Week End Position Squaring Forces a Pause
Eventually, we all knew the USD would consolidate and begin to show signs of life again. Obviously, it was just a matter of time, and of how far the big dollar could fall, before that eventuality came to pass. Now traders have begun to take a sober second look at the market’s position ahead of the weekend, and have chosen to book profits and bolster the reserves in their respective war chests so as to be best prepared for whatever the market brings us next week. Most asset classes have seen a profit-taking inspired retracement from the levels achieved this week, and the dollar index is trading up by more than 0.60%.
Equities in Asia turned lower overnight, with the Hang Seng shedding 2.26% of its value while the Nikkei limped to deliver a 0.33% decline at the close. The FTSE in London has traded roughly 0.4% lower as we head towards the close, while the CAC in Paris and DAX in Frankfurt look to at least finish the day in the black, though not by very much. Equity futures are pointing to a slightly positive opening in New York, while Toronto looks to be in the mood to see a turn lower. This would most likely be because commodities have softened, having this week’s outsized rally in hard assets as a hedge against long-term inflation.
Though the CRB index is still treading water on the day, we’ve seen a significant pull back in gold and energy overnight. Concerned about long-term price pressures amid what is largely expected to be a wave of US-style quantitative easing in Canada, the UK, Switzerland, and Japan, if not more nations, traders rushed into hard assets as a store of value and hedge against the decaying purchasing power of currencies. Though commodities may very well continue to bounce going forward, the gains will likely be capped by the fact that the various QE measures being undertaken by some of the world’s leading central banks are being employed specifically because global economic growth is still in a tailspin. It’s hard, then, to imagine a scenario in which demand for commodities, as productive inputs, could grow aggressively in such an environment. And at the end of the day, the motivation to establish a hedge against inflation will likely not outstrip the rationale for shorting economic production (and therefore commodities, as a significant input into that process) in the immediate-term.
As has been the case of late, the loonie is now lagging its other second-tier commodity cousins of Australia, New Zealand, and Norway. Though