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With little in the way of  US economic data to distract market participants, the severity of the Loonie’s slide yesterday was the main focus for currency traders, as the slightly more dovish Bank of Canada gave CAD bears the confirmation required to push the currency to fresh lows not seen since mid-2009.   While the BoC maintained their neutrality in regards to how the next movement on interest rates would unfold, the central bank downgraded their inflation forecasts for the next two years, while removing a key sentence in the rate statement which subscribed “the substantial monetary policy stimulus currently in place remains appropriate.”   The BoC also highlighted that while the recent depreciation of the CAD would provide support to the export sector, the Loonie remained strong and would continue to pose competitive challenges for the non-resource based export sector.

The dovish slant to the monetary policy report was by no means a surprise given the recent deterioration in domestic data, and gave traders the green light to go ahead and pound the sell button further as the BoC made it clear it was not unhappy with the current price action of USDCAD.   The updated assessment of the Canadian economy feeds into our narrative that the Loonie has further to slide as 2014 unfolds, although the speed of the depreciation is likely to run out of steam when USDCAD hones in around the 1.15 level, with the Loonie managing to claw back some of the losses as the year comes to a close and a budding recovery in the USD helps prop up demand in the Canadian economy.

The woes for the Loonie continued overnight, with a fresh surge of selling around the Asian open after the Flash HSBC Chinese PMI hit a 6-month low for January at 49.6, signaling contraction from the previous month.   The disappointing print on the back of softening domestic demand conditions in China has the commodity-currency bloc on its heels, indicating the respective export-based resources economies of Canada and Australia will continue to slog along should the recovery in China stumble.

The risk-off sentiment in Asia didn’t end with the challenging Chinese PMI print, but accelerated as a managing director at the IMF made a comment that they did not see the need for additional monetary accommodation in Japan if steady progress was being made towards the 2% inflation target.   The Yen quickly rallied off the headlines and sent USDJPY into the low-104s, while the Nikkei stumbled and ended up shedding just shy of 0.8% on its session.

European equities are struggling with the depressed market sentiment on worries over less stimulus from Japan in the future, with the major bourses stuck in the red despite a set of better than expected PMI readings.   The manufacturing sector showed renewed vigor across the common-currency bloc, with the diffusion indices in Germany and France beating expectations and printing at 56.3 and 48.8 respectively.   The survey of purchasing managers in the services sectors also showed some surprising strength, as promising French numbers managed to push the aggregate reading for the zone up to 51.9 from the previous print in December of 51.0.   The bright picture painted by purchasing managers across the Eurozone puts the outlook for the region on firm ground to begin 2014, and has traders and investors adding exposure to the EUR this morning hoping that Draghi and the ECB have been right so far to hold off on any additional stimulus to help boost consumer prices.   In FX markets the EUR has been the notable outperformer overnight, causing EURUSD to rally into the mid-1.36s, which has the knock-on effect of putting pressure on the DXY as the USD-index slips 0.6%.

The Loonie is center stage again this morning, with retail sales for the month of November just being released.   After Poloz and the BoC emphasized competition in the retail sector as one of the main reasons for sluggish prices, consumer spending numbers were closely watched to see if retail traffic could pull through and cauterize some of the Loonie’s gushing wounds.   Expectations had been for the headline reading to see a 0.2% increase from October, but helped by a sharp increase in auto sales, the print came in with a 0.6% increase.   The gain for November marked the fourth increase in the last five months, reassuring markets that domestic consumer demand is still chugging along swimmingly, which has helped the CAD gain back some of its overnight losses.   After touching up into the high-1.11s overnight, the stronger than expected retail sales number has spurred a retracement into the low-1.11s for USDCAD on a bout of Loonie buying.  The CAD not doubt is fighting an uphill battle at this point, but should a few domestic data points come in stronger than expected over the next few weeks, we could see another period of consolidation before USDCAD looks to move higher.

Heading into the North American open, US equity futures are trading heavy in response to the Japanese stimulus headlines overnight, little changed after jobless claims came in essentially unchanged from the prior week.   Light-sweet crude has yet to find anything to take the wind out of its sails, with front-month WTI trading over $97/barrel as the southern leg of the Keystone XL began operation yesterday.

A Canadian data-heavy latter half of the week is set to continue  tomorrow, with consumer price data the main economic release on the docket.   With the recent downgrade of inflation forecasts from the BoC yesterday, the pace of increase in the CPI basket will continue to remain one of the main data points feeding into to traders assessment of interest rate movements in Canada.   The core and headline are both forecast to increase to 1.3% on a y/o/y basis for December, with both reading projected to show some softness from the previous month.   With sentiment in the market so negative towards the CAD right now, the shorts must be careful of quick unwinds on any signs of positive data surprises, although it is likely any bouts of CAD strength will be quickly sold, as corporates naturally short-USD look to cover short-term requirements.

Further reading:

US existing home sales slightly disappoint at 4.87 million

Canadian retail sales shine – CAD recovers