Doves vs. Hawks

The commodity currencies of Canada, Australia and New Zealand led the way higher in FX last week underpinned by firmer commodity prices and an improving China. The commodity futures price index, the CRB, has advanced for 8 weeks since putting in a double bottom in early February. China’s industrial output and retail sales surged in March urging greater confidence that China’s economy has stabilized and will avoid a hard landing. Of course, the better the Chinese economy performs the better the continued advance for commodity prices.

There were no less than eight Federal Reserve Presidents speaking last week. Some were doves, some were hawks, some were FOMC voting members, and some were not. One wanted a rate hike in April; others ruled out an April hike but favoured a June hike; and one (Lacker) was busy making a case for four rates hikes in 2016 – I kid you not. I don’t know about you, but methinks that continued pontification by US Fed members is starting to fall on deaf ears. I think the market is sensing this as well – US Fed fund futures is pricing in 2% chance of a rate hike at the April FOMC meeting, 13% for June, 28% for July, 36% for September, 40% for November, and 52% for December, 55% in February 2017. In other words, the market is pricing in no rate hike until 2017.

So with possible interest rate hikes being pushed out further in time, the USD continued to be shunned. U.S. economic reports didn’t help the dollar’s cause either. A horrible retail sales report and a disappointing inflation report undermined the US Fed’s interest rate hike expectations.

At the time of this writing, we learn that the world’s major oil producers failed to reach an agreement to freeze oil production at this weekend’s OPEC and non-OPEC meeting in Doha. No one should be surprised by this as, over a month ago, the Saudis stated that there would be no agreement without Iran’s participation. There was no way that Iran would agree to freeze production now that they have been allowed to sell oil again on the world market after agreeing to forgo their nuclear ambitions; and the Saudis knew this. The price of oil and the CAD have steadily gone up over the past two months on hopes of a deal.

Turning the corner?

The price action in the CAD and the GBP have demonstrated that a change in trend has occurred. The CAD had dropped for the first 12 trading days of the year. On Wednesday the losses stopped and the CAD went up for 3 straight days. The combination of the turnaround in the equity markets on Wednesday, the decision to stand pat on monetary policy by the Bank of Canada (also on Wednesday), and the 3 straight days of gains in crude oil (10.85% on the week) help cement the interim bottom in the CAD. Wait a second, I know what the regular readers of our blog are thinking right now – didn’t we say last week that the CAD had the potential to reach the 1.60 level due to the bust of the commodity super cycle? Yes we did and that is why we are calling last week’s bottom in the CAD as an interim bottom. Time will tell if this is the beginning of a correction before going to 1.60 or if it is a change in trend – the price action will determine that.

The price action in the GBP was also indicative of a turnaround. The GBP had steadily declined from the 2.090 level in early December until the about face in mid-week which broke the prevailing momentum. To further demonstrate this point, the GBP traded sharply higher on Friday despite a fall in retail sales that was three times larger than the consensus expected. When a currency rallies despite bad news this tells us that change is afoot.

Looking ahead, it will be another busy week in the currency markets. Along with the various economic reports due to be released, the central banks of Japan, New Zealand, and the USA will deliver policy announcements. No moves are expected by all three banks but if there is to be a move it will come from the Reserve Bank of New Zealand which could cut by a quarter point. After delivering its first rate hike in a decade, the Federal Reserve is not expected to make a move. However, it would be a total surprise if the FOMC statement did not contain a hint of concern over the recent volatility in equities and commodities. If it does then the USD will take a hit.

Australia reports strong jobs numbers!

After finishing in second place last week the AUD was able to supplant the USD, as it failed to maintain its lead in the week after the exceptionally strong U.S. jobs report which had helped fan expectations of a December Fed rate hike. Similar to last week, it was the jobs report that helped power up the performance of the domestic currency. Australia recorded the largest payroll increase since early 2012 as the economy added 59K jobs in October, beating expectations of 15K and a -1K decline in September. The unemployment rate dropped to 5.9% from 6.2% a month ago, marking the lowest level since May 2014, while the participation rate picked up to 65% from 64.9% in the prior month. The internals were also stellar as both full-time and part-time jobs rose last month with the former gaining 40K (following September upwardly revised 10K decline) and the latter adding 19K (compared with September's 10K increase). Just to put these numbers into perspective, the 59K October jobs gain would equate to over 800K new jobs in the U.S.; and just last week the market was cheering about the 271K increase.

