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USD strengthened after positive Empire Manufacturing reading

The USD had a stellar session yesterday, gaining against the majors as market participants get more comfortable with the notion that the Fed’s tapering is likely to persist.  A strong Empire Manufacturing reading and a relatively upbeat Fed Beige Book allowed the DXY to hold its gains around the 81 handle, while the EUR remained pinned pivoting around the 1.3600 level.

Policy makers from across the Atlantic were vocal throughout the session, with the Deputy Governor from the Bank of France saying the EUR was surprisingly high considering the growth differentials between the Eurozone and the United States, while IMF head Christine Lagarde chimed in and added that monetary policy in the common-currency zone had room to get more accommodative.  The Loonie was an outperformer on the crosses for the day, managing to hold its ground and essentially trade flat against the USD for the session, but put in some stout gains against both the EUR and GBP.  While we envision there could be further losses for the EURCAD pair to retrace some of the strong gains seen in January, the fundamental positioning between the economies in the UK and Canada is not one that suggests any persistent weakness in the GBPCAD pair to come, and corporates that are naturally short GBP might want to think about taking advantage of any CAD strength over the next few sessions.

A rough overnight session for the Aussie has the Antipodean currency at its lowest levels in three years against the USD, tumbling after the December jobs report showed that the economy shed almost 32k jobs, a wide miss on expectations of 10k new jobs being created.  Although the unemployment rate remained at 5.8%, the majority of the job losses were in the full-time sector, with the participation rate slumping to almost an eight-month low at 64.6%.  Over the course of 2013, the Australian economy purged 67.5k full-time jobs, increasing traders bets that the Reserve Bank of Australia would continue their easing bias towards monetary policy as 2014 unfolds; the probability of an interest rate cut to 2.25% at the next RBA meeting in February increased to almost 25%, sending the Aussie cratering against the USD to trade south of the 0.88 handle.

European equities are mixed midway through their session, with little in the way of economic data to really move the needle.  Inflation for the Eurozone came in as expected for the month of December, continuing to tread water at the 0.8% mark on a y/o/y basis.  From the language of policy makers at the ECB, it appears as if inflation will have to take another leg lower before the central bank decides to step in and take further action to stimulate prices and the economy, so with inflation holding steady today the EUR has also managed to cling to the 1.3600 level.

Heading into the North American open, inflation numbers for the American economy in December were released earlier this morning, coming out bang on the median analyst estimate.  The all items index printed at 1.5% when compared to 12 months prior, the smallest gain in prices for the last three years despite the 0.3% m/o/m rise in December that was the sharpest increase in the past six months.  Equity futures were little changed on the news, as it does little to really alter market participants perspectives as to how the Fed will approach is tapering program, with S&P futures continue to trade soggy ahead of the opening bell and looking set to give back some of the previous gains seen over the past two days.

On the Canadian economic data front, demand for domestic securities from foreign parties increased over the month of November, with foreign investors adding $8.7bn of Canadian securities to their portfolios.  The better investment numbers were up from the $4.4bn added in October, and marks the fifth straight month that investors added to their Canadian holdings.  Almost half of the increase was seen in the Canadian bond market, with investors pushing demand for Canadian debt to a 10-month high.  The robust foreign security demand and an unchanged US CPI print has the Loonie on slightly firmer ground from yesterday, with USDCAD grinding into the low-1.09s.  Decent support for the pair has been touted at the psychological level of 1.0900, before the pair sets it’s sight on the mid-1.08 level corresponding with the 38.2% fib retracement level from the most recent rally in USDCAD.

Looking ahead to tomorrow, Building Permits and Housing Starts for the month of December in the US are set to hit the wires, with both readings expected by analysts to show some softness after the marginal upside surprises in November.  The forecasts are for both numbers to hang around the 1M mark on an annualized basis, flattening out from the upswing into the end of 2013.  Despite the lack of hiring in December, reports showed consumer spending did not suffer as a result, so we’ll see if that optimism flows through into the housing market.  That being said, the San Francisco area saw home sales fall by 12.7% in December from a year ago, so we’ll have to see if this softness on the West Coast permeates through the rest of the United States.  Regardless, the recent strength of the USD could be in jeopardy if we see weaker than forecast data on the housing industry, but unless we see a drastic miss, anything coming in around the 1M mark in housing starts and permits won’t deter the Fed from continuing to pull back on their asset purchases.

Further reading:

What’s more important? Fundamentals or price?

EUR/USD Jan. 16 – Steady As Euro CPI Matches Forecast


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.