Equity investors were jubilant yesterday, taking solace in the fact that Vladimir Putin’s press conference in response to the annexation of Crimea didn’t escalate the already tense geopolitical environment, instead assuring the western world that Russia had no intentions of expanding their territory past the Crimea region. Although sentiment was on the verge of getting dicey after violence erupted and a Ukrainian serviceman was killed in Crimea as a result of Russian soldiers storming a military base, market participants brushed this development under the rug on the hopes that cooler heads would prevail and the lack of blow-back from Russia in response the western sanctions would lead to a diplomatic resolution. The S&P built on its gains for the week, adding another 0.72%, while cash VIX shed another vol to finish at 14.5%, and the yield on the 10-year US treasury slid to 2.67% as investment flows moved to higher-yielding asset classes.
The Canadian dollar finished yesterday bruised and battered, ceding almost a full percent to its American counterpart after Bank of Canada Governor Poloz held a press conference and cited there would be some softness in GDP growth for Q1, and that there had been little evidence to suggest the economy has seen a boost to the export sector as a result of the weakening Loonie. The central bank head also reiterated the BoC would remain data dependant in regards to the future direction of interest rates, and although continued to hold a neutral stance, wouldn’t rule out a cut of interest rates. Though there was little new in terms of guidance from Poloz yesterday, the market was a little unprepared for the dovish slant towards Q1 growth, and seemed to have expected the hotter than forecast inflation print in January would have the BoC ruling out future interest rate cuts. However, with Poloz confirming inflation was expected to slide back towards the lower band of the BoC’s target in February, and the economic softness to start 2014 was not all due to weather-related issues, Loonie bears used the presser Q&A to establish fresh short positions, while speculative CAD longs scrambled to cover. The cumulative forces vaulted USDCAD into the 1.11s, where it held for the remainder of the North American session after Finance Minister Flaherty announced his resignation from cabinet to rejoin the private sector. While it had been widely expected another term for Flaherty would be a long-shot because of his health (despite Flaherty saying his decision today had nothing to do with his health), the loss of the fiscal hawk could be act as another weight on the Loonie over the next few sessions. Flaherty’s replacement is expected to be announced today, and according to CBC it will be Natural Resource Minister Joe Olivier who takes the helm as head of Finance.
The overnight Asian session was marred by weak macro developments that steered equities away from mimicking the performance seen earlier on Wall Street, with Japanese exports in February rising by less than expected, thereby leading to a larger than forecast trade deficit. This was the eighth miss out of the last nine months and 35th consecutive deficit, confirming that sluggish export growth remains an issue for the region. Bank of Japan board member Kiuchi expressed concern with the weak numbers, warning exports could continue to disappoint, and that further policy easing wouldn’t help the economy in the long-run. Kiuchi also stated that marginal costs of more easing could exceed the benefits, the first time we’ve heard comments from BoJ board members echoing the Federal Reserve’s rational for winding down their own QE program. While it is likely the BoJ will continue to inject more stimulus into its economy, and it’s too early to suggest a wind down of their asset purchase program, the cautious comments from Kiuchi echo our skepticism that the issues with the Japanese economy can’t be inflated away with endless stimulus. USDJPY recovered into the mid-101s throughout the Asian session, while the Nikkei finished higher by 0.36%.
Further west, reports showed the Bank of England Monetary Policy Committee all voted in favour of keeping policy unchanged at the last meeting, with policy makers seeing the persistent pound strength putting downward pressure on inflation, noting there is a risk of further appreciation as the economy continues to recover. On the economic data front, unemployment in the UK held steady at 7.2% over the month of January, in line with what economists had anticipated. The good news came in the form of jobless claims, with approximately 35k less people lining up for the dole, less than the -27.6k posted in January and better than the -25k that had been expected. The better than expected jobless claims have boosted the appeal of the pound to traders and investors, with Cable bouncing off its March lows to trade north of the 1.66 mark.
As we get set for the North American open, S&P equity futures are waffling around unchanged, but in slightly positive territory as we go to print. Oil is slightly weaker in early morning trade as front-month WTI holds under $100/barrel, while Copper is back to probing lows not seen since 2010 in the $2.93 region. The woes of the Canadian dollar continued overnight, with selling momentum picking up in Asia after the dovish steer from Poloz and the resignation of Flaherty had traders chasing USDCAD higher for a test of 1.12. Chatter of a large option barrier at 1.12 stemmed the Loonies losses and helped the commodity-linked currency recover some of its overnight weakness, firmly establishing the 1.12 area as the next major resistance level the pair will have to overcome. Wholesale Sales for the Canadian economy in January came in bang on estimates with a 0.8% increase, but the real driver for USDCAD for the balance of the day will be the conclusion of the two-day FOMC meeting.
Looking ahead to the remainder of the session, the big event financial markets will be awaiting is the FOMC interest rate decision, and the corresponding press conference from Janet Yellen. Given the comments heard from Fed Presidents and the chairwomen herself over the last few months, there is little to suggest the slowdown in Q1 growth will deter the Fed from reducing their monthly asset purchases by another $10bn, landing at $55bln per month. There will likely be some reference to the harsher than expected weather tempering consumer spending and economic production as of late, but that these factors are likely to abate in the coming months and activity should pick-up. In addition, with the unemployment rate hovering at 6.7% for February, it is also likely we see the Fed amend their forward guidance as members no longer find it a useful tool to dictate future levels of interest rates; instead looking to add some qualitative measures to telegraph their commitment to keep rates low until it is certain the economic recovery is well underway. The other main focus for the afternoon will be centered around the updated projections on unemployment, growth, and inflation from the FOMC, with the adjustments based on the last measurement driving price action of the USD. Holding growth projections steady while at the same time lowering unemployment forecasts would help underpin the big dollar; though should the FOMC decide to scale back their GDP forecasts while adding strong qualitative language to their forward guidance, an offer tone for the American unit would likely resonate through markets.
Have a chat with your dealing teams prior to the FOMC release, as there are few scenarios that could make for a volatile day trading the USD!
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