Surprisingly, the GBP was able to match the AUD’s gain after last week’s disastrous Super Thursday performance which was outlined in detail in last week’s Dispatch. The labor market also played a role in relation to the domestic currency 1.21% gain as the unemployment rate fell unexpectedly to a fresh seven-year low of 5.3%. Meanwhile, employment rose by 177,000 over the quarter, meaning there are now 31.2m people in work, according to the Office for National Statistics. Comments made by Bank of England Governor Mark Carney encouraged speculation that the central bank could move on interest rates sooner than previously suggested. Carney told Bloomberg he believes the U.K. economy, which is forecast to grow at 2.7% this year, may soon have the right conditions for a rate rise.

The odd person out last week belonged to the CAD with a weekly decline of 0.15%. The main culprit was the 8% drop in the price of crude as prices fell toward the $40 handle. The decline this week came from fresh signs of increasing supply due to abundant supplies and slackening demand, especially in China. The IEA said global oil-demand growth will slow to 1.2 million barrels a day in 2016, after surging to 1.8 million barrels a day this year, a five-year high. Having said this, Friday’s tragic terrorist attack on Paris could further slow the global economy and demand for oil. Thus, weakening oil prices may exert even more downside pressure on the CAD to start the week on top of key reports due this week on inflation and retail sales.

Last Thursday, no less than six Federal Reserve policy members spoke. We won’t bore you with the details of each speech – the common take away was that the Fed is ready to raise interest rate if the data supports the move.

IMF Will Decide the Near-Term Future of the Yuan

Most market analysts have little doubt the that Chinese yuan will one day be part of the International Monetary Fund’s special drawing rights (SDR) at some point in the future, but very few believe that it will happen by the end of this month. On November 30th the IMF Managing Director Christin Lagarde will make a decision about the CNY becoming part of the SDR, which is a multilateral institution basket of currencies that include the USD, EUR, GBP and JPY. However, if the IMF surprises us all, the inclusion of the CNY into the SDR could be the spark that fires the yuan rocket in the years ahead as a global reserve currency, likely replacing the Japanese yen and Great Britain pound in the currency hungry emerging market central banks.
It was only a few months ago that several media outlet reports suggested that people inside the IMF were saying that the yuan was not yet equipped for prime time. However, more recently Ms. Lagarde stated, “The IMF staff assessed that the RMB [CNY] meets the requirements to be a ‘freely usable’ currency and…proposes that the Executive Board determine the RMB to be included in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the U.S. dollar.” She added that the staff also found that Chinese authorities have addressed “all remaining operational issues identified in an initial staff analysis submitted to the Executive Board in July. I support the staff’s findings.” This is big news.

The decision to include the CNY into the SDR will not rest entirely on Ms. Lagarde. The market at large will have a say as well. Meanwhile, China is busy building up its local bond market with the hope that it will be seen by Asian institutional investors, emerging market central banks and big sovereign wealth funds as a safe haven alternative to U.S. Treasury bonds at some point in the near future.

In August, the Peoples Bank of China (PBoC) allowed the CNY to trade within a wider band, which resulted in a weaker yuan. The result was furious push-back from Western economies because they felt that it was a protectionist measure to manipulate its currency in order to save its export
manufacturers at a time when the economy is growing slower than it has in years. However, it’s important to keep in mind that the yuan at the time was the strongest in the region – stronger than the likes of South Korea, Taiwan and the Singapore Dollar. Moreover, the trading band actually gave the market more say to sell the CNY short and weaken it against the USD and EUR. In its history, this is the closest China has come to free-float the CNY. China still has a long road ahead, but its goal to become a reserve currency has gain momentum. However, the PBoC’s strict control on the flow of the yuan will continue to impede its progress and restrict it from becoming a basket currency, as all other currencies in the IMF’s SDR are determined by the market.

It's Official: Canada is in Recession

It’s Official: Canada is in Recession

From Business Insider:

Canadian gross domestic product unexpectedly fell 0.2% in May. This was worse than the 0.0% expected by economists.

"The economy has contracted in six out of the last seven months," BNP's Derek Lindsay noted. The resource-rich economy has felt the crushing pain of falling commodity prices as global demand for raw materials has decelerated. And relief doesn't seem to be coming anytime soon.
"We continue to see falling commodities prices weighing heavily on the economy, with mining, utilities, and manufacturing presenting biggest drags on the goods side," Lindsay said. And this probably means more easy monetary policy.

"The Bank of Canada is likely to read this report as supportive of their move to cut rates at their last policy meeting earlier this month," Lindsay added. "We expect further easing ahead, as investment and exports remain in contractionary territory and the economy remains vulnerable to a correction in housing and a pullback in spending due to high levels of household debt."

Here are the specific details from Stancan:

Manufacturing output contracts

Manufacturing output contracted 1.7% in May, following no growth in April.
Durable-goods manufacturing fell 2.4% in May, as almost all major groups lost ground. Notable declines were recorded in machinery, computer and electronic products, fabricated metal products and miscellaneous manufacturing. Non-metallic mineral products manufacturing was up.
Non-durable goods manufacturing was down 0.7% in May, primarily because of declines in the manufacturing of food as well as beverage and tobacco. Decreases were also posted in textile, clothing and leather manufacturing, chemical manufacturing as well as printing and related support activities. The manufacturing of petroleum and coal products and of plastic and rubber products advanced.

Mining, quarrying, and oil and gas extraction falls again

Mining, quarrying, and oil and gas extraction fell 0.7% in May, down for a seventh consecutive month.
Oil and gas extraction fell 1.0% in May, after decreasing 3.4% in April, mainly as a result of a decline in conventional oil and natural gas extraction. Non-conventional oil extraction was also down.
Mining and quarrying (excluding oil and gas extraction) was down 0.8% in May. A decline in metallic mineral mining outweighed a gain in coal mining. Non-metallic mineral mining (which includes potash mines) was unchanged in May.
Support activities for mining and oil and gas extraction increased 2.8% in May, after rising 9.6% in April, as both drilling and rigging services advanced again. The gains in April and May followed double-digit declines in the first three months of the year.

Wholesale trade falls while retail trade rises

Following a 1.6% gain in April, wholesale trade fell 1.0% in May. Declines were notable in wholesaling of machinery, equipment and supplies, miscellaneous wholesaling (which includes agricultural supplies) as well as motor vehicle and parts wholesaling. On the other hand, food, beverage and tobacco wholesaling and farm products wholesaling were up.
Retail trade rose 0.5% in May after a 0.3% decline in April, led by increases in the activities of building material and garden equipment and supplies dealers as well as electronics and appliance stores.

Construction grows

Construction grew 1.0% in May, as engineering and repair construction as well as residential and non-residential building construction advanced.
The output of real estate agents and brokers rose 2.1% in May, up for a fourth consecutive month.
Finance and insurance sector declines
The finance and insurance sector declined 0.3% in May. A decrease in banking services outweighed increases in financial investment and insurance services.

Other industries

Utilities declined 1.4% in May, down for a third consecutive month. Electricity generation, transmission and distribution as well as natural gas distribution were both down in May. Unseasonably warm weather was recorded in some parts of the country in May.
The public sector (education, health and public administration combined) edged down 0.1% in May. Declines in educational and health care services more than offset an increase in public administration.
Accommodation and food services were up 0.9% in May, in parallel with an increase in the number of overnight travelers to Canada.

Need even more evidence?

Here are Five stages of death of the Canadian dollar according to the Globe and Mail which include Denial, Anger, Bargaining, Depression and finally Acceptance...

From BMO deputy chief economist Michael Gregory and senior economist Benjamin Reitzes:

"With a view to final trimester Fed tightening this year, unmatched by the BoC, we look for the currency to continue to depreciate, averaging C$1.33 in October [meaning about 75 cents]. Political uncertainty heading into the Oct. 19 federal election and continued global oil price volatility (but along sideways trend) should reinforce the weakening trend. Presuming the absence of post-election policy uncertainty and more oil prices, we look for the Loonie to average a cent or so stronger by 2015-end."

Other news...

