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
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