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A boring day for North American equities kept stocks range-bound for the majority of yesterday’s session, with investors managing to turn the other cheek at some worse than expected economic data out of the US, choosing to instead focus on the Non-Farm Payroll data from the BLS to be released  on Friday.   Although the ADP employment report showed the amount of jobs created in the private sector fell short of estimates and the Non-Manufacturing PMI survey from ISM fell to 51.6 in February, the S&P managed to finish the day unchanged, while yields on the 10-year US note edged higher to 2.71%.

Currencies drifted sideways for the majority of yesterday’s trading day, although the Loonie grinded higher against the USD into the afternoon, helped higher as traders cut short bets on the Loonie after the Bank of Canada kept their interest rate statement fairly neutral compared to their last meeting in January.   The BoC continued to highlight the downside risks to inflation as CPI remains consistently below their target, while reiterating the next change in policy rate would be data dependent and could be either up or down.   Poloz and Co. removed language about the weakening of the Loonie that had been in the January statement, but also referenced the sluggish export growth and business investment that could potential hamper GDP growth in Q1 2014.   The statement was in-line with what we expected heading into the release, although the market seemed to embrace the fact that the BoC didn’t get outright dovish and signal a rate cut could be in the cards.   Also helping the Loonie was the worse than expected ADP jobs report from the US, increasing the chance the NFP  on Friday  will come in south of what analysts had originally forecast.

In our opinion USDCAD is still a buy on dips, as the outlook from the Bank of Canada hasn’t changed materially enough to suggest they are getting more optimistic on the Canadian economy.   From a fundamental perspective, the February job number will help with the assessment of the economic landscape in Canada; however, the areas in which the BoC is focused on (inflation and exports) have not improved enough to suggest they will be changing their neutral outlook in the near-term.   On the technical side of things, USDCAD is still grinding out a pennant formation, and if the bottom end of the support range holds, pennant formations are usually resolved to the upside in the same direction as they were started.   In short, the technical and fundamental picture are aligning to make us cautious on how much weakness south of 1.1000 is possible for USDCAD, with the 50-day moving average in the high-1.09s likely to act as strong support on any further downside moves.

The overnight Asian session saw USDJPY add to its gains this week, moving for a test of 103 on Yen weakness after Japan’s health ministry advisory committee said the nation’s pension plan (GIPF) doesn’t need a domestic bond focus and there is no need reason the fund should focus on passive investments.   While the statement contradicts any traditional pension management theory by only focusing on return instead of matching assets to liabilities, the change of asset allocation (if implemented) will allow the fund to purchase more stocks in the hope of chasing return.   The possibility of the GIPF purchasing more international assets in the plan sent the Yen lower, and helped the Nikkei post a 1.59% gain on its session.

Over in the UK, the Bank of England elected to keep its monetary policy unchanged as expected, holding both the interest rate and bond purchase program at current levels.   As there was no change to policy the BoE didn’t release a statement, so investors will be looking towards the minutes that will become available in a few weeks to see how the discussion on the Monetary Policy Committee unfolded.   On the domestic data side of things, house prices increased by 2.4% in the month of February, the fastest rise in prices in almost five years, reinforcing fears that bubbles may be emerging in the Britain’s housing industry.   At this point it seems as if it was a good decision for the BoE to end its support for mortgage lending at the end of last year, as it is becoming apparent strength in the housing market is no longer just contained to London.   The Pound is trading lower against the American dollar this morning, pivoting right around the 1.6700 handle.

Turning our attention to mainland Europe, the European Central Bank followed in the BoE’s footsteps and left interest rates unchanged at their policy meeting this morning.   With some analysts and traders expecting a small cut in the repo rate to try and make financing more attractive, the EUR went marginally higher against the USD, although there was little change in price action after the release of the statement.     It is clear traders were waiting to hear Mario Draghi’s press conference at  8:30EST  in order to determine if the ECB has changed their outlook in regards to the European economy and their struggle with disinflation.   There was still a possibility the Draghi announces an end to the sterilization of the SMP program at the presser; either way, EUR traders will have more actionable data to work with at the press conference, which is usually where the most volatility for EURUSD Is displayed.   As we write Draghi’s initial comments have failed to satisfy the EUR bears, upgrading the ECB’s 2014 GDP growth forecast, which has sent EURUSD to test the 1.3800 handle.

Heading into the North American open, equity futures are levitating higher ahead of the opening bell, gathering strength from a surging USDJPY and a better than expected initial jobless claims number.   The Loonie is pivoting around yesterday’s close in the low-1.10s against the USD, slightly stronger after building permits for the month of January increased by 8.5%, much better than the 1.0% that analysts had forecast.     Despite the Crimean parliament voting unanimously to enter the Russian Federation and to hold a referendum for its population on  March 16, market participants do not seem bothered about the news, with oil’s slide continuing as front-month WTI drops below $101/barrel.

Looking ahead for the remainder of the session, the Ivey PMI survey is due at  10:00EST, and is forecast to show purchasing managers are seeing a slightly slower expansion than was witnessed in January.   The two key sub-indices to make note of in the report will be employment and prices paid, as the employment index could give a good indication of what to expect  on Friday  in terms of new jobs created, and the prices paid will educate participants if inflation could be picking up with higher prices.

Make sure to speak with your dealing teams ahead of tomorrow’s employment numbers as we could be set for a volatile day for currencies.   In regards to the USD, markets have digested the ADP number and many analysts have begun to revise their NFP forecast lower, so there could be a bout of USD short-covering if the report shows over 150k new jobs were created in the American economy.   Weather has been a main consideration for the soft ADP number we saw yesterday, so it is likely that a reading in the 120-140k region does little move markets as participants are expecting the harsh weather to continue to weigh on hiring.   The colder than expected beginning to 2014 was also referenced in the Fed’s beige book yesterday, with unseasonably cold weather conditions being blamed for slow job creation and consumer demand.

North of the 49th  parallel will also receive statistics on the job situation for February, and analysts are expecting to see some continued positive job creation with the employment sector still trying to claw back the large destruction of jobs seen over the month of December.   As previously mentioned the Ivey PMI report will be a good indication to what could transpire  tomorrow, although reading in January saw employment contract compared to the previous month, which makes us believe that the job market in Canada still remains soft.   The use of limit orders around strong support levels in USDCAD will be a good strategy to use heading into tomorrow’s jobs day, as there will likely be strong corporate interest to purchase the American buck if the Canadian employment report comes out strong and the Loonie strengthens.

Further reading:

Draghi does not announce new measures – EUR/USD screams higher

ECB leaves all rates unchanged – EUR/USD jumps up and down