According to the Bank of Canada’s Business Outlook Survey, business sentiment remains positive and the sales outlook, although moderating, still remains healthy. At the same time, capacity and labor pressures are becoming more apparent and are stimulating firms’ employment and investment plans since the previous survey. Survey results suggest that economic slack is now largely limited to the energy-producing regions. Five out of the Big Six banks are now fully expecting a rate hike, the Bank of Montreal is the holdout.
Oil prices are still at near recent highs and are adding strength to the USDCAD, expect a narrow range over the next few days.
USDCAD 1.2417, 1.2406, 1.2396 1.2463, 1.2476, 1.2482
The dollar opened the week on a firm footing. has opened the new week on a firmer footing, with EUR-USD ebbing under 1.2000 for the first time this year and USD-JPY lifting back to within a few pips of Friday’s 12-day high at 113.31 before backing off some. The dollar has also made gains versus sterling and the Australian dollar, tumbling by 0.4% against the latter to a two-session low of 0.7835. The antipodean currency was not helped by a forecast for iron ore prices to tumble 20% this year on the back of rising global supply and falling Chinese demand. The forecast was made by Australia’s Department of Industry, Innovation and Science. There was suspected intervention by the Bank of Korea in USD-KRW, which surged as a consequence. Trading conditions have been on the thin side, with Japanese markets closed today for the Coming of Age public holiday today.
EUR-USD has traded below 1.2000 for the first time this year, logging a low of 1.1983. Unexpected weakness in German manufacturing orders helped give the pair a push at the start of the London session, though this has been subsequently offset by above-forecast retail sales and confidence data out of the Eurozone. Technically, momentum indicators have been turning bearish, flagging potential for a sustained correction following the three-week rally phase from levels under 1.1750. Resistance comes in at 1.2019-20, and support at 1.1983. A daily close below these levels would affirm shift in directional bias to the downside.
USD-JPY has rallied for a third consecutive day, this time hitting a nine-day peak at 113.28. This extends the rebound from the thee-week low that was seen earlier in the week at 112.05. EUR-JPY, AUD-JPY and other yen crosses have also posted gains today. A record-breaking rally on Wall Street, and strong equity market gains globally have weakened the yen, as per the usual inverse correlation the Japanese currency often displays during phases of pronounced risk appetite. We advise following the trend, especially into the release of the U.S. jobs report for December today, which comes laden with upside risks following the strong ADP jobs report, and strong employment components in other data, such as the ISM manufacturing report. We also advise monitoring geopolitical concerns closely, particularly North Korea and the evolving situation in Iran, as any significant flare up on these fronts could spark demand for the yen safe haven credentials. USD-JPY has support at 112.86-88, and 112.27-30.
The pound has been lacking strong domestic leads so far this year. Unexpected weakness in the December manufacturing and construction PMI surveys were offset by a firmer than expected PMI reading for the dominant service sector. The ONS stats office reported an encouraging tick higher in UK productivity today, though to little impact. Brexit-related news or developments, meanwhile, have been thin so soon after the holiday period. Formal negotiations with the EU on a post-Brexit trading relationship are due to start in March. Next week’s UK calendar is fairly quiet, highlighted by the private BRC retail sales survey for December (Tuesday) along with November production and trade data (Wednesday). The BoE MPC’s next policy meeting will take place on February 7th-8th, where a no change decision is widely anticipated. The BoE will then also publish its latest quarterly inflation report, with updated growth and inflation projections.
EUR-CHF has come off the boil somewhat after last week clocking a 36-month high at 1.1778, with the cross since settling to the lower 1.17s. Over the last six months, the franc has seen its biggest weakening, both against the euro and in trade-weighted terms, since the Eurozone crisis took hold back in 2010. The Eurozone has seen political threats diminish, which has been accompanied by steady and assured pickup in growth momentum. This backdrop, along with the enticement of the SNB’s -0.75% deposit rate, have seen the franc unwind any vestiges it had of being a safe haven currency. Assuming the Eurozone can continue to conquer political threats, and assuming the SNB remains anchored to ultra-accommodative monetary policy, which looks likely to be the case for the foreseeable (the central bank reaffirmed this commitment at its recent quarterly policy review), we anticipate EUR-CHF will make an eventual return to 1.2000, which was the former floor the central bank maintained until January 2015.
USD-CAD has settled to a consolidation near 1.2400 after logging a 13-week low on Friday at 1.2355. The low was seen following a stellar Canadian December jobs report, which outshone the U.S. employment report for the same month. The data cemented market expectations for the BoC to hike rates by 25 bp at its policy meeting next week. USD-CAD has trend resistance at 1.2457-60. Ahead into 2018, how the U.S. dollar benefits from the expected tax overhaul, how oil prices evolve, how NAFTA re-negotiatios go, and how the BoC proceeds with its slow-go tightening cycle will be dominant themes for USD-CAD.