Week in FX Americas – Fed Minutes Shows Appetite for Rate Patience

The EUR/USD started the week in a now familiar strong USD tune after a strong employment number the week before. The main event for the pair was the release of the minutes from the FOMC meeting two weeks ago. The actual minutes were more dovish than originally expected even after Chair Yellen’s press conference. A strong NFP fueled the expectation that the Fed would have seen the recovery coming. After the minutes the USD lost ground against all majors with the EUR/USD almost reaching 1.28.

The USD was able to regain some ground on the back of global growth forecasts cuts by the IMF and soft data out of Germany. The Canadian employment data provided the surprise of the week after crushing expectations of 20,000 new jobs with an actual 74,100 print. Sceptics will point out that Statistics Canada has reportedly erroneously in the past, and the Australian Bureau of Statistics the most recent example of expectation beating figures being way offside. For the moment CAD was boosted by the mostly full time job creation.

Global Growth

The International Monetary Fund, the World Bank and OECD have all cut growth forecasts for 2014 and 2015. Here divergence amongst recovering economies is clear. US and the UK lead the developed world with Europe and Japan stuck at a standstill. Emerging markets continue to struggle trapped between diminishing foreign direct investment that is going back to safe havens as major central banks make their move and geopolitical events unfold diminishing appetite for riskier investments.

Commodities

Stunted global economic growth has reduced the demand for all commodities. Base metals along with precious have lost as supply is way ahead of demand. Oil has been hit by slowdown of China and remains to be seen if the OPEC discounts trigger a price war, specially after the US has increased its productions due to technological advances. There is a lot of supply in the market and refineries are looking for cheaper crude.

Next Week For Americas:

North America and Japan have a short trading week with Monday being a bank holiday. China kick starts events with the release of their trade numbers on the weekend. Most of the week will be dominated by price reports from the U.K, China and Canada. By Tuesday, investors get to gage business and economic sentiment from Australia and Germany. On Wednesday, Draghi is due to deliver opening remarks at the 7th Statistics Conference in Frankfurt. Volatility is often experienced during his speeches as traders attempt to decipher interest rate clues. The US delivers key sales numbers, weekly claims and rounds off the week with consumer sentiment and Fed Chair Yellen speaking in Boston.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* GBP Core Consumer Price Index

* EUR German ZEW Survey (Economic Sentiment)

* CNY Consumer Price Index

* USD Advance Retail Sales

* CAD Bank Canada Consumer Price Index Core

* USD U. of Michigan Confidence

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Bank of Canada To Focus on Monetary Policy Not Currency Rate

- Global economy has only partially recovered

– Loonie is still 40% higher than in the early 2000s

– Bank of Canada will not manipulate the currency exchange rate

The Bank of Canada Governor Stephen Poloz addressed a crowd of entrepreneurs earlier today. While at times the governor seemed to be giving a Central Banking 101 lecture he stressed the importance of a floating currency in the current adverse economic atmosphere. He also came across as a firm believer in avoiding the pitfalls that have befallen the policy makers that have relied heavily in forward guidance. In start contrast to his predecessor Mark Carney, now governor of the Bank of England, Poloz is not an “unreliable boyfriend”. Carney was called that by one of UK’s MPs after contradictory statements in the same week that had markets confused about the interest rate outlook of the nation. Poloz outlined the Canadian reality of an economy dependant on exports mainly to the US. A Recovery in the US will benefit its norther neighbor.

Bank of Canada Governor Stephen Poloz main points:

• Global economy has only partially recovered


• Loonie is still 40% higher than in the early 2000s


• Bank of Canada will not manipulate the currency exchange rate


• A floating loonie is the best strategy to achieve monetary policy objectives


• Canada’s economy is linked to commodity prices


• An export focus is needed to get Canada back on track

The Bank of Canada Governor Stephen Poloz reiterated the central bank’s mandate. To achieve its mandate the BoC needs to be focused on inflation.

The Governor’s what if scenario on cutting rates to keep the loonie at 65 cents in is a good educational tool but it is afforded the luxury of knowing the outcome of the 2008 crisis.

The data earlier today supports Governor Poloz speech to entrepreneurs. Canadian manufacturing exceeds expectations. Auto manufacturing leads the way with 11.6% MoM increase. Factory shipments rose 2.5% with auto again being a strong contributor to the surge. Both figures were well above expectations and tied into the BoC Governor’s speech.

The Governor is focusing on the positives of a weak loonie but outlines the challenges of central bank intervention as they could wreak havoc with inflation and ultimately job creation.

The main challenge facing Canada is its reliance on commodities and manufacturing. The first have decreased in price given the current global growth forecasts and only energy seems to have contributed to Canadian growth. Manufacturing surprised to the upside with auto being the major driver. After the harsh winter it will remain to be seen if the pace of recovery is sustainable but a lot depends on the US market.

You can read the full speech at the Bank of Canada website

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Fed Rate Expectation Keep Hammering EM Currencies

Emerging-market currencies weakened, led by the Turkish lira, and developing-nation stocks fell for a fourth day amid concern U.S. interest rates may rise faster than investors anticipated.

The lira and South African rand both depreciated 1.1 percent versus the dollar, while South Korea’s won decreased 0.8 percent. Benchmark equities gauges in Turkey and Egypt declined at least 1.1 percent. OAO Sberbank paced a 0.8 percent gain in Russian shares after European Union governments put on hold the imposition of new sanctions.

The MSCI Emerging Markets Index retreated 0.7 percent to 1,087.76 at 1:33 p.m. in London, poised for the longest losing streak since Aug. 8. Low volatility across financial markets may signal investors are underestimating how quickly the Federal Reserve will raise interest rates, according to researchers at the San Francisco Fed.

“The Turkish lira remains one of the most fragile currencies,” Martial Godet, the head of emerging-market equity and derivatives strategy at BNP Paribas SA in Paris, said by e-mail. “Forecasts of Turkey’s current-account deficit still stand among the highest in emerging markets.”

The lira weakened to 2.1990 per dollar, the lowest level since March 25 on a closing basis. Turkey’s current-account gap was 7.5 percent of gross domestic product at the end of the first quarter, the most among major emerging markets, according to data compiled by Bloomberg.

via Bloomberg

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