Breaking News
0

USD Strength And CAD's Meltdown

By Kathy LienForexDec 05, 2018 18:10
ca.investing.com/analysis/usd-strength-and-cads-meltdown-200197974
USD Strength And CAD's Meltdown
By Kathy Lien   |  Dec 05, 2018 18:10
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Daily FX Market Roundup 12.05.2018.

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

After Tuesday’s nearly 800 point drop in the Dow, investors feared the worst for stocks as this was the largest one-day decline in almost 2 months. Yet outside of the sell-off in USD/JPY, the other currencies were unfazed with euro and sterling ending Tuesday unchanged. US markets were closed Wednesday in memory of President George H.W. Bush but currencies and equity futures continued to trade. Judging from the more than 100-point recovery in Dow futures, USD/JPY’s move back above 113 and the general strength of the greenback, investors are still hoping for more gains in the dollar. Stronger manufacturing activity and a relatively upbeat Beige Book assessment encourages this sentiment. According to the Fed, the economy is still doing well with most districts expanding at a modest or moderate pace. Prices are rising, labor markets have tightened further and wage growth tended to the higher side of modest. The resilience of the U.S. dollar tells us that investors are waiting for Friday’s Nonfarm Payrolls report and are hoping that job growth will be strong enough to revive the dollar’s rally, particularly since the labor market has been the strongest part of the economy and the main source of the central bank’s optimism. We get a first look at how the job market is doing on Thursday with ADP, Challenger layoffs, jobless claims and the non-manufacturing ISM reports scheduled for release.

Unfortunately, even if most of Thursday’s reports surprise to the upside, the dollar is in the final stretch of its rally. The drop in 10-year Treasury yields was a big deal and reflects concern about lower price pressures, global growth, less-hawkish guidance from the Fed later this month and the possibility of a pause in rate hikes. All of these concerns are real problems that the Fed won’t be able to ignore. When US markets reopen on Thursday, we expect US yields to remain under pressure preventing any meaningful rally in the greenback. The sharp sell-off in stocks and general market volatility should also make businesses hire more conservatively as they worry about the recent decline turning into a deeper, more prolonged correction. While the dollar is strong now, rallies should start to fade, especially if Friday’s jobs report falls short of expectations.

Meanwhile, Tuesday’s defeat of the UK government in a key Parliament vote and Wednesday’s significantly weaker-than-expected PMI services report should have driven sterling to fresh 19-month lows but GBP held steady as traders pinned hopes on some sort of a Brexit compromise passing the UK Parliament. According to our colleague Boris Schlossberg, as of now there is no evidence that PM May’s plan will pass. Still, Wednesday’s data only underlines the risk ahead. If politicians allow the matter to spin out of control, UK cold tip into a recession as early as the start of the year as the threat of a hard Brexit brings all business activity to a standstill. UK PMI Service came in at 50.4 – much lower than 52.5 expected and within a whisker of the 50 boom-bust level. This was the worst reading in 15 months with business optimism at its weakest since June 2016. According to Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

A sharp deterioration in service sector growth leaves the economy flatlining in November as Brexit concerns intensified. Measured across services, manufacturing, and construction, the survey results suggest that the pace of economic growth has stalled. With the exception of July 2016, when business slumped in the immediate aftermath of the EU referendum, November saw the worst performance since February 2013. “The surveys are so far consistent with 0.1% GDP growth in the fourth quarter, thanks to the expansion seen back in October, but growth momentum has since been lost and risks are clearly tilted to the downside.

USD/CAD rose to its strongest level since June 2017 following the Bank of Canada’s monetary policy announcement. No one was surprised by the central bank’s decision to leave interest rates unchanged at 1.75% but what caught everyone off guard was its comment that there may be more room for non-inflationary growth. Back in October when BoC raised interest rates, the monetary-policy statement was adjusted to suggest more aggressive tightening in 2019 but it dialed it back Wednesday in recognition of slower growth momentum in Q4. The decline in oil prices is becoming a bigger problem for the central bank because it not only impacts trade but also inflation and overall growth. The BoC admitted Wednesday that the energy sector may be materially weaker than it had previously thought. Although USD/CAD failed to close above the June highs near 1.3385, it should be on its way to 1.35.

Wednesday's worst-performing currency was the Australian dollar, which dropped 0.9% on the back of very weak GDP growth. According to the latest report, Australia’s economy expanded by only 0.3% in the third quarter, pushing year-over-year growth down to 2.8%, the weakest level in 2.5 years. The fourth quarter could be better with service-sector activity improving but we’ll have to see how Wednesday night’s Australian retail sales and trade balance fares. If retail sales also fall short of expectations, which it shouldn’t given the increase in employment and the sharp rise in the sales component of PSI, AUD/USD will test 72 cents. However if it improves like the PSI suggests, we could see a recovery back above 73 cents. For the time being, the uptrend remains intact until 72 is breached. The New Zealand dollar on the other hand is just beginning to turn and with job ads, house prices and commodity prices deteriorating from the previous month, we could see further weakness in the next 24 to 48 hours.

Last but not least, the euro ended the day unchanged against the greenback. Having fallen below 1.13 last week, the pair is consolidating above this round number thanks to slightly better data and signs of cooperation between Italy and the EC. It's too early to tell, but the pair’s tight trading range points to a pending breakout.

USD Strength And CAD's Meltdown
 

Related Articles

USD Strength And CAD's Meltdown

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email