Currency Market Trend Analysis: September 25, 2017

By The Numbers: Your FX Week In Review

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Market Analysis

CAD/USD - Canadian Dollar

Opened last week at 0.8172 and closed at 0.8125.

The CAD fell by -0.57% against the USD, amid disappointing Canadian data and a US announcement of balance sheet normalization. BoC Governor Lane stated this past Monday that rate hikes were made in the context of strong exports and investments; he highlighting that exports would be carefully monitored in the wake of the recent rate hike, and would be a key determinant for future hikes. Markets interpreted this as a dovish statement, readjusting expectations for an October rate hike from 53% to 41%. Canadian CPI and retail sales figures came in below expectations (Annualized CPI: 1.4% vs. 1.5%, Retail sales up 0.2% vs. 0.4% expectation). These factors were partially counteracted by rising oil prices, traditionally a boon for the commodity-sensitive Loonie.

This will be a data-light week for the CAD, with BoC Governor Poloz’s Speech on Wednesday being the highlight. With few events on the calendar, markets are likely to look to turn their attention to the large volume US data releasing this week. Short-term movements will depend on how this US data fairs against expectations. While further short-term CAD consolidation is possible, the expectation of further Canadian rate hikes will likely provide long-term support. 

1. BoC Governor Poloz Speech: Wednesday, September 27^th

GBP/USD - British Pound

Opened last week at 1.3482 and closed at 1.3529.

The sterling appreciated by 0.35% against the greenback last week, despite Moody’s downgrade of the UK credit rating to Aa2. Moody’s sighted damage to the UK economy caused by Brexit, as well as insufficient Brexit negotiation progress reinforced by PM May’s detail-lacking speech on Friday. Though light on details, May’s speech did hint that that the UK could leave the EU before March 2019, followed by a 2-year transitionary period. In response, the EU Chief Brexit negotiator stated that Britain must “settle the accounts” and hasten negotiations, if they want a free trade deal in place when they exit the bloc.

This Brexit-related news was balanced in-part by a hawkish turn from the BoE; Andy Haldane, Chief Economist of the BoE hinted that UK interest rates by rise this year. This is of particular interested given Haldane’s dovish track-record. Mark Carney, the Governor of the BoE, displayed both dovish and hawkish sentiment in his speech. Carney highlighted that spare capacity is being absorbed more quickly than anticipated, but warned that there are “still considerable risks to the outlook”. 

Markets currently anticipate a BoE rate hike of 25bp at the November 2^nd meeting, reversing the previous rate cut. The sterling is still underperforming the average of the G7 economies, and inflation remains a concern. Additionally, rising interest rates in other developed countries may pressure the BoE to prematurely hasten their rate hike schedule. These factors, combined with Brexit-related concerns, have created a deep pessimism regarding the GBP. The last three weeks have seen a rapid appreciation of the GBP (totaling 4.52%); given the pace of these gain, consolidation may be in the cards this week. For gains to continue in the longer term, real rage growth must improve, and markets need to be reassured that Brexit will progress smoothly.

1. GDP (Q2): Wednesday, September 27^th    

2. BoE’s Governor Carney Speech: Thursday, September 28^th   

3. BoE’s Governor Carney Speech: Friday, September 29^th    

EUR/USD - European Central Bank Euro

Opened last week at 1.1937 and closed at 1.1970.

Over the past week, the Euro appreciated by 0.27% against the USD, boosted by strong PMI’s. If PMI and inflation data continue to come in strong, it could further hasten the ECB’s rate hike and QE tapering schedules. Markets currently expect that the ECB will announce, at their October meeting, that QE will continue at a reduced pace through the first half of 2018. Some speculate that this tapering will take place in three steps, each consisting of am EUR 20bn reduction. 

This past week saw a partial upset in the German election; Angela Merkel is still the Chancellor, but her bloc has lost its majority. The most likely outcome, is that Merkel will try to create a coalition with the Free Democrats and the Greens (this has been dubbed the “Jamaica Coalition”, due to the parties’ colors). It is estimated that this coalition will not be functional until at least December, creating some political uncertainty.

Despite this political upset, the Euro is still supported by relatively strong growth, and the expectation of QE tapering. This weeks’ movements will be heavily influenced by Draghi’s speech and Friday’s CPI figures. Inflation markers are being carefully monitored, as they will have a heavy influence on the magnitude and speed of the ECB’s QE tapering. A short-term consolidation is possible, as Merkel’s incomplete victory continues to be priced in, but the medium-term still looks bullish. 

1. ECB VP Vitor Constancio Speech: Monday, September 25^th     

2. ECB President Draghi Speech (EMU): Monday, September 25^th    

3. ECB Executive Board member Cœuré Speech: Monday, September 25^th    

4. ECB Executive Board member Praet Speech: Tuesday, September 26^th    

5. Economic Sentiment Indicator (EMU, Sep): Thursday, September 28^th    

6. Unemployment Change (Germany): Friday, September 29^th   

7. CPI (EMU, Sep): Friday, September 29^th  

8. ECB President Draghi Speech: Friday, September 29^th   

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?