more than 90 million "retail" investors involved in the stock market, more downside is expected due to forced selling created by margin calls. The fear for all of us is that the stock market crash will dent Chinese consumer sentiment and derail whatever economic momentum China has left, which in turn could spread and derail the global economy.

More Cowbell?

Surprisingly, the biggest story of the week wasn’t Greece but the USD and the Fed. Federal Reserve Chairwoman Janet Yellen emerged from a two day policy meeting to declare that the FED NEEDS “MORE DECISIVE EVIDENCE”. More cowbell? Are you kidding?! It seems that every time the market’s perception gets closer to thinking the Fed is about ready to finally raise interest rates the Fed pulls the rug out from underneath that train of thought. After more than 6 years of emergency monetary policy, which included QE1, QE2, QElite, QE3 – all under a zero interest rate policy – what is it that the Fed is fearing?

The USD took it on the chin (more on this later) as it appears the market has lost complete faith in the Fed. For example, let’s take a look at the Fed’s revised growth rate for 2015. It downgraded 2015 GDP to 1.8-2.0% from 2.3-2.7%, which had already been downgraded in March. Doing the math, Q1 came in at 0.7% and the Atlanta Fed GDP Now model has Q2 at 1.9%. Thus, to get to 2.7% for the year means that both Q3 and Q4 must come in at 4%. This may be a tall order, but if it happens then we should expect the Fed to raise interest rates.

Now for the USD, the reaction after the Fed announcement was swift and fast. The US dollar index is not on firm ground on the charts. The 50-day moving average has crossed the 100-day moving average, which is known as a death cross in technical analysis. As you can guess from the name this is not a positive development, as it indicates a bear market is on the horizon. The momentum indicators are also flagging.

On the fundamental side, the America’s trading partners are heading in the opposite direction. Japan has signaled that it no longer wants a weaker yen. The UK looks to have regained its legs after the Scottish referendum, the federal election, and a central bank that appears comfortable in raising interest rates in mid-2016. Europe looks like it has escaped deflation and is slowly on track for positive growth despite its problems with Greece. As for China, it is starting to exhibit some green shoots – just last week China’s business indicator reached its highest reading in a year at 53.5 from the 49.7 it registered in May.

Salvation to Catastrophe: What might happen to Greece

We found this excellent article on Bloomberg, which we thought is worth a read. You can find the Original article here

The Greek saga has haunted policy makers for more than five years. Now talks are deadlocked, banks are on life support and time is running out. With financial doomsday drawing ever closer in Athens, everyone from creditors and investors to depositors is increasingly focusing on what's next.
Some things are clear:

 Greece owes the International Monetary Fund about $1.7 billion this month.

 In July and August, the European Central Bank is due almost 6.8 billion euros ($7.6 billion).

 The euro-area backed bailout program expires on June 30, with creditors refusing to release up to 7.2 billion euros in remaining funds before Athens complies with belt-tightening conditions.

With time running out to close a deal, the German government has begun planning for a Greek default, according to Bild newspaper. If you're waiting for a clear resolution to the country's status in the 19-nation monetary union, you may wait a long time. Adopting the euro was always supposed to be a one-way ticket, so there is no legal precedent or political roadmap for an exit.
Next steps for Greece range from retaining the euro to catastrophic divorce. Half-measures are also on the cards, such as having multiple currencies circulate, with aid recycled to repay foreign-currency debts. Equally unclear is who would tell the world - and how - that Greece has entered an economic afterlife. Possible messengers include Greek Prime Minister Alexis Tsipras, European Central Bank President Mario Draghi, European Union President Donald Tusk and European Commission President Jean-Claude Juncker. There could be others.
We asked economists, investors and former policy makers what could happen next – and how it might unfold.

Scenario A – Grexit Avoided

Tsipras, whose Syriza party won January elections promising to undo the tough terms of the bailout loans, capitulates to creditor demands. Faced with a choice between effective expulsion from the euro area or implementing austerity in exchange for loans, Tsipras takes the cash. The ECB maintains its support of the financial system.
While aid flows, the government's days are numbered as its most hardline supporters mutiny. A new coalition is formed with backing from the pro-European opposition and Syriza's moderate flank – or elections are called. Greece's continued euro membership is ultimately secured as new loans are used to repay the ECB and the IMF and the country's coffers are replenished. Greece gets easier repayment terms on bailout loans. This helps tame the popular backlash against the new wave of fiscal measures. However, the cuts attached to the agreement suppress economic output, delaying Greece's recovery from the longest recession on record.

