Looking Ahead to 2015
The USD finished 2014 on a
high note, making highs that it hasn’t seen since the onset of the 2008 credit
crisis. On the first day of trading on January 2nd of 2015, the USD picked up
where it left off powering its way higher against all currencies. The dominant
support behind the rise in the USD continues to be the “divergence theme” – a
U.S. economy growing at a 4% clip and a central bank ready to deliver an
interest rate hike by mid-year, while additional stimulus is required in the
rest of the world. We expected this divergence to remain in place for at least
the first quarter of the year. After that we will reassess to see if the
deflationary risk of lower commodity prices, especially crude oil, and a higher
USD cause a slowdown in the U.S. economy, and thereby cause the Fed to reassess
the timing of its first interest rate hike. For now, let’s look at the drivers
for each currency.
By all accounts, the ECB has
probably run out of time and has no choice now but to go full throttle into
quantitative easing as Europe struggles with deflation. Bond yields for Germany, Italy, Spain,
France, and even Portugal have dropped to levels not seen since the 14th
century, according to Andrew Roberts, credit chief at RBS. ECB President Mario
Draghi may have to go against Germany’s wishes and announce that the ECB will
increase its balance sheet by buying sovereign bonds. This along with Greek elections in January
will pressure the Euro lower.
In Switzerland, the leadership
at the Swiss central bank is totally focused on the ECB as evidenced by the
Swiss decision in December to enter negative interest rates on deposits; this
will go into effect on January 22nd, the same day as the ECB policy meeting.
The Swiss are betting that the ECB will announce some sort of sovereign bond
buying program on that date and they want to make sure that there 1.20 currency
floor does not get violated. Currency speculators will endeavor to test the
central bank’s resolve in protecting the 1.20 floor throughout the year ahead.
With the Bank of Japan fully
committed to its QE program and Japan's Government Pension Investment Fund
committed to doubling its allocation for both local and overseas stocks from
bonds; the yen will continue to depreciate. Also, Prime Minister Abe’s election
win in December gives him the latitude he needs to add more stimulus if the present
programs do not yield the desired results of higher wages and growth.
In the UK, the second half of
2014 was plagued with falling inflation and the easing of growth causing market
expectations of the UK being the first G7 country to raise interest rates to
completely unwind. Perhaps the larger factor at play in 2015 will be political.
Reduced growth and a fall in North Sea oil revenue will cause government
revenues to fall leading to some fiscal consolidation. Add to this mix is the
upstart popularity of the anti-EU party, UK Independent Party, led by the
always colorful Nigel Farage and you get the strong possibility of a change in
the make-up of the government. The Tories will have to team up with a different
coalition party in order to stay in power, probably with the Labour party. This
could spark a credit review and a possible warning or downgrade by rating
agencies which in turn will weigh on the GBP.
A strong USD, falling
commodity prices, and weak global growth leaves the dollar-bloc currencies
vulnerable. Believe it or not, the CAD was the best performing petro-currency
by a non-OPEC country in 2014. It was down only about
8% against the USD compared to 40% for Russia, 15% for Norway, and 13% for Mexico. The CAD’s
resilience stems from commodity resources diversification, neutral monetary policy, and the benefit of having
the U.S. as its biggest trading partner. The CAD will continue to depreciate in
2015 but it will probably find a bottom once the price of crude does.
The problem with Australia’s
economy is that its number one customer for its biggest export, iron ore, is
China. China will continue to slow down in 2015 as manufacturing gets
rationalized. Add to this a very dovish central bank and you get an even weaker
currency in the year ahead. The head of the central bank, Glenn Stevens, has
been aggressively talking down the AUD in the past and has, on more than one
occasion, mentioned that the currency should be at 75 cents against the USD.
The other dollar-bloc
currency, the NZD, should also decline in 2015 has the central bank signals
that it is ready for a pause in its interest rate raising cycle in response to
very low inflation. In addition, the central bank’s discontent with the high
level of the NZD should continue to encourage currency depreciation.
Finally, we come to China.
China has experienced 42 consecutive months of negative producer price
deflation and consumer inflation is at a 60 month low. In November, China’s
leadership switched its strategy of cutting bank reserve ratios and decided to
cut its benchmark interest rates for the first time
in two and a half years. We
suspect that if growth in China falters then the leadership will opt to let its
currency fall against the USD which will cause another wave of deflation to be
exported to the rest of the world.
Threat of Grexit Looms Again
Two opposing stories dominated
European financial headlines over the weekend as Greek political parties
embarked on a flash campaign to determine the fate of the country’s membership
in the euro currency zone. The first story is that German leadership publicly
contends that they want the struggling nation to stay in the Eurozone and pay
back its debts. The second story, however, is that the German’s believe that
the Eurozone could cope with a Greek exit, or “Grexit”, if it proved necessary.
Greece’s current Prime
Minister, Antonis Samaras, has warned that if the main opposition party,
Syriza, wins the election, Greece would default and also exit the euro region.