The top performing currency last week was the Pound Sterling (GBP) but the excitement builds this week as we may see further gains in anticipation of the three PMI’s; Construction, Manufacturing and Services. In addition, it will be the first time the Bank of England will simultaneously release its policy decision, the meeting minutes, the votes and their new macroeconomic forecasts. Early last month BoE Governor, Mark Carney, had stated that, “the British economy's strong momentum meant the decision on when to raise rates would come into sharper focus around the end of this year.” Therefore, there is a strong possibility that there will be at least one vote for an interest rate hike.

The worst performer last week was the Swiss Franc (CHF). The SNB, Switzerland's central bank, reported a loss of 50.1 billion CHF on Friday due to a policy change. Per Business Insider, the bank's foreign currency reserves underwent a major devaluation when it decided to abandon a policy to cap the value of the franc against the euro earlier this year. Since the SNB had been buying Euros to maintain an exchange of 1.20 Swiss Francs to the Euro, it pushed up the value of the Franc, devaluing the recently bought Euros.

If you’re wondering why the US Federal announcement had little impact on the on the market last week, it might be because “staff projections prepared before the June 16-17 policy meeting were inadvertently included in a computer file that was posted to the Fed’s website on June 29.”
How’s that for a spoiler! The projections saw the federal-funds rate averaging 0.35% in Q4 of 2015, then rising to 1.26% in Q4 of 2016 and finally 2.12% in the fourth quarter of 2017. That’s one hike this year and potentially four next year. The actual statement however was quite lack luster, as the central bank only made small changes to its monetary policy, being very careful not to suggest when exactly they will raise interest rates this year; September or December. A September hike is the heavy favorite among banks, analysts and traders alike, but they may have missed something…

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.

Oximoron

Teetering Technical Recession

Canada may be teetering on the brink of a technical recession as business investment plunged in response to slumping crude-oil prices. Last Tuesday, Statistics Canada released the April GDP report and it showed that Canadian real GDP contracted for a fourth consecutive month, with real GDP down by 0.1% in the month. Market expectations were for a 0.1% increase in April. The data is raising concerns in the economy’s ability to post growth of 1.8% in the second quarter, which is what the Bank of Canada is expecting. This is raising speculation that the BOC could cut rates as soon as its next meeting on July 15th, which would weigh heavily on the CAD.

The BOC cut rates in January as an “insurance policy” for the economic fallout in the plunge in the price of crude oil. Crude oil was under pressure last week due to the increase in drilling rig counts and the possibility of a near term deal between Iran and the USA which would put more supply into the market. As you can see from the chart, the price of oil has stabilized over the last couple of months but it is in danger of slipping below its lowest level since mid-April. If it breaches that level the next support would be around the $52 level. The BOC will be watching the chart below very closely and may be tempted to take out another insurance policy by way of a rate cut.

The CAD fell through the green trend line on the daily chart on the negative GDP news of last week. The downside stalled near the mid-April low around the 0.79 level. However, increase speculation on another BOC rate cut and continued pressure on crude could put the mid-May low of 0.7780 in play. There is plenty of Canadian data this week - Ivey Purchasing Managers index, Business Outlook Survey, Building Permits, Housing Starts, and Friday’s employment data.

The Japanese yen finished at the top of the leader board last week as the yen did what it always does in a risk off environment – it races to the top as it benefits from safe haven flows. Interestingly, the commodity currencies of Australia, Canada, and New Zealand were the worst performers, and they all under-performed for the same reasons – risk off, lower prices of key commodities, and potential monetary policy moves. Greece and the Chinese stock market selloff have pushed safe haven flows to the yen and USD. The AUD was weighed down by declines in the price of copper and iron ore; the CAD suffered due to the down draft in the price of crude oil; and the NZD continued to suffer from the ongoing decline in milk as the GlobalDairy Trade index declined for the eighth consecutive week. The commodity price and economic backdrop for all three of these countries is putting pressure on their respective central bank to make some near term policy moves.


Over the weekend China demonstrated that it is very nervous about the 30% decline in its stock market since June 12. The week before the Chinese central bank lowered its key one-year lending and deposit rates and cut reserve requirements. These moves failed to arrest the fall in the stock market so on Friday more measures were announced by various group – 25 mutual funds companies stated that they would actively buy stocks and hold them for at least a year, 21 brokerage firms said they would invest 15% of their net assets (about $20 bln) in the ETFs of high capitalization stocks, and finally no new IPOs were being issued for the time being. These moves reek of desperation. The other big news over the weekend is that Greece voted “no” in their referendum. What this means precisely is unknown and it will probably play out over the following week, but we’ll go into further detail below.

Greece: The Unknown Abyss

In a previous blog post "More Cowbell?", we talked about possibly scenarios that might play out with a “no” vote. Well, we’re here, and frankly speaking, absolutely nobody knows what’s going to happen in the near- and long-term. However, everyone does agree that something must happen very quickly. Allianz’s Mohamed El-Erian offered a brief preview of what will happen next as a function of three main things:

 Whether Greece and its creditors can work together to reconcile what were two very different interpretations in the run-up to today as to what a “no” outcome means, and do so very quickly and effectively;

 Whether already horrid conditions on the ground, including the high likelihood of further delays in re-opening the banks and significant difficulties getting fresh money into ATMs, provide enough time for the politicians to get their act together; and

 Whether the ECB rolls out new measures to contain contagion.

The fallout from the “no” vote has already begun as the embattled Greek Finance Minister, Yanis Varoufakis resigned. In a blog post, Varoufakis stated, “"I was made aware of a certain preference by some Eurogroup participants, and assorted 'partners', for my ... 'absence' from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason, I am leaving the Ministry of Finance today." He continued, "I shall wear the creditors' loathing with pride."

Speaking of creditors, no discussion on Greek debt is complete without identifying who is owed. Currently, Greece’s public debt stands at €323 billion, which is nearly 175% of the country’s GDP. You don’t need us to tell you that this is completely unsustainable.

There are simply too many unknowns to get into a deep analysis of what might happen in the coming days and months. As we said earlier, the process must start very quickly and openly so that the markets find some stability. In addition, the last thing we want to do is misguide you as you make decisions on your personal or corporate exposure to FX, particularly the EUR. That said, we love an informed customer, so please call us at 604-685-1016, or email us at info@vbce.ca. We would be more than happy to give you up-to-the-minute information on what’s going on in the markets.

The FX Roundup

We did not see this coming. I’m not referring to the “ohi” (otherwise known as “no”) vote delivered by the Greek people (for you students of Modern Greek “ohi” is pronounced “o-hee” with a guttural “hee”). I am referring to the mandate delivered; a clear margin of victory for those rejecting the proposed austerity measures. While the market waxes and wanes some minor details need to be worked out, such as “Is the referendum binding?”, and “If so, how?” Maybe this whole matter needs to be kicked upstairs. As Axel Schaefer, a deputy head of the Social Democrats in Germany suggested: “EU leaders must get together immediately, even on Monday. The situation is too serious to leave to finance ministers”. This quote is so funny on so many levels we don’t even know where to start. We will say that we're calmed by the fact that it appears that someone important in Europe will be taking a look at this problem in the next 24 hours.


We will be bombarded with lots of news and commentary from all corners of Europe over the next few days so we think it’s better to keep our own powder dry with respect to addressing where we go from here. Greek Prime Minister Alexis Tsipras tweeted out “Today's referendum doesn't have winners or losers. It is a great victory, in and of itself…. The mandate you've given me does not call for a break with Europe, but rather gives me greater negotiating strength.” We will see about that in 6 months if after rejecting the bailout terms Greece teeters on the brink of total collapse before capitulating to something far more draconian than the deal on the table today.

USDCAD falls from 1.2442 down to 1.2310 - two week low on higher oil

VBCE Daily Foreign Exchange Update for Tuesday, June 9, 2015

USDCAD spot rate: 1.2325 - 1.2330 (AS AT 8:09AM PST)

RANGES:	Asia:	1.2380	to	1.2419
	Europe:	1.2378	to	1.2442
	North America:	1.2317	to	1.2382

Technical Support / Resistance:

S2	S1	R1	R2
1.2260	1.2317	1.2440	1.2563

Key Economic Data Releases:

- U.S. wholesale inventories: 0.4% (exp. 0.2%)

Key Event Calendar:

DATE	CANADA	U.S.A.
June 10		Business inventories, crude oil stocks change
June 11	New housing price index	Jobless claims, retail sales
June 12		Producer price index, consumer sentiment index

