USD Continues to Shine, Bank of Canada Decides on Policy

10 min readMar 6, 2019

The greenback continued to gain against most of its major peers yesterday, as better-than-expected US data may have eased further concerns with regards to the health of the world’s largest economy. The Aussie was among the main losers, tumbling after Australia’s GDP disappointed. The pound slid as well following headlines that no Brexit breakthrough is on the horizon, while SEK surged on comments that Riksbank’s plan remains for higher rates later this year. As for today, the BoC decides on interest rates, with investors eager to find out whether the latest softness in economic data will prompt policymakers to alter their interest-rate guidance.

USD Keeps Gaining, AUD Slides after GDP, GBP Stays Brexit-Driven

The dollar continued gaining against most of the other G10 currencies yesterday, with the DXY recording its 5thpositive session in a row. The greenback gained the most versus CHF, AUD, and NZD in that order, while it underperformed only against SEK and JPY.

The driver may have been the positive surprise in the ISM non-manufacturing index for February, and the better-than-expected new home sales for December. Specifically, the ISM index rose 3 points, to 59.7 from 56.7, beating estimates of 57.3, while the new orders sub index surged to its highest since August 2005. New home sales slowed to +3.7% mom from 9.1%, but this was still much better than the consensus of a 8.7% slide. Following last week’s GDP for Q4, which did not slow as much as many may have anticipated, yesterday’s releases ease further concerns with regards to the health of the world’s largest economy.

As for the other currencies, the Aussie was the second loser in line, tumbling after Australia’s GDP data disappointed. Specifically, the Australian economy slowed to +0.2% qoq in Q4 from +0.3% in Q3, missing estimates of +0.5%, something that pushed the yoy rate down to +2.3% from +2.8%, notably below the RBA’s latest projection for the quarter, which is at 2.75%. Although the statement of Tuesday’s meeting provided little new information compared to the previous one, the softness in the GDP data may have further increased speculation with regards to a rate cut by the end of the year. Remember that just the day after the February meeting, Governor Lowe introduced the prospect of a cut, noting that interest rates could move in either direction, with the probabilities of an up and a down move evenly balanced, something that was mentioned in the meeting minutes as well.

The pound also slid yesterday following headlines that the gathering between EU chief negotiator Michel Barnier, the UK attorney general Geoffrey Cox, and Brexit minister Stephen Barclay was unlikely to result in a breakthrough with regards to the Brexit bill. The British currency was also hurt by shadow chancellor John McDonell’s remarks, who said that only a few Labour MPs may back May’s updated deal that is expected to be put to a Parliamentary vote by March 12th. That said, the currency recovered almost all of the headline related ground, although it came under some selling interest hours thereafter. In our view, the aforementioned headlines include little element of surprise and that’s why the pound was quick to recover the related losses.

The Swedish Krona was the main gainer, coming under strong buying interest after Riksbank Deputy Governor Cecilia Skingsley noted that the Bank’s plan is to raise interest rates later this year, even with inflation running below the Riksbank’s objective of 2%. The increase in the Sweden’s services PMI for February may have also helped the currency, although industrial production slowed to +0.1% mom from +1.6%. Skingsley’s remarks come after last week’s GDP data, which showed that the Swedish economy expanded +1.2% qoq in Q4 from an upwardly revised -0.1% in Q3, twice as fast as the +0.6% forecast. These comments may have encouraged market participants to add to bets that the Riksbank will follow through with its guidance to hike in the second half of 2019, at a time when other major central banks are expected to remain on hold, or even cut interest rates.

GBP/USD — Technical Outlook

Since the reversal to the downside a week ago, GBP/USD continues drifting lower, trading below its short-term downside resistance line taken from the high of February 27th. At the same time, the pair is still above its upside support line drawn from the low of January 2nd. But given that the rate had distanced itself from that line, we may see GBP/USD sliding further down. For now, we will remain cautiously-bearish and target lower levels.

Yesterday, GBP/USD found good support near the 1.3110 hurdle and then rebounded from it, but failed to get back above the 1.3180 barrier, which is yesterday’s high. For now, it seems that the bears are still in control and we may see the pair traveling further down. But in order to get comfortable with lower levels, at least for the short run, we would like to see a break below the aforementioned 1.3110 zone, which could open the door to the 1.3050 obstacle, marked by the low of February 25th. If the selling continues and that obstacle fails to withstand the bear-pressure, another move down might drag GBP/USD towards the psychological 1.3000 level.

On the other hand, if the short-term downside resistance line gets broken and GBP/USD moves above the 1.3180 barrier, this may attract more bulls again, who could push the pair further up, to test the 1.3255 obstacle, marked by the high of March 4th. If the buying doesn’t end there, the rate could accelerate further, aiming for the 1.3290 level, near the high of March 1st.

Will the BoC Alter its Forward Guidance?

The Canadian dollar has been on a slide mode against its US counterpart since Friday, when Canada’s GDP data disappointed. The Loonie may have also been weighed on by developments in the Canadian political landscape, as two cabinet ministers resigned over the government’s handling of a scandal involving a construction company.