The leader of the Syriza Party, Alexis Tsipras, has openly stated that is his
party would end the German-led, and IMF backed, austerity program. The stakes
are high for every member of the Eurozone as polls suggest that Syriza will win
on election-day, January 25th. A poll published this past weekend shows that
Syriza leads with 30.4% compared to Samaras’ New Democracy party with 27.3%.
According to a report in Der
Spiegel magazine on January 3rd, Chancellor Angela Merkel and Finance Minister
Wolfgang Schaeuble are ready to accept a Grexit should Syriza win because they consider
that the Eurozone has implemented enough reforms since the height of the
regional crisis in 2012 to make a potential Grexit manageable and not
disintegrate the currency union. In addition, they contend that the
European Stability
Mechanism (ESM), the
EU’s bailout fund,
is an effective
and available rescue procedure to protect major financial
institutions. Der Spiegel, quoting a senior German official, cited that, “The
danger of contagion is limited because Portugal and Ireland are considered
rehabilitated.” However, one can’t
help but be
wary of opening
Pandora’s Box. If one weak country leaves the Eurozone, then
markets will pluck the next weakest one and so on. Borrowing costs for those
economies will rise, which would make it nearly impossible for those
governments to fund themselves and it becomes a self-fulfilling prophecy of
sorts.
On the
flip-side, the German
government has been
quoted that they want
Greece to stay
in the Eurozone for the benefit of
all its members, including Greece itself. From an article in Ekathimerini found here,
The German government wants
Greece to stay in the Eurozone and there are no contingency plans to the
contrary, Vice Chancellor Sigmar Gabriel said on Sunday, responding to a media
report that Berlin believes the currency union could cope without Greece.
“The goal of the German
government, the European Union and even the government in Athens itself is to
keep Greece in the Eurozone”, Gabriel said in the interview to appear today.
“That’s why we can’t be blackmailed and why we expect the Greece government, no
matter who leads it, to abide by the agreements made with the EU”, he said
referring to the January 25th Greek
election and possible change of government.
As the euro zone’s paymaster,
Germany is insisting that Greece must stick to a course of austerity and not
backtrack on its bailout commitments – especially as it does not want to open
the door for other struggling euro zone members to relax their reform efforts.
Peter Bofinger,
one the wisemen council of economic
advisers to the German government, warned against Grexit, “There would be many
high risks for the stability of the Eurozone with such a step”, he told Welt am
Sonntag. He continued, “It would let a genie out of the bottle that would be
hard to control.”
In public, Chancellor Merkel
is being politically correct, but behind closed doors, it seems as though
German leadership (and likely the Eurozone as a whole), simply wants the
headache that is Greece to just go away. If Syriza does win the election, the EUR’s
decline should pick up some pace.
VBCE FX Update for Wednesday, January 7th, 2015
USDCAD spot rate: 1.1850 - 1.1855 (AS AT 8:43AM PST)
RANGES:
|
Asia:
|
1.1823
|
to
|
1.1847
|
|
Europe:
|
1.1822
|
to
|
1.1870
|
|
North America:
|
1.1811
|
to
|
1.1865
|
Technical Support / Resistance:
S2
|
S1
|
R1
|
R2
|
1.1564
|
1.1671
|
1.1870
|
1.1984
|
Key Economic Data Releases:
-Canada international merchandise
trade: -$0.64 billion (exp. -$0.30 billion)
-Canada Ivey purchasing managers
index: 55.4 (exp. 52.3)
-U.S. ADP employment change: 241k
(exp. 225k)
-U.S. trade balance: -$39.00 billion (exp. -$42.0 billion)
-U.S. FOMC meeting minutes: TBA ~
11:00am
Key Event Calendar:
DATE
|
CANADA
|
U.S.A.
|
|
|
|
Jan.8
|
New housing price index
|
Initial jobless claims
|
Jan. 9
|
Housing starts, building permits, net
|
Non-farm payrolls, unemployment rate
|
|
employment change, unemployment
|
|
|
rate
|
|
Yesterday, USDCAD traded from 1.1753 up to 1.1840 after
having fallen from 1.1845 down to 1.1730 the previous day. The USD is the best
performing currency today on better than expected ADP employment and trade
balance data. The market now awaits the 11:00am release of the U.S. Fed meeting
minutes. There is some speculation that although interest rates will begin to
rise in the U.S. (most likely in June) rates may not rise as much as what the
market had previously expected. Overnight USDCAD dipped to 1.1822 before rising
to 1.1870. The pairing has since fallen to 1.1811 followed by another attempt
higher which has stalled at 1.1865. USDCAD has subsequently dipped to 1.1850.
Currently, the TSX and the DJIA are up 0.29% and 0.82% respectively. EURCAD is
down 0.50% trading between 1.3977 and 1.4093. GBPCAD is down 0.40% trading
between 1.7840 and 1.7964. JPYCAD is down 0.60% trading between 0.00989 and
0.00999. Gold is down 0.37% trading between $1,209 and $1,219USD/oz, silver is
down 0.25% trading between $16.30 and $16.63USD/oz, while oil is up 0.15%,
trading between $46.86 and $49.29.
Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets,
Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive
