The current 22% decline in EURUSD over the last ten months is comparable in magnitude to that of 2011-2012, 2009-2010 and 2008-2009. The recovery of inflation from its -0.6% lows in July 2009 to 1.9% in Nov 2010 took a little over 12 months, but the trough in core inflation at the time was at +1.3%, compared to the current +0.6%. Full charts & analysis.
The surprise on Wednesday wasn't so much that the Bank of Canada held rates but the hint that no more rate cuts are coming. The Canadian dollar was the top performer while the euro was caught in wave of US dollar buying. Australian retail sales and trade balance are next. 1 of our GBPUSD trades was stopped out, today's issued GBPCAD short 15 minutes ahead of the BoC decision hit its final target for 170 pips, while the remaining AUDNZD short further nears its final target.
The market was stubbornly pricing a 25% chance of a BOC cut ahead of the decision and USD/CAD hit a session high of 1.2542 just before the data but it was a quick fall afterwards. The BOC held rates at 0.75% and said inflation risks are now 'more balanced', which is a sign that cuts aren't coming. The pair fell as much as 130 pips before a minor bounce late.
Considerable real money that has fled Canada in the expectation of more rate cuts but with oil continuing to show resilience – including a $1 rally today despite an enormous build in EIA supply data – the window for a run to 1.30 has been closed, at least temporarily. The focus now is on the recent series of lows, which extend down to 1.2350.
One spot where there are no recent lows is EUR/USD. The pair fell through 1.1100 to an 11-year low on Wednesday, leaving very little support aside from the psychological 1.10. There have been signs of better growth in the Eurozone but the wave of QE still hasn't hit and that's the dominant factor.
At the same time, the US dollar was broadly stronger on the day. ADP employment was close to expectations but a solid revision to the previous month spared some dollar buying. In addition, ISM non-manufacturing data at 56.9 was slightly stronger than 56.5 expected. The employment component was also strong.
Later, the Beige Book was cautious and said wage pressures were only moderate but that couldn't stop the dollar. Cable was also caught in the crosshairs as it fell to 1.5263 from 1.5340 in US trading.
Looking ahead, the focus shifts to the Australian dollar with two important releases at 0030 GMT. January retail sales are expected up 0.4% and the trade deficit is expected at A$925m. The problem for Australian dollar bulls right now is that they can't seem to get a foothold. The RBA didn't spark a lasting bounce and neither did a squeeze higher on Wednesday.
|Retail Sales (JAN) (m/m)|
|0.2%||Mar 05 0:30|
|Trade Balance (JAN)|
|-436M||Mar 05 0:30|
The Canadian dollar jumps across the board after the Bank of Canada announced keeping rates unchanged at 0.75%, stating that “inflation is now more balanced” and current degree of policy stimulus remains “appropriate”. The first 4-day consecutive rally in crude oil since June also helped. Charts & analysis.
A drop in oil prices did little to stifle the Canadian economy in the second half of 2014. The first reading on Q4 GDP showed a 2.4% increase compared to 2.0% expected. Q3 was also revised to 3.2% from 2.8% and combined it put annual growth slightly ahead of the US at 2.5% for 2014.
The loonie initially jumped 80 pips on the report but later gave up more than half the gains. In part because two-thirds of the quarterly growth was due to inventory building. A late, broad recovery in the US dollar was also a factor.
The more important factor in the day ahead is the Bank of Canada. In mid-February the market was pricing a 75% chance of a cut but that's dwindled to 25% after a series of better data points including employment, retail sales and CPI. Poloz and Cote also dropped small hints about waiting on the sidelines while oil prices are about $3 higher than they were at the last meeting.
Overall, if Poloz had an doubt about a March rate cut a month ago, it would have been solidified by the latest economic numbers. With a large net short position in CAD, expect a bump on the announcement but not to the magnitude of the Aussie on Tuesday.
On that front, the AUD/USD bulls were likely disappointed with the lack of follow through following the RBA. The pair made a marginal fresh high in US trading but then sagged back down to 0.7810. A similar lack of follow through is likely in loonie trades if the BOC holds (barring any big moves in oil).
Before the BOC, it's a busy day for data in the Asia-Pacific region. It starts with Australian Q4 GDP at 0030 GMT. The consensus is for a 0.6% q/q rise in growth. But if the RBA could offer a lasting boost to the Aussie, why would a stale GDP report?
Next is a speech from Yellen at 0115 GMT. The topic is bank regulation and Yellen has never been known to go off script but a hint at removing 'patient' would send the dollar surging.Next is the Japan services PMI from Markit at 0135 GMT and the China services PMI from HSBC 10 minutes later. Neither are traditional market movers but traders are beginning to get skittish about China so we rule nothing out.
|Gross Domestic Product (Q4) (q/q)|
|0.7%||0.3%||Mar 04 0:30|
|Gross Domestic Product (Q4) (y/y)|
|2.6%||2.7%||Mar 04 0:30|
|Fed's Yellen Speech|
|Mar 04 1:15|
|Fed's Evans Speech|
|Mar 04 14:00|
|Fed's George Speech|
|Mar 04 18:00|
|Fed's Richard Fisher's speech|
|Mar 04 22:00|
|Markit PMI Composite (FEB)|
|54.4||Mar 04 14:45|
|Markit Services PMI (FEB)|
|54.2||Mar 04 14:45|
|ISM Non-Manufacturing PMI (FEB)|
|56.5||56.7||Mar 04 15:00|
|Markit Services PMI (FEB)|
|51.3||Mar 04 1:35|
|51.8||Mar 04 1:45|