Loonieiviews Weekly 19Jan18

The dumbing down of Davos

Michael O’Neill

FX Trade Strategist / www.Loonieviews.net



· Davos summit unlikely to spur major FX moves

· BoC hike sees massive two-way move, continued CAD uncertainty

· USD meltdown continues on gov’t shutdown fears

The gilded peaks of Davos will host the US’ brassy new president next week, but don’t expect more than a fleeting impact on FX. Photo: Leon Gutierrez / Shutterstock.com

By Michael O’Neill

The mission statement of the World Economic, colloquially known as “Davos”, says it is “committed to improving the state of the world.”

You have to wonder how that goal gets achieved when you glance at the guest list.

President Trump’s idea of improving the world appears to involve nuclear missiles, trade wars, and self-promotion. Canadian prime minister Justin Trudeau, meanwhile, is there to be the designated apologist, ready with a tearful apology for heart-wrenching injustices yet to be named.

French president Emmanuel Macron is the straight man of the trio, and the Eurozone’s default champion now that Angela Merkel’s political issues have marginalised her impact.

The Davos forum attracts a lot of attention from the media and generates a lot of headlines. These tend, however, to have the approximate shelf-life of a cold beer on a hot day, and FX markets will be wise to ignore them.

In Canada everything is coming up roses, but…

With the Bank of Canada’s Stephen Poloz, there is always a “but.” On Wednesday, the loonie went into convulsions upon the release of the monetary policy statement.

The first sentence in the statement read “the Bank of Canada today increased its target for the overnight rate to 1.25%,"; this sent USDCAD tumbling from 1.2410 to 1.2367.

The third sentence – "however, uncertainty surrounding the future of the North American Free Trade Agreement is clouding the economic outlook” – then launched USDCAD to 1.2532.

Economists and analysts are undecided as to whether the combined policy statement, monetary policy report, and press conference were dovish or hawkish.

Those believing it was a dovish rate hike pointed to the BoC’s claim that it would be “cautious” with additional rate increases because of the uncertainty surrounding the NAFTA negotiations.

The hawkish camp focused on the BoC modestly increasing growth forecasts, as well as the inclusion of “higher interest rates will likely be required over time” – a phrase lifted from the December statement.

Poloz said that future rate moves are “data-dependent, not NAFTA-dependent". Broad scepticism among market participants, however, has limited USDCAD downside.

The week ahead

Looking at next week’s major events, we of course have the World Economic Forum all week,. President Trump’s attendance ups the entertainment quotient exponentially with Trudeau set to be the “Beavis” to his “Butthead.”

On Tuesday we have a Bank of Japan policy meeting statement, Q4 outlook, and press conference. USDJPY started to slide last week after the BoJ “tweaked” its long-term and super-long-term bond buying. That led to assumptions of a soon-to-be-announced policy shift.

On Thursday, we will see the European Central Bank policy meeting statement and press conference. FX traders have lifted EURUSD in anticipation that the ECB will announce a shift in bond-buying policy. Many economists think not, but the ECB may sound more upbeat on the economy.

The week that was

Monday: The Martin Luther King holiday in the US didn’t deter US dollar sellers in Asia or Europe.

An upbeat-sounding BoJ governor Kuroda fuelled USDJPY selling while EURUSD was buoyed by fresh, hawkish ECB expectations. Sterling shone on the back of new “soft-Brexit” hopes following chatter that the Netherlands and Spain wanted a close relationship with the UK. The antipodeans rallied on broad US dollar weakness; USDCAD was rangebound ahead of the BoC Wednesday.

Tuesday: In Asia and Europe, Monday’s US dollar sellers were Tuesday’s dollar buyers. Renewed concerns about Merkel’s ability to form a government, and Japan’s finance minister expressing concern about sharp currency moves supported the greenback. Sentiment shifted in the US session, and the dollar sellers were back in the driver’s seat. Talk that the ECB would maintain its current dovish policy stance underpinned EURUSD. GBPUSD rallied on US dollar weakness and solid economic data; the US dollar finished with losses across the board.

Wednesday: The US dollar opened in New York with minor gains. USDJPY retreated after Kuroda repeated that policy would continue to be crafted to achieve inflation of 2.0%. AUDUSD declined despite strong domestic data. EURUSD was erratic. It jumped to 1.2322 in Asia and then dropped to 1.2209 in early Europe trading. Eurozone inflation data were ignored, but an ECB official wasn’t. He expressed some concern about the high level of the currency.


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Sterling dropped, in part, due to profit-taking. The NY session was frothy as EURUSD rallied to 1.2285 by mid-day and then sank to 1.2216 at the close. GBPUSD hit 1.3940 before retreating to 1.3954 at the end of the day. The Bank of Canada triggered a 1.2367-1.2532 range after a dovish rate hike because of Nafta concerns. Wall Street indices soared. The Dow Jones Industrial Average closed at 26,115. Apple announced plans that included the repatriation of $250 billion

Thursday: AUDUSD couldn’t hang on to gains after a better than expected employment report. However, the downside was limited, and it traded in a 0.7980-0.8000 range until the New York close. USDJPY bounced wildly inside a 110.60-111.40 band, closing in New York at 111.05. Prices were buffeted by US government shutdown fears, higher Treasury yields, and mixed US data. Broad US dollar weakness lifted the antipodean currencies to the highest levels of the week by the close in New York. EURUSD consolidated Asia gains during the US session while Sterling ticked steadily higher.

Friday: The US dollar traded on the defensive overnight and in New York on heightened concerns that the US government would shutdown on Saturday.

— Edited by Michael McKenna

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Categories FX, Foreign Exchange, Currency, Canadian Dollar

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