GFX Morning FX Commentary

Good Morning,

Today’s expected range for the Canadian Dollar against the US Dollar is 1.1080-1.1175

Today’s expected range for the Canadian Dollar against the Euro is 1.5160-1.1.5250

Today’s expected range for the Canadian Dollar against Sterling is 1.8460-1.8560

The US Dollar is weaker this morning against all currencies but one, no prizes for guessing that the one currency that the US Dollar is much stronger against is the Canadian Dollar, more on that later. This morning saw the Euro jump to its highest level in 3 months as the Euro-Zone manufacturing data climbed to its highest level in 2 1/2 year. Sterling continues its tremendous run trading higher on the back of the expectation that the next move by the Bank of England will be to reduce stimulus and start to think about hiking interest rates.

I am not sure how to describe the recent activity of the Canadian Dollar but I think a good word is carnage. Almost every other currency was stronger last night against the US with the expectation of the Canadian Dollar which set a new 5-year low. Against the Euro and Sterling the Loonie is just getting creamed, earlier this week we were talking about 1.8000 being a big level to break, this morning we are trading at 1.8500. EURO.CAD is now near 1.5200, on Monday we talked about it trying to break above 1.5000. This latest bout of weakness is all a result of the Bank of Canada statement yesterday and their views on inflation (more below). I still believe that this move is well overdone and would now look at US Dollar sellers to take advantage of this move and look at some forward contracts. The Loonie feels like a runaway freight train at the moment and it is tough to stand in its path but at some point we will see the Loonie recover a little.

The Canadian market focus will now turn to inflation reports as a key driver of direction, tomorrow we get the Canadian report for December. Since most of the volatility in the Loonie has occurred in January I don’t expect that the weak Canadian Dollar will have much effect on this number, but if we see a low inflation number then USD.CAD could go beyond 1.1200, if we see inflation starting to rise then we could see USD.CAD pull back to 1.1000 very quickly, more on this theme tomorrow morning.

Up today we do get some secondary US data and Canadian retail sales reports for November, I think these will be ignored by the markets and today will see Canadian Dollar trading continue to be illiquid and volatile.

 

Brief Notes on the Bank of Canada

Here is what you need to know about the Bank of Canada announcement and how it will affect your business. In October of this year the bank changed their bias away from increasing interest rates to one of a neutral stance that said rates could go down as easily as they could go up, since then the value of the Canadian Dollar has dropped 6% against the US Dollar. Yesterday most economists were expecting that the Bank was going to move their bias to one of weakening (lower interest rates in the future,  instead they stated that they were more concerned with the weak level of inflation in that a low inflation rate is just as bad for the economy as is a high rate of inflation. They also mentioned in their Monetary Policy Quarterly Report that the Despite depreciating in recent months, the Canadian dollar remains strong and will continue to pose competitiveness challenges for Canada’s non-commodity exports”

One of the effects of a weak currency is that it is inflationary (imported goods become more expensive) so we are seeing two things emerge, the Bank of Canada while not take direct action on interest rates at this time but  is still talking down the value of the Canadian Dollar in hopes that it will help bring up the inflation rate and secondly they are only going to move the interest rate lower( which would also boost inflation and weaken the currency) as a last resort. What I get from this is that the Canadian Dollar will remain weak and that while I expect some short-term recovery for the US Dollar there is still a scenario where USD.CAD can jump to higher levels  in the coming weeks. You will need to keep this in mind until we next hear from the Bank in Early March, once the weak Loonie helps to push inflation higher then I think you will see a recovery in the Loonie but that could be in the 2^nd half of the year.

Have a great day

Mike