Scenario B – Hotel California

Greek Finance Minister Yanis Varoufakis has described euro membership by using a lyric from the famous 1976 Eagles song: “You can check out any time you like, but you can never leave.” Tsipras might fail to strike a compromise acceptable to the German government, Communist factions of his Syriza party, and stakeholders in between. Somehow, though, he manages to keep Greece officially in the euro.
Bailout loans – Greece's only source of funding – remain stalled. With Europe's political leaders unwilling to proceed, the ECB rations Emergency Liquidity Assistance, the lifeline keeping Greek banks afloat.
That requires the imposition of capital controls – as there isn't enough cash to meet demand – following a bank holiday. We're calling the two possible outcomes from here “somersault” and “check out.”
Scenario B1 – Somersault
Capital controls mean that limits are placed on withdrawals and transfers. The dramatic consequences force Tsipras to compromise. Opinion polls show that most Greeks – between two-thirds and three-quarters of the population – want to stay in the euro area “at any cost”. “You can check out any time you like, but you can never leave.”
Tsipras forges a new coalition with opposition lawmakers of pro-European parties. A referendum carried out amid capital controls and with banks shut, gives him a mandate to reverse course. A unity government is formed and Greece remains in the euro, but not before the disruption triggers a new recession.

Scenario B2 – Checking Out

With banks shut, the political situation deteriorates and a popular uprising intensifies, with Germany targeted as the country's main antagonist. Polls show a swing in favor of breaking from the euro area.
Capital controls give the government the space and time to print either a new currency or IOUs for domestic payments. The new scrip quickly plunges, reflecting the weak fundamentals of an economy that has shrunk by about a quarter since 2008.

Euro-area governments give Greece a “sweetener,” a parting-loan in hard currency. The rationale is to avert total economic collapse, which would create a failed state in a strategically critical region.
Greece’s debt to public entities is restructured, providing for the repayment of loans to the IMF, either through the euro area’s crisis fund or from the departure credit. Greece remains shut out of debt markets. Most Greek companies and banks default. Some bank deposits are seized to recapitalize a shattered financial system, or redenominated to the new legal tender equivalent. The sovereign debt
restructuring of 2012 has already ensured that the state won’t have to pay principal on most of itsexisting loans to private investors and the euro area for the next few years and until the economy stabilizes. Both the new paper and euros circulate. Greece may not officially leave the euro zone – the door is open to a return in good standing – though the country sputters in a financial purgatory.

Scenario C – ‘C’ for Catastrophe

Greece separates from the euro area in a messy default, amid demonstrations and deepening misery for most, with the government blaming everything on the Germans. No help is provided to support a new currency and to keep servicing bonds and IMF debt. That triggers cross-default clauses to all creditors. The government and banks collapse, meaning that years will be needed before a new structure emerges. Greece's economy plunges into a second depression. The blow from the biggest default in the history of capitalism drives Europe back into a recession and heaps pressure on vulnerable euro countries such as Italy.

Bad blood leads to Greece’s departure from the European Union. The idea that the euro is irreversible is thrown into question, rattling global markets. The economic implosion paves the way for extremists, from either the left or the far right, to take power. Those who can, flee the country. The tumult casts doubt on Greek membership in NATO. A new – and unstable – government turns to Russia for support, providing a Mediterranean outpost for Vladimir Putin.

Position Adjustment - Euro was the top performer last week, US keeps interest rates at its current level and this Friday's April US non-farm jobs report will be in focus

What a week! The euro was the top performer on the week with a gain of over 3% and at one point moved a whole four euros against the USD. Technically, the euro rally may have run its course giving up almost a full euro on Friday and after having met the 61.8% Fibonacci retracement and coming within a whisker of its 100-day moving average. The price action in the euro last week caused clients, with euro exposure to their business, to call us with questions about what was happening. The simplest explanation is positioning. The euro has been the most heavily shorted currency in the futures market for some time now, so when everyone in the boat is leaning one way and a big wave hits the boat the result is that the wave redistributes the weight (position adjustment). Thus, the big move in the euro was due to a short squeeze as speculators bought the euro in order to exit their short trade and not due to a fundamental change in the prospects in the Eurozone.

 

The catalyst for the move was a combination of a poor reading for Q1 GDP and the FOMC announcement. The US Federal Reserve, as expected, kept interest rates at its current level, but offered little hints on the timing of its first rate hike in nearly a decade. What the Fed did do was to remove all calendar references on a potential window for raising its benchmark Fed Funds Rate making very clear that rate decision will be a data driven. Furthermore, the Fed said it will take into account labor market conditions, inflationary pressures, and expectations of international financial developments when it decides on the timing of a rate increase.

 

 

The latest reading of Q1 US GDP came in at 0.2% which essentially demonstrates that the economy stagnated in Q1, or to sugar coat it, the economy grew very, very, very slowly. This was a huge deceleration from the Q4 2014 when real GDP gained 2.2%. Economists on average were anticipating growth of 1% in Q1. How bad was it? Well, if it wasn’t for the biggest inventory build in history, which grew by $121.9 billion and merely remained flat, US Q1 GDP would not be 0.2%, but would be -2.6%.

 

Just like a year ago, many economists and investors are pointing to snowy winter weather as the root of the weakness. Other factors holding back growth this time around may have included the strong USD, pressure on the energy sector from lower oil prices, and dock worker strikes on the West Coast that disrupted that flow of trade. All of these excuses are what the Fed calls "transitory factors". Therefore, as long as inflation keeps moving to the Fed’s target and that the economy sees further improvement in the labor market then the Fed will be looking for an opportunity to raise interest rates. Having said this, this Friday’s April non-farm jobs report will be in focus. A strong report will keep a June rate hike as a possibility. A weak report would not only rule out a June rate hike, but would put into question a move in September as well.

