Currency Market Trend Analysis: December 12, 2017

By The Numbers: Your FX Week In Review

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Market Analysis

CAD/USD - Canadian Dollar

The CAD opened last week at 0.7885 and closed at 0.7786 - depreciating against the USD by 1.25% as crude faltered and the markets reacted to a dovish BoC statement.

Early in the week, Canadian employment, trade deficit, and GDP figures surprised to the upside. This data was balanced by mixed market reactions to the extension of OPEC supply cuts until the end of 2018. The cuts will produce a supply-driven price hike which will increase the viability of US shale. In the medium-term the resulting shale-driven supply increase could drive prices back up.

As expected, the BoC did not hike interest rates this month. Expanding upon this decision, the BoC stated that higher interest rates will likely be required over time, but that they will be cautious in making these hikes - with wage growth and inflation being key drivers. This statement was interpreted as dovish, and triggered a CAD selloff.

Many analysts believe that the BoC will wait until April to hike rates. The BoC’s financial stability report noted that household debt remains a key weakness. By April, the effects of the two recent rate hikes on household debt will be clearer and NAFTA renegotiations will have concluded. With a more complete economic picture and NAFTA unknows resolved, the BoC will be in a more favorable position to hike rates.

With a relatively light schedule on the Canadian side, and the US interest rate already priced in, markets will look to US macroeconomic data for impetus. 

1. BoC Governor Poloz Speech: Friday, December 15^th      

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GBP/USD - British Pound

The sterling opened last week at 1.3472 and closed at 1.3386 - depreciating by 0.64% and retracing some of last weeks’ gains, despite Brexit clearing stage one of negotiations.

Early in the week, the GBP took a hard dive, as a BBC article stated that a Brexit deal should not be expected from May’s talks on the 4^th.  Compounding this article, May stated that the divorce payment was not truly locked in, as it depends upon a broader agreement being reached. The breakdown of talks on the 4^th was credited to a last-minute phone call regarding the Irish border. Political risk heightened further with a failed assassination plot against May by an Islamic terrorist, and reports of a Cabinet revolt led by Boris Johnson and Michael Gove.

The Brexit outlook softened greatly throughout the rest of the week. An EU representative stated that they are “only a few billion Euros apart on the financial settlement”. Soon thereafter a deal was reached on the future role of the European Court of Justice in British legal cases post-Brexit, and reports emerged that a deal on the Irish border was hours away. On Friday a deal was struck, enshrining special rights for four million EU citizens, defining a 40-60bn Euro divorce payment from the UK to the EU, and paving the way for stage two of negotiations. Although this is a crucial step forward for Brexit, the next phase of negotiations may prove even more contentious, and EU officials have stated that is it not realistic to expect a UK trade deal by March 2019. Still, the chances of a hard Brexit have lessened, and market sentiment for the GBP is likely to improve.

This week’s movements will be data-driven, with a host of macroeconomic data on the calendar. The PPI/CPI will be of particular note, with many looking for improvements in the negative wage growth outlook. 

1. GDP (Nov): Tuesday, December 12^th   

2. PPI/CPI (Nov): Tuesday, December 12^th   

3. RICS Housing Price Balance (Nov): Thursday, December 14^th   

4. Retail Sales (Nov): Thursday, December 14^th   

5. BoE Interest Rate Decision: Thursday, December 14^th    

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EUR/USD - European Central Bank Euro

The Euro opened last week at 1.1897 and closed at 1.1771 - depreciating by 1.05%, as German coalition talks stalled, and data came in below expectations. 

Eurozone data disappointed this week, with EZ PPI coming in mixed, and Sentix investors’ confidence missing the mark (31.1 vs. expectation of 34.0). Despite favorable weather and reports of cost and wage pressures, retail sales disappointed and the CPI did not accelerate. These data may be payback for a relatively strong October, rather than a systemic slowdown.

This will be a very data-heavy week for the common currency, with data due in on inflation, production, and trade, as well as Markit PMIs, and the ECB interest rate decision and monetary policy statement. The Euro may also gain supports from the recent graduation of Brexit negotiations from stage one to stage two.

1. ZEW Survey (EMU): Tuesday, December 12^th       

2. ECB President Draghi’s Speech: Tuesday, December 12^th      

3. Index of Consumer Prices (Nov, Germany): Wednesday, December 13^th          

4. Industrial Production (Oct, EMU): Wednesday, December 13^th         

5. CPI (Nov, France): Thursday, December 14^th         

6. Markit PMIs (EMU): Thursday, December 14^th         

7. ECB Interest Rate Decision: Thursday, December 14^th         

8. ECB Monetary Policy Statement: Thursday, December 14^th         

9. Trade Balance: Friday, December 15^th                      

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About the Author

 Collin McAliley - Business Operations 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?