Loonie at the Mercy of Ivey

Update: Canadian Ivey PMI surprised expectations, printing 64.1 on a seasonally adjusted basis last month. The better than expected release may be a sign that the undelying economic trend is not as weak as a string of disappointing real indicators (employment and GDP) have suggested in recent weeks.

The Canadian Government plans to issue a US dollar denominated global bond later this week (no details of size, duration, or coupon just yet). The issue will “provide funds to supplement and diversify Canadian foreign exchange reserves and meet foreign currency requirements” to supplement lending by the IMF.” It will be the governments first offering in three years and is expected to be over subscribed.

Given the markets lack of focus on fundamentals lately, the loonie by all accounts, for a growth sensitive currency is holding its own outright, but for how long? The Loonie has been riding on the coattails of a strong NFP report (+243k and +8.3%) and ignoring its own softer domestic job output print (+2.3k and +7.6%) that supports BoC Carney dovish tone and economic concerns of late.

The market is assuming that the Canadian economy should increasingly benefit as its largest trading partner down south recovers from the recession. Investors are beginning to believe that any positive US data should keep the pressure on for a lower USD/CAD (0.9971). All this from one day out when the market was wondering if the worlds largest economy was slipping back into recession. One stellar NFP print does not make a trend, but it is a start!

Currently, the dollars price continues to lift off last weeks low print of 0.9928. According to the technicals, the daily charts indicate that the loonie is overbought, but selling outright dollar strength seems to remain the order of the day whilst below the four-week trend line (1.0015), risk is lower to 0.9780.

The AUD along with its antipodean partner bore the weight of risk aversion moves in the O/N session. The Aussie fell from near a six-month high after a government report showed retail spending unexpectedly declined, adding to the case for the RBA to lower rates tomorrow. Retail sales declined last month (0.1%), the first drop in six-months, as consumers spent less at grocers and on dining out in an economy where employment growth stalled last year. Almost everyone expects a-25bps cut on Wednesday, in line with consensus. The OIS market is pricing a 75% chance of a cut. It seems that the market will be extremely surprised if the RBA does not implement a third successive rate cut, taking the base rate down to +4%.

Will it weaken the AUD? Last week the currency managed to forge ahead and print a six-month high outright after NFP and record another record against the beleaguered EUR despite a rate cut on the sidelines. The currency remains the worlds favorite growth proxy. Domestic data warrants an ease (retail, inflation and a softer job market). Even because of international demand, a cut is warranted. However, because of the country’s commodity boom persisting coupled with more frequent international economic positive reporting (USA, China etc) could be a reason for Governor Stevens to stall this time around. It’s slim and a thin argument. In hindsight, the AUD has been much more tightly correlated with “swings in global risk appetite and asset prices than it has domestic economic developments and RBA policy.”

The AUD strength, particularly against the EUR, is very likely to survive any rate cut, especially if Governor Stevens and his policy makers give a hint that the end of the current easing cycle is drawing to an end.

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Land of the Rising Yen

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