Financial markets traded with a more subdued tone yesterday, taking a breather from the wild price swings seen earlier in the week. A mixed bag of economic data that saw a slight beat in Non-Manufacturing PMI and a slight miss on ADP employment, kept stocks within a well-defined range for most of the North American session, although there was notable weight to the tape throughout the day. In addition to the mixed economic data, Richmond Fed President Lacker and Chicago Fed President Evans were on the wires, both echoing that the Fed faced a fairly high hurdle in terms of what would have to transpire in order to shake the Fed from cutting $10bn off their asset purchases at each subsequent FOMC meeting. While Lacker and Evans don’t vote on FOMC policy this year, it confirms our view that the prevailing sentiment within the Fed is to have the QE program wrapped up by end of year, and that the situation will have to get much worse on both a global and domestic perspective in order for the Fed to deviate from its tapering schedule. Therefore, with the market essentially discounting the wind-down of QE, we see equities continuing to trade in line with how US-centric data evolves, and the correlation between positive US equity performance and the Loonie breaking down as yields in the US continue their gradual rise.
Price action in overnight trade stabilized somewhat, with the Nikkei ending essentially flat after a lack of economic data failed to push Asian equities strongly in any one direction. USDJPY kept within a fairly tight range overnight, pivoting around the mid-101s and continues to remain an important driver of overall risk sentiment as the ‘carry-trade’ leader. The AUD is putting in another strong performance, with the commodity-linked currency trying to make a run at the 0.9000 handle against the USD after a sharp jump in demand for Australian exports pushed the country’s trade balance into a surplus for the first time in two years. Fueled by a weaker Aussie and a bumper harvest in Western Australia, exports increased by 4% in December, helping boost the trade balance to a surplus of $0.47bn. The better than expected export figures have helped the Aussie maintain its positive upward momentum since Tuesday morning’s rate statement, with the covering of AUDUSD shorts pushing the pair into the high-0.89s.
Central bank action from across the Atlantic unfolded broadly as expected this morning, with both the Bank of England and European Central Bank leaving their respective monetary policies unchanged. The Bank of England doesn’t release a statement where there is no change so there was little language from the bank to decipher, although next week we will see their quarterly inflation report with updated economic predictions. The updated forecasts on inflation and unemployment levels will provide further insight into how the BoE sees the recovery unfolding, and what the implications could be in terms of their forward guidance. GBPUSD is trading relatively flat in the high 1.62s against the USD after the announcement, but Sterling traders will want to mark their calendars for February 12 and the release of the BoE’s inflation report.
In-line with expectations Mario Draghi and the ECB refrained from tinkering with interest rates, keeping all three major rates unchanged. The EUR initially spiked higher on the news of policy inaction, but quickly pared those gains in a knee-jerk fashion as traders positioned ahead of Draghi’s press conference. Although the decision on interest rates have come and gone without any surprise, the most volatility is usually experienced during Draghi’s press conference, where there is still the potential for Draghi to announce an end to the SMP sterilization, or even outline to a greater extent how the ECB might go about purchasing ABS from banks as a policy measure to boost credit availability. EURUSD was having a hard time keeping its head above 1.3500 ahead of Draghi taking the podium, but managed to recoup its earlier losses after Draghi hasn’t varied much from previous ECB rhetoric, promising to do whatever is required if the medium-term outlook for inflation deteriorates or short-term interest rates squeeze higher and get propagated forward to longer-term rates. The inaction and lack of enhanced guidance from Draghi has EUR shorts disappointed, covering positions and driving EURUSD into the high-1.35s before the opening bell in North America.
Heading into the North American open, Loonie traders were intently focused on the domestic export data that just crossed the wires. USDCAD had grinded lower overnight on the strength of the commodity-bloc, but the Loonie’s gains were obliterated after the December trade balance showed a larger deficit then had been expected, with exports remaining essentially flat from November while imports grew at a fast clip than forecast. The main culprit leading to the disappoint figure was higher prices for energy products, most likely resulting from a weaker Loonie, as volumes of imports actually declined on a m/o/m basis. Unfortunately the weakening Loonie didn’t flow through to expects as much as the Bank of Canada would have liked, and as a result, the trade deficit grew to $1.7bn. USDCAD ripped higher above the 1.11 handle after the release, but we would further gains to be limited ahead of the Ivey PMI figure due out at 10:00am EST.
S&P equity futures are putting in some constructive gains before the opening bell, telegraphing a positive start to the North American session when the bell rings. Hydrocarbons are also levitating in early morning trade, with front-month WTI above $98/barrel while Brent moves past $107/barrel. Not wanting to be left out of the commodity rally, Gold is also moving higher, with the yellow metal garnering bids north of $1,260/ounce.
Looking ahead to tomorrow, the long-awaited statistics on job creation for January in the US and Canada are both due to be released. Expectations are for the employment situation south of the 49th parallel to vastly improve over what we saw in December, with the American economy set to add 185k jobs, up from the 74k that were created in December. While we are likely to see the outcome of this number drive overall market sentiment for the day, with the dominant view on the Fed conducive to the continued paring of bond purchases, we’ll have to see a material deviation from expectation to drastically change the current narrative.
Where there is potential for Loonie traders to witness higher volatility would be on the Canadian employment side of things, where analysts are forecasting half of the jobs lost in December to be recouped in January, bringing the unemployment rate down to 7.1%. After a relatively stable few employment reports where the actual readings didn’t vary much from what analysts had expected, December’s horrible report shocked traders, and sent more Loonie longs rushing for the exits. If we see a return to large deviations around the median analyst estimate like we did earlier in the year, there’s the potential to see quite the rocky session for USDCAD. For example, if we have an equivalent deviation to what was witnessed in December, but to the upside, the elevated short position could be vulnerable to a sharp correction as the weaker positions scramble to cover. Make sure to touch base with your dealing teams ahead of the data releases, as limit orders and hedging strategies can help smooth out some of the volatility surrounding the economic data.
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