The increase of geopolitical tensions, as civil demonstrations increased in Iran amid their weak state of economy, has caused the oil prices to stay over $60 USD for North American oil prices, while North Sea prices have now climbed over $67 USD a barrel. The Canadian Dollar has responded in a positive manner with the currency reaching October lows. Markets are now also building an interest rate hike from the Bank of Canada for January and March due to Canada’s well performing economy and its continued worries about household debt.
Expect the USDCAD to range 1.2445-1.2525 in the near term.
USDCAD 1.2498, 1.2480, 1.2475 1.2517, 1.2526, 1.2534
The dollar has literally fallen into 2018, starting the new year where it left off the last by declining against most other currencies. EUR-USD logged a four-month high of 1.2082, as did Cable, at 1.3567. AUD-USD and NZD-USD rallied to fresh 10-week highs, of 0.7844 and 0.7131, respectively. USD-JPY tipped to an 18-day low of 112.11, even though EUR-JPY earlier made it to a new 26-month high, and AUD-JPY a 10-week peak. The final December manufacturing PMI out of the Eurozone was confirmed at a solid, peer-beating 60.6 reading, as expected but reaffirming the impressive growth momentum that’s been building up in the Eurozone economy. We still think that EUR-USD, and the euro more broadly, may be ripe for a correction. Concerns about the Italian election and upcoming key data releases in the U.S., culminating with the December employment report on Friday, may serve to dampen the EUR-USD’s uptrend. The pound, while having gained on the dollar, was weaker versus the euro and yen, amongst other currencies. The UK’s December manufacturing PMI missed expectations, declining to a headline reading of 56.3 from 58.2 in the month prior.
EUR-USD rallied to a new four-month high at 1.2077 just earlier, since settling around 1.2062-65. The move mostly reflects ongoing broad dollar softness, but also a degree or two of euro outperformance, with the common currency having also edged out a 26-month high versus the yen, a five-week high against the pound, a two-session high relative to the Swiss franc, and a four-session high versus the Australian dollar. The final December manufacturing PMI out of the Eurozone was confirmed at a solid, peer-beating 60.6 reading, as expected but reaffirming the impressive growth momentum that’s been building up in the Eurozone economy. This is now the eighth session out of the last nine that EUR-USD has gained, which is an impressive run by historical standards, and we expect that the market is now ripe for a consolidation ahead of key data releases this week, which culminate with the U.S. December jobs report on Friday. EUR-USD has a key resistance at 1.2092, which is the September major-trend peak, and 1.2100. Support is at 1.12014-15.
USD-JPY fell for a seventh consecutive session in logging an 18-day low at 112.11, reflecting broader dollar declines. This is despite EUR-JPY having logged a new 26-month high, and AUD-JPY a 10-week peak, though these moves were seen before USD-JPY came under pressure. We expect the yen to trade comparatively softly outside the case against the dollar. The BoJ left monetary policy unchanged at its meeting in December, signalling that it is in no rush to exit from crisis-mode stimulus policies despite maintaining an upbeat view on the economy. Governor Kuroda also emphasized that the central bank will remain committed to dovish policy settings even if the government declares that the threat of deflation has ended. Technically, USD-JPY is amid a broadly sideways chop, roughly centred between 108.0 to 115.00, which has been persisting for eight months now. We are anticipating the dollar to rally in early 2018 as markets digest looser fiscal policy in the U.S.
The pound has been trading mixed, gaining ground versus the underperforming dollar but losing ground to the euro and yen, amongst other currencies. The UK’s December manufacturing PMI missed expectations, declining to a headline reading of 56.3 from 58.2 in the month prior. The median forecast had been for a more moderate dip to 57.9. The 56.3 outcome matches that seen in the October survey, unwinding what was an unexpected pop in November. Despite the slowing from November levels, the survey still indicates healthy expansion in the sector, and showed output, new orders and employment components all rising at solid, above-trend rates. The average reading for Q4 2017 worked out at 57.0, which is the best average since Q2 2014. Focus will now shift to the construction and services PMIs due tomorrow and Thursday, respectively. Into 2018, we expect the pound will maintain the 15% trade-weighted discount that’s been roughly persisting since the Brexit vote in June 2016. The Brexit negotiation process will continue to dominate the UK’s agenda, and the weak political position of the prime minister and her minority government will continue to be a font of uncertainty for investors and business leaders. Resistance is at 1.3570 and 1.3600, and support is at 1.3500.
EUR-CHF has been emblematic of the euro’s rally since mid 2017. The cross logged a 36-month peak last week at 1.1777. 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 conquer existential 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 broken lower over the last week, through two-month range lows at 1.2613-23, which now revert as resistance levels. The pair logged a 10-week low last Friday at 1.2514, which follows a six straight session run lower, and comes amid general U.S. dollar weakness and with oil prices having traded above $60 for the first time since mid 2015. Ahead into 2018, how the U.S. dollar benefits from the expected tax overhaul, how oil prices evolve, how NAFTA re-negotiations go, and how the BoC proceeds with its slow-go tightening cycle will be dominant themes for USD-CAD.