Last night there was a sudden rise in EUR/USD in early Asian trading. The reason is unclear. It may be volatility from the crypto-currency market affecting the fiat currency market. Bitcoin has been volatile this morning.
The VIX index – the so-called “fear gauge” that measures expected volatility in US stocks – has risen. In late December 2017 it hit a record low of 8.90. It had never traded with an 8-handle before. Early this year it wasn’t far off that at 8.92. On Friday 12thJanuary 2018 it closed at 10.17, a more normal level for recently. Last night it rose up to 12.41.
The biggest mover of the day was NZD. According to press reports, it fell ahead of today’s milk auction in anticipation of a poor result. In the event, milk prices rebounded – the average winning price rose 6% to $3,310 – but the NZD didn’t. The explanation could be just technical – the failure of NZD/USD to hold above 0.7300 may have brought in some momentum traders. In that case, there could be a rebound as the market digests the better-than-expected milk auction and looks forward to tonight’s China data.
CHF was the best-performing G10 currency even though Swiss National Bank President Thomas Jordan said that negative interest rates were still needed to limit the strength of the “still highly valued” currency. The gist of his comments was to explain and support the negative interest rate policy. Indeed he pointed out that “If we were to change the interest rates, the franc would appreciate.”
There are no major indicators or announcements due out during the European day.
On today’s agenda is the Bank of Canada rate decision. They’re widely expected to hike rates to 1.25% from 1.0%.
As you can see from the graph, early in the year expectations were leaning towards unchanged – the market put 59% odds on unchanged vs 41% on a hike. But on January 5th 2018 that suddenly flipped to 82% hike, 18% unchanged, after the unemployment rate suddenly plunged to 5.7%, the lowest since the current data series began in 1976. Bank of Canada Governor Stephen Poloz has said that interest rate decisions will depend on the data, and the market clearly thought that that bit of data made a rate hike more likely. Today the odds are 90%.
Other data too pointed to an improving economy. Housing starts remain on an uptrend, and the Bank of Canada’s Business Outlook Survey said that “capacity and labour pressures are becoming more apparent and are stimulating firms’ employment and investment plans,” which mean less slack in the economy and less need for an emergency level of rates.
The main reason to refrain from hiking would be concerns about the negotiations over the North American Free Trade Agreement (NAFTA). But here too things seem to be improving. Press reports say US President Donald Trump is “taking more seriously” the risks of withdrawing from the agreement, for two reasons: 1) the risk to his core supporters, many of whom are farmers who rely on exports, and 2) the risks to the stock market, which he views as a barometer of his popularity.
The key points to watch for are: 1) in the first paragraph, whether they repeat the December 2018’s statement that there is “considerable uncertainty, notably about geopolitical developments and trade policies,” and 2) any changes in the final assessment, which in December 2018 read “While higher interest rates will likely be required over time, Governing Council will continue to be cautious, guided by incoming data…” I think if they repeat both those lines, then CAD could fall after the announcement.
As for the US indicators, December 2018 industrial production is forecast to rise at a faster mom pace than in November 2018. That’s pretty good, considering that the November 2017 figures still reflected a rebound in production after the hurricanes (particularly in oil and gas extraction). It would show that output is expanding nicely, which should make the Federal Reserve more confident and boost the dollar.
(The capacity utilization figures that come out as part of the industrial production (IP) figures don’t seem to have any correlation with the subsequent movement in the dollar.)
The Fundamental Analysis is provided by Marshall Gittler an external service provider of an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.