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Hawkish tones of FOMC voting members softened currencies

North American equities staged a low-volume rebound in yesterday’s session, managing to recoup the majority of the previous day’s losses as the S&P carved out a 1.08% increase after its worst day in four months.  The catalyst for the move other than a cheaper entry point for investors is somewhat foggy, with the small beat in retail sales (notwithstanding the prior revisions) trumping the relatively hawkish tones of FOMC voting members.

The Loonie waved its white-flag and retraced all of its gains from the previous day, coming under pressure after the Junior Finance Minister of Canada suggested the manufacturing sector was happy about the recent weakening of the CAD, and that the improved terms of trade for exports provided “remarkable opportunities.”  The reaffirmation from policy makers within the Canadian Government that they are comfortable with the fresh bout of Loonie softness has given traders and investors impetus to push USDCAD higher, relatively content that the official tone on the status of the CAD is unlikely to change in the coming months.  A renewed wave of DXY buying on Yen weakness as the overnight session kicked-off led to the EUR, GBP, and CAD all being hit with a surge of sell orders, pushing the USD basket further into the high-80s.

In news from Washington, the bill to restore emergency jobless claims throughout the end of 2014 was shot down by the Senate, as Majority Leader Harry Reid lost support from key Republicans by not being able to come up with a plan to offset the cost over a 10-year period.  The Senate is now back to the drawing board in order to try and pass a law before the end of the month when the emergency unemployment claims evaporate, affecting 1.4M Americans and potentially causing a distortion in the labour market statistics as people withdraw from the labour force and stop looking for work.  The key affect would be that the unemployment rate would continue to fall due to a slide in labour force participation, essentially raising more questions in regards to the Fed’s forward guidance on monetary policy and how that corresponds to the lower unemployment rate when the overall economy is still on uneven ground.

The World Bank set the tone for the overnight session by upwardly revising 2014 and 2015 growth forecasts for the global economy, but warning that emerging market growth could suffer as some excess liquidity from non-conventional monetary policy is drained from the system.  The bank upgraded its global growth forecast for 2014 to 3.2% from the previously estimated 3.0%, but downgraded growth in China to a flat y/o/y reading at 7.7% citing an unwind in investment and tightening in global financing.

Speaking of struggles with tighter lending conditions as Chinese policymakers charge ahead with reforms, new loans in the region for December came in much lower than expected, with only 482bn Yuan being lent on expectations of seeing credit granted increase to 570bn Yuan.  The decrease in new loans issues from the previous month highlights the ongoing slowdown in credit growth for the region, and flags the challenges in seeing China move materially past the 8% handle of growth moving forward.

Despite the slowdown in Chinese loan data, global equities are trading higher heading into the North American open, as traders instead focus on the upgraded growth forecasts from the World Bank.  The EUR never managed to recover from the offer tone it had displayed for the majority of the overnight session, taking another leg lower after statistics showed German economy only mustered 0.4% growth for the whole of 2013, lower than the 0.5% that had been forecast.  The lackluster growth for the largest economy in the common-currency bloc is a combination of struggles within the zone, but also a factor of a difficult external environment and a relatively strong EUR which capped exports to growth of only 0.6% for the year.  EURUSD has slipped almost a full figure this morning, heading south for a test of the 1.3600 handle as we get set for the North American cross.

Looking at the North American data on the docket today, the Empire State Manufacturing Index saw a sharp beat of expectations this morning, with the January reading coming in at 12.51 vs. the median forecast of 3.75 and up from the revised 2.22 print seen in December.  The measure of producer prices for the American economy was also released, and showed a slight uptick in price of finished goods and services sold by producers.  The 0.4% increase over the month of December was in line with analysts’ estimates, but up from the -0.1% registered in November, and gives a slight bias to an underpinning of prices in December based on stronger retail spending figures, which could flow through to tomorrow’s CPI reading.  S&P futures were little changed after the data releases, still clinging to a green tape with front month WTI continuing its comeback to trade north of $93/barrel.  After more weakness for the Loonie overnight, USDCAD has fallen back to the mid-1.09 region this morning, however the continued narrowing of yield spreads between short-term CDN and US debt does not bode well for the Canadian unit.  

After the reading on producer prices released earlier today, tomorrow brings the release of consumer prices for the American economy in the month of December, a measure which is expected to show a slight increase in the headline print on a m/o/m basis.  While the FOMC is indeed keeping an eye on the level of inflation in determining the optimal level of monetary policy, the actions by the Fed in December to begin the taper despite the lack of evidence its preferred measure of inflation (the core PCE deflator) was moving back towards its 2% target lessen the importance of the CPI reading, and unless there is a massive miss to the downside, it is unlikely that a reading coming in slightly around the median analyst estimate alters the near-term course of FOMC policy.  That being said, an unexpected print could bring with it a knee-jerk reaction from the markets as traders digest the numbers, so make sure to speak with your dealing teams in order to position ahead of the report, especially corporates that are naturally short-USD and looking for any sort of USD weakness to take-up new positions in the market.

Further reading:

EUR/USD Jan. 15 – Lower As Eurozone Trade Balance Misses Estimate

EUR/USD: Trading the Philadelphia Fed Manufacturing Index


Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.