 

 

The technical condition of the US dollar index is on much firmer ground after last week’s price action. The index has found support near the 50% Fibonacci retracement, the 100-day moving average, and the shelf of support which was carved out from mid-January to the end of February.

 

Furthermore, the RSI has turned up, the MACD looks to be making a bottom, and the full stochastics have crossed and turned up. The technical foot print makes us wonder if the chart is forecasting a good jobs number and thus a turn in the economic data, which dovetails nicely with the Fed’s transitory factors and the beginning of warmer weather.

 

 

 

USDCAD falls to 3 week low at 1.2428 and subsequently bounces to 1.2530

USDCAD spot rate: 1.2510 - 1.2515 (AS AT 8:19AM PST)

RANGES:	Asia:	1.2504	to	1.2546
	Europe:	1.2472	to	1.2534
	North America:	1.2428	to	1.2530

Technical Support / Resistance:

S2	S1	R1	R2
1.2350	1.2400	1.2617	1.2725

Key Economic Data Releases:

-U.S. consumer price index m/m: 0.2% (exp. 0.2%) y/y: 0/.0% (exp. -0.1%)
-U.S. CPI ex food and energy m/m: 0.2% (exp. 0.1%) y/y: 1.7% (exp. 1.6%)
-U.S. housing price index: 0.3% (exp. 0.5%)

-U.S. Markit manufacturing PMI: 55.3 (exp. 54.7)

-U.S. new home sales: 0.539 million (exp. 0.470 million) % change: 7.8% (prev. 4.4%)

-U.S. Richmond Fed manufacturing: -8 (prev. 0)

Key Event Calendar:

DATE	CANADA	U.S.A.
Mar. 25		Durable goods
Mar. 26	Bank of Canada Poloz speech	Markit services PMI
Mar. 27		GDP Q4, consumer sentiment index

Yesterday, USDCAD traded from 1.2536 up to 1.2615 before falling to 1.2496. The pairing edged higher to 1.2546 in Asian trade on broad-based USD strength as China manufacturing data came in at an 11 month low and signaled economic contraction. The trend changed course in Europe with USDCAD falling to 1.2472 as oil traded over $48. U.S. headline CPI data was near expectation but the age component was weak. A quick USD sell-off saw USDCAD drop from 1.2510 to 1.2428 – a 3 week low. The move was short-lived with the pairing bouncing back to 1.2530. USDCAD has since eased to 1.2510. Over the past two months, USDCAD has tested the 1.2350 – 1.2400 “quadruple bottom” support area 4 times while recently testing a “double-top” resistance at 1.2835 on two occasions last week.

Sentiment in USCAD appears to be neutral with no clear upward or downward trend at the moment. Currently, the TSX and the DJIA are up 0.75% and 0.14% respectively. EURCAD is down 0.30% trading between 1.3638 and 1.3739. GBPCAD is down 0.70%, trading between 1.8576 and 1.8733. JPYCAD is unchanged trading between 0.01043 and 0.01047. Gold is up 0.14% trading between $1,185 and $1,195USD/oz., silver is up 0.32% trading between $16.83 and $17.05USD/oz., while oil is up 1% trading between $46.69 and $48.53.

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

 

 

Weekly FX Market Update - Cavalcade of Central Bank Easing

 

The USD turned in a mixed performance last week as the market continues to question whether the Federal Reserve is able to deliver its first interest rate hike by mid-year. Last week it was the strength of the economy and the Fed itself that interjected some uncertainty – U.S. GDP growth slowed to 2.6% in Q4 from 5% in Q3 while the FOMC statement upgraded its economic assessment it also recognized that international developments could affect their policy decisions in the future. The worst performer was the Swiss franc as on signs that the Swiss National Bank (SNB) may have intervened. According to Swiss newspaper, Schweiz am Sonntag, the SNB was operating "a kind of minimum exchange rate against the euro" with a "corridor from 1.05 francs to 1.10 francs". So it would appear that even though the SNB was forced to abandon the cap it hasn’t completely abandoned trying to weaken its currency.

The cavalcade of monetary stimulus resumed last week as more central banks joined the procession. The central banks of Russia and Pakistan both surprised the markets with interest rate cuts. The central bank of Turkey signaled that it may cut rates next week during an emergency meeting while Hungary’s central bank turned dovish. We would like to say the Danish central bank surprised the markets by cutting interest rates to minus 0.5% from minus 0.35% but that would be untrue – the truth is that it is the bank’s third cut in less than two weeks. The Reserve Bank of New Zealand bucked the trend, holding rates steady, though it did warn that it would likely leave rates on hold for longer, which of course means that its next move would be a rate cut.

 

With countries around the world cutting interest rates and watching their currencies fall against the USD – where does this leave the so called "strong dollar" policy? The truth is a rising USD is no picnic for the U.S. economy as export growth will slow. With the Fed geared up to raise interest rates this trend will most certainly persist, so the question will be how and when will the U.S. government react.

 

Leave us a comment below, do you think the strong US dollar will continue to rise?