The U.S. Senate has just voted to reopen the government and the NAFTA talks are set to start in Montreal Tuesday. Negotiations will be difficult as the USA has stated that the main stumbling block, auto production, has to change significantly, Currently, 62% of the parts in a car sold in North America must come from NAFTA countries with no limitations as which country they come from. The USA wants to change the percentage to 85%, and half of that comes from the USA. Both Canada and Mexico have said no, but time will tell.
Expect continued volatility.
USDCAD 1.2450, 1.2445, 1.2437 1.2472, 1.2488, 1.2498
USD-CAD has maintained a consolidation in the mid 1.24s over the last several sessions. The BoC’s 25 bp rate hike last week met expectations, but was accompanied with cautious guidance. The central bank’s gradual normalization reflects ongoing uncertainties, notably the NAFTA renegotiation. We expect two more 25 bp rate hikes this year, in July and October. Focus will remain on the NAFTA front, with uncertainty about this having curtailed the Canadian dollar rallying amid the surge in oil prices.
EUR-USD has remained buoyant during into the European afternoon session. The pair has re-established itself above 1.2250, though has remained below the high that was seen in opening dealings in Asia-Pacific, which is at 1.2274. The Bundesbank’s monthly report said that the German economy has continued to expand at high speed while advocating that price pressures will build this year. News that Germany is on course to have a new grand coalition has also been in the mix is a euro positive, though directional ambition is being crimped ahead of the U.S. Senate vote on government funding, which will take place a noon in Washington DC (17:00 GMT), as the impact on the outcome will likely be a binary buy dollars or sell dollars. EUR-USD has support at 1.2182-84. Last Tuesday’s 37-month high is at 1.2323 remains in the scopes.
Cable has come off the boil since logging a new post-Brexit vote high of 1.3945 on Friday. Hefty sell-stops were reportedly triggered in GBP-JPY through 153.70. UK retail sales disappointed in official December data, released Friday, dropping 1.5% m/m, more than the 0.6% m/m decline anticipated by the median forecast. The y/y figure came in with 1.4% growth, well off the median forecast for 2.6% growth. The UK calendar this week brings monthly government borrowing data (Tuesday), the January CBI surveys on industrial trends and distributive sales (due Tuesday and Friday, respectively), the monthly labour market report (Wednesday), and the second estimate for Q4 GDP (Friday). Focus will also fall on negotiations between the EU and UK on a transitory Brexit period. The BoE MPC next meets on February 7th-8th. Cable has support at 1.3845-48, and resistance at 1.3945.