Yesterday, USDCAD climbed from 1.2430 to 1.2472 before falling to 1.2396 on better than expected Canadian housing data. The pairing then bounced to 1.2450 before falling to 1.2383. The move below 1.2400 was short-lived with USDCAD climbing back to 1.2415 late in the session. Overnight, USDCAD dipped to 1.2380 before climbing to 1.2442. The move higher was short-lived and USDCAD dropped to 1.2330 this morning in the absence of any key data. A minor bounce to 1.2355 has since been followed by a move to 1.2310 – a two week low. Oil is on the rise for the 2ND straight day after comments made by the Saudi Arabia Oil Ministry: “production rise is the result of increased global demand – not designed to compensate for low oil prices.” On Thursday, U.S. retail sales data is expected to rise by 1.1% after no gain the previous month. Currently, the TSX and the DJIA are up 0.16% and 0.12% respectively. EURCAD is down 1% trading between 1.3848 and 1.4055. GBPCAD is down 1%, trading between 1.8849 and 1.9055. JPYCAD is down 0.55% trading between 0.00991 and 0.00999. Gold is up 0.23% trading between $1,172 and $1,183USD/oz., silver is down 0.12% trading between $15.97 and $16.19USD/oz., while oil is up 3.5% trading between $58.25 and $60.20.

 

An Air of Optimism

　

With the CAD ringing in its best weekly performance in four years, the question on the desk and with our clients is – is the bottom in? We will answer that in a moment. The CAD was up on a combination of less than stellar US economic data, firming Canadian economic data, a less dovish Bank of Canada, and a firmer oil price.

The Canadian economy seems to have gone from an "atrocious" first quarter as described by BOC Governor Stephen Poloz to an air of optimism. Canadian retail sales racked up their biggest increase in eight months for the month of February while core inflation saw its fastest pace in 6 years. This helps to explain why the BOC upgraded their assessment of the domestic economy. They revised Q1 GDP to flat from 1.5%, but Q2 was revised up to 1.8% from 1.5% and Q3 to 2.8% from 2.0%. Overall, the BOC sees 2015 growth at 1.9%. They also upgraded their inflation outlook which indicates that they see the oil impact mostly behind them. All in all, the BOC’s more optimistic mood has pretty much ruled out the chance of another rate cut this year.

The over 50% hair cut in the price of oil has been the main culprit in the roughly 16% decline in the value of the CAD since mid-2014. The price of oil surged about 8% last week, hitting a 2015 high of $57 at one point. The price action has the earmarks of a reverse head-and-shoulders bottoming formation. With the price of oil slicing through the neckline the technical analysis demonstrates that the price of oil has now bottomed. Ironically, this comes at a time when inventories are growing at least three times more than had been expected. Be that as it may, the recent price action speaks volumes.

So has the CAD bottomed? During this year we have been ask many times by clients as to what level the CAD would fall to. Our response has always been that the level is unknowable, however, the one thing that we are sure of is that the CAD will find its bottom once the price of oil has bottomed.

 

USDCAD Big 5 Forecasts from earlier this year:

 

 

The USD was taken to the woodshed last week after another round of weaker U.S. economic reports drove it sharply lower against all of the major currencies. Since the Fed jettisoned "patience" from their FOMC statement it is understood that the Fed will be data driven. Last week’s uninspiring economic data (US industrial production, Empire Fed, and Fed Beige Book) is causing some market participants to wonder out loud if the Fed will actually raise interest rates at all in 2015. This has caused market sentiment to change dramatically in the past week with market participants now questioning if the rally in the USD is over. Furthermore, with the economic calendar a little on the light side this upcoming week for US data, there will be little in the way of the USD’s current downward path. The one thing that could change its path next week could be safe haven flows due to the renewed fears about the risk of a Greek debt default and possible exit from the euro.

 

Negotiations between the Greeks and the Eurozone are reaching its climax and the endgame is finally visible. Greek Finance Minister Yanis Varoufakis doesn’t really have any choices if no deal is struck: Greece must either accept the terms of the bailout or risk going bust. An article written by Simon Nixon for the Wall Street Journal nicely summarizes the current situation.

It’s still possible that Greece can remain in the Eurozone — though that is no longer the base case for many policy makers. At the very least, most fear the situation is going to get much worse before it gets any better. No one now expects a deal to unlock Greek bailout funding at this week’s meeting of Eurozone finance ministers in Riga — originally set as the final deadline for a deal. The new final, final deadline is now said to be a summit on May 11.

But among European politicians and officials gathered in Washington DC last week for the International Monetary Fund’s Spring Meetings, there was little optimism that a deal will be agreed by then. The two sides are no closer to an agreement than when the Greek government took office almost three months ago. "Nothing, literally nothing has been achieved," says an official. In fact, it is worse than that: so far, the bulk of Athens’ reform plans would actually cost money or reduce government revenues, according to Eurozone officials.

They say that when you add up all the government’s proposals, the budget surplus required under the current program turns into a 10-15% deficit while debt soars far above the 120% of GDP targeted for 2022. There is no way that the Eurozone — let alone the IMF — could disburse funds on the basis of such fantastical numbers.

The bottom line is that Athens won’t get any money unless it can reach a deal that satisfies the IMF that Greek debt is on a sustainable path and that it has a medium-term funding plan in place. The Eurozone won’t disburse its own bailout funds without a deal that carries this IMF seal of approval.

The IMF has agreed to streamline its demands, but that hardly diminishes the scale of the compromise required of Prime Minister Alexis Tsipras; even a slimmed-down deal will require either Athens to commit to an ambitious third bailout program or the Eurozone to agree to provide substantial debt relief—which it won’t until Athens can convince the Eurozone it is serious about reform.   

 

VBCE Daily Foreign Exchange Update for Tuesday, Mar 31st, 2015

USDCAD climbs to 1.2784 before reversing lower to 1.2660
on better than expected CDN GDP data

USDCAD spot rate: 1.2670 - 1.2675 (AS AT 8:24AM PST)

RANGES:	Asia:	1.2672	to	1.2711
	Europe:	1.2708	to	1.2755
	North America:	1.2660	to	1.2784

Technical Support / Resistance:

S2	S1	R1	R2
1.2350	1.2415	1.2784	1.2840

Key Economic Data Releases:

-Canada GDP (Jan): -0.1% (exp. -0.2%)

-U.S. Case Shiller home price indices y/y: 4.6% (exp. 4.5%)

-U.S. Chicago purchasing managers index: 46.3 (exp. 51.5)

-U.S. consumer confidence: 101.3 (exp. 96.0)

Key Event Calendar:

DATE	CANADA	U.S.A.
Apr. 1	RBC manufacturing PMI	ADP employment, Markit / ISM mfg. PMI
Apr. 2	Int’l merchandise trade	Trade balance, factory orders, jobless claims
Apr. 3	Good Friday	Non-farm payrolls, unemployment rate

Yesterday, the uptrend in USDCAD continued after the large reversal from Friday. USDCAD climbed from 1.2596 up to 1.2705 and held near session highs for the balance of the day. Oil fell back below $48 while Bank of Canada Governor Poloz warned that “the first quarter of 2015 will look atrocious.” Overnight, USDCAD climbed to 1.2755 and extended up to 1.2784 earlier this morning ahead of the Canadian GDP data. January data showed that GDP contracted by 0.1%, not as bad as the market had anticipated. USDCAD initially dropped to 1.2730 before finding some support but has subsequently fallen to 1.2660. Oil has bounced from overnight lows and is back above $48. Also, risk aversion flows have subsided as European and North American indices pare losses.

The GBP is the best performing currency with the CAD a close second. U.K. 4TH quarter GDP came in higher than expected at 3.0%. On Friday, the U.S. is expected to add 242,000 jobs after adding 295,000 the prior period. The unemployment rate is expected to hold at 5.5%. Currently, the TSX and the DJIA are down 0.11% and 0.29% respectively. EURCAD is down 1% trading between 1.3588 and 1.3760. GBPCAD is up 0.20%, trading between 1.8764 and 1.8914. JPYCAD is unchanged trading between 0.01055 and 0.01066. Gold is up 0.30% trading between $1,179 and $1,191USD/oz., silver is up 0.50% trading between $16.46 and $16.84USD/oz., while oil is down 1% trading between $47.31 and $48.70.

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