Currency Market Trend Analysis: September 18, 2017

By The Numbers: Your FX Week In Review

Currency Calendar

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Market Analysis

CAD/USD - Canadian Dollar

Opened last week at 0.8227 and closed at 0.8209.

The CAD fell -0.22% against the USD amid a data-light week that saw higher-than-expected US inflation. Markets continue to be hawkish towards the BoC, with a 50% probability of a December rate hike priced in; many see evidence that up to two additional rate hikes may follow in 2018. This week will continue to be data-light for the CAD, with markets looking towards the CPI/PPI data to be released Friday. Higher-than-expected CPI/PPI growth would further support a BoC rate hike in the near future. A negative surprise will likely have a larger impact than a positive one, as a near-future hike is already expected. This weeks’ movements will be influenced by the relative strength of the Canadian CPI/PPI figures, and the US Markit PMI’s. The CAD riding the tailwinds of strong data and impending rate hikes, while the USD is weighed down by low expectations for tax reform, rate hikes, and Yellen being reappointed. These factors give support to the CAD, but could be upset by rumors of a Trump tax reform plan release on the 25^th. Further confirmation of tax reform could initiate a small-scale CAD consolidation.

1. BoC Gov Council Member Lane Speech: Monday, September 18

2. CPI/PPI (Aug): Friday, September 22

GBP/USD - British Pound

Opened last week at 1.3196 and closed at 1.3575.

The sterling appreciated by 2.87% against the greenback last week, as UK inflation increased by 0.3% MoM, unemployment fell to a record low of 4.3%, and the BoE took a hawkish turn. Though inflation picked up, UK wage data disappointed, with growth steady at 2.1%, representing a loss in real wage growth. The timing and scale of BoE rate hikes and asset purchases continues to be a major source of speculation. The BoE stated that a majority of its members have judged that if the UK economy continues to follow projections, a withdrawal of monetary stimulus in the coming months will be appropriate. Markets have seen this as a hawkish statement, and have shortened their expected time horizon for a BoE rate hike, creating renewed support for the sterling. The GBP gained against both the USD and EUR this week, indicating that appreciation comes from GBP strength, not ongoing USD weakness. Politics also gave tailwinds to the GBP this past week, with UK lawmakers voting 326 to 290 in favor of a motion which would convert around 12,000 EU laws and regulations into domestic statute on the day the country leaves the bloc. The past two weeks have seen rapid gains for the cable, and it is possible that we may experience some consolidation this week. Movements will depend in part on Wednesday’s retail sales, which will provide further data on the growth of the UK economy. A positive surprise would indicate, ceteris paribus, an uptick in inflation, further supporting the GBP.

1. BoE’s Governor Carney speech: Monday, September 18

2. Retail Sales (Aug): Wednesday, September 20

3. Public Service Net Borrowing (Aug): Thursday, September 21 

EUR/USD - European Central Bank Euro

Opened last week at 1.2037 and closed at 1.1959.

Over the past week, the Euro depreciated by 0.65% against the USD, as EMU inflation came in below expectations by 0.1%. This downtick in inflation is largely attributed to the continued appreciation of the Euro. ECB President Draghi tried to calm markets, stating the ECB rule of thumb that a persistent 10% appreciation in the exchange rate equates to a 0.5% reduction in inflation. The ECB still plans to further discuss recalibration of its QE program at the October 26^th monetary policy meeting. Despite the inflation downtick, markets are pricing in a 40% likelihood of a December rate hike, up from 26% the previous week. This will be a busy week data-wise for the common currency, with several key speeches, CPI/PPI figures, and Markit PMI’s. Exchange movements will largely depend on the relative strength of this data against US PMI’s and the results of the Philadelphia Fed Manufacturing Survey. Slight appreciation is likely, with the EUR still supported by strong growth, as well as undervaluation against its USD purchasing power parity (1.25 by Big Max Index, 1.33 by OECD measurement). 

1. CPI (EMU, Aug): Monday, September 18   

2. ECB’s Lautenschläger speech: Monday, September 18

3. ZEW Survey – Economic Sentiment (EMU, Sep): Tuesday, September 19

5. ECB Non-monetary policy meeting: Wednesday, September 20

6. ECB President Draghi’s speech: Thursday, September 21  & September 22

7. Markit PMI’s (EMU, Sep): Friday, September 22 

About the Author

 Collin McAliley - Financial Analyst

Collin educates corporate clients on foreign currency markets lending industry best practices that enhance client knowledge and create specialized solutions that fit each business. Interested in having a custom international payments strategy or foreign exchange risk plan?