As for today, CAD traders are likely to turn their attention to monetary policy and the BoC decision. When they last met, BoC policymakers left interest rates unchanged and kept the door open for further rate increases. However, latest CPI data showed that inflation slowed in both headline and core terms, while economic activity contracted in both November and December, with the qoq annualized rate for the final quarter of 2018 tumbling to +0.4% from +2.0%.

Seen in isolation, these releases raise concerns over the BoC’s ability to raise borrowing costs further. However, bearing in mind that, in a recent speech, Governor Poloz noted that the Bank’s plan remains for higher rates over time, we believe that officials could keep their forward guidance unchanged at this meeting. They may prefer to wait and see whether the softness continues before they go ahead and alter it. That said, we don’t expect an upbeat narrative either. In the same speech, the Governor said that the timing of future rate increases is “highly uncertain”, which combined with the aforementioned data may prompt policymakers to strike a more cautious stance compared to the previous time, even if they stick to their guns that further rate increases are needed in the foreseeable future.

As for the Canadian dollar, its recent tumble suggests that market participants are positioned for a very dovish outcome. Some of them may even expect the Bank to take future hikes off the table. So, having that in mind, we view the risks surrounding its reaction as asymmetrical and tilted to the upside. A dovish narrative by itself may not be enough to push the Loonie lower if officials maintain the view of further rate increases. On the contrary, the currency could come under some buying interest at the time of release, at least temporarily. For the Loonie to extend its latest slide without even correcting somewhat higher, we believe that a shift similar to the Fed’s may be needed, namely a “patent” and data dependent stance.

USD/CAD — Technical Outlook

After a strong bounce from its long-term upwards-moving trendline taken from the low of February 1st, 2018, USD/CAD continued traveling higher, testing the 1.3375 barrier once again. This is where, at the time of this report, the pair is getting held. Last time this area was tested on January 24th, from which the rate moved lower. Even though we are still bullish on USD/CAD from the near-term perspective, from the short-term one we may see a small correction to the downside before another leg of buying.

If the rate struggles to get above the 1.3375 barrier, USD/CAD could correct a bit lower and travel to the 1.3325 hurdle, which acted as a resistance on March 4th, February 14th and 8th. Just a few pips lower sits another potential support area, at 1.3310, which may also help support the rate from falling lower. If the bears are not able to push the pair below those levels, this is when the bulls make take control of the steering wheel again and push USD/CAD back up towards the 1.3375 barrier, a break of which may clear the path to the next possible resistance zone, at 1.3405, marked by the swing high of January 4th.

Alternatively, if USD/CAD travels below the 1.3310 hurdle, this might be seen as a warning sign for the bulls, as such a move may increase the pair’s chances of drifting further down. But in order to get more comfortable with the downside, we would like to see a break below the 1.3270 support zone, marked near the low of March 4th. This is when we may shift our short-term views towards the downside again, aiming for the 1.3240 obstacle first, which if broken could drag the rate further south, potentially targeting the 1.3180 level, or even the aforementioned long-term trendline.

As for the Rest of Today’s Events

The US ADP employment report for February is due to be released. Expectations are for the private sector to have gained 189k jobs, less than January’s 213k. This could raise bets that the NFP number, due out on Friday, may also come in below its prior stellar print of 304k. At the time of writing, the forecast for non-farm payrolls is at 180k. That said, we repeat once again that, even though the ADP is the only major gauge we have for the non-farm payrolls, the correlation between the two time-series at the time of the release (no revisions are taken into account) has been low in recent years. Taking into account data form January 2011, this correlation stands at 0.46. The US trade balance for December is also due to be released and expectations are for the nation’s trade deficit to have widened to USD 57.8bn from 49.3bn.

In Canada, apart from the BoC rate decision, we have the nation’s trade balance for December, the Labor Productivity index for Q4 and the Ivey PMI for February. The nation’s trade deficit is expected to have widened, while the Labor Productivity index is forecast to have slowed to +0.2% qoq from +0.3%. As for the Ivey PMI, it is anticipated to have risen to 55.1 from 54.7.

With regards to the energy market, we have the EIA (Energy Information Administration) weekly report on crude oil inventories. The forecast points to a 1.2mn barrels inventory build following a 8.7mn slide the week before. That said, bearing in mind that the API report, released yesterday, suggested a 7.0mn barrels increase, we view the risks surrounding the EIA forecast as tilted to the upside.

As for tonight, during the Asian morning Thursday, we have Australia’s trade balance and retail sales, both for January. The nation’s trade surplus is expected to have decreased, but retail sales are anticipated to have rebounded 0.3% mom after sliding 0.4% in December.

As for the speakers, we have four on today’s agenda: BoE MPC members Jon Cunliffe and Michael Saunders, while from the Fed, Cleveland President Loretta Mester and New York President John Williams will step up to the rostrum.

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