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Market watch - 23rd February 2018

The US Dollar had a volatile ride yesterday as it was strong overnight on Wednesday but fell broadly in early US trading as domestic equities pushed higher.  The Greenback recovered later yesterday when Dallas Fed President Robert Kaplan conveyed his view that three rate hikes this year were reasonable.  The Buck is on firmer footing in relatively tight ranges in its respective pairings with the Euro and Swissy, is softer against the Pound, and Yen, while USD made some gains versus the Aussie Dollar and Kiwi.  The Canadian Dollar was in tight ranges with the Greenback overnight, but was higher on better than anticipated Canadian CPI data.  That said, USDCAD is in relatively tight ranges since yesterday afternoon.
There is no domestic economic data on tap today, but there are three Fed speakers scheduled for today.    New York Fed President William Dudley is set to speak at 10:15am, Cleveland Fed President Loretta Mester at 1:30pm, and San Francisco Fed President John Williams is scheduled for 3:40pm as well.  As always, any Fed speaker can have influence on the market if they address monetary policy.

The Canadian Dollar strengthened to a three-day peak this morning on better than expected CPI MoM data after USDCAD hit a 59-day high yesterday morning on worse than anticipated Retail Sales MoM.  That said, USDCAD is in very tight ranges since yesterday afternoon.  Canadian headline CPI MoM came in at +0.7% compared to +0.4% forecast consensus, which was also much better than -0.4% for last month. The Core figure came in at +0.5% which was also an impressive improvement from -0.5% previous. The CAD capitalized on US Dollar weakness yesterday to quickly recover from its lows after the disappointing Retail Sales MoM figure, but USDCAD was largely sideways overnight ahead of the CPI release.  This is the first significant upward surprise to Canadian data since the much worse than expected CPI data on January 26.  That said, there was quite a long streak of positive Canadian data, and this key inflation release today could underpin the Bank of Canada’s hawkish perspective. 

The Euro was a bit softer versus the Buck this morning in tight ranges after rallying on higher US equities yesterday morning. Eurozone Final CPI YoY was exactly on target at 1.3% headline and 1.0% Core this morning.  While this is not negative, inflation in the EU is well under 2% which is not likely to push the European Central Bank (ECB) to tighten policy.  Indeed, the ECB Monetary Policy Meeting Accounts yesterday seemed to be clear that the ECB Governing Council was clearly concerned about soft inflation. The result of the SPD vote on the “Grand coalition” deal will be announced on the same date as the Italian election, March 4th, which certainly brings some potential political uncertainty in the near future.

Cable rose to a two-day peak this morning in tight ranges as the notion of rising rates in the UK is firming.  The Bank of England (BoE) seems to be getting more hawkish which is outweighing Brexit uncertainty at the moment.   Worse than expected Second Estimate UK GDP QoQ helped the Pound weaken, but broad USD weakness yesterday morning sent Cable higher.   On the Brexit front, there is broader support for a customs union with the EU which would be positive for the UK economy.  Prime Minister Theresa May and her team seem to be in climb down mode as news emerges that the idea of “managed divergence” for a new trade deal was rejected by the EU even before it was agreed Cabinet policy.  Also, the EU’s insistence that any EU citizen arriving in the UK before the end of the transition period can stay permanently if they wish appears to also being accepted after initially being rejected by the Prime Minister.  Labor leader Corbyn will outline his vision for Brexit next Monday, which seems to include a customs union, and PM May will follow with another Brexit speech next Friday.  BoE MPC Member Ramsden spoke today and stressed that Brexit is weighing down UK productivity but he did note that clarity on the future UK-EU trade relationship could significantly reduce uncertainty.

The Buck is trading higher versus the risk weighted Aussie Dollar and Kiwi this morning, with NZDUSD at a 9-day low as uncertainty remains a major factor in financial markets..  In Australia, Deputy Prime Minister Joyce has resigned after his philandering scandal although this event still maintains the government’s majority of 1 in parliament.  Interestingly, the Kiwi fell despite rising copper prices combined with better than expected Retail Sales QoQ data for New Zealand at 1.7% compared to 1.4%.
The Japanese Yen stayed firm with the Buck as the safe-haven was relatively strong across the board with uncertainty playing a big role in financial markets.  In addition, Japanese National Core CPI YoY was 0.1% better than expected at +0.9% yesterday evening.  The strong Yen reflects a degree of continued risk aversion.
The Swiss Franc is a touch softer versus the Dollar as it shadowed EURUSD, but remains much stronger than yesterday morning before the Buck sold off given its safe-haven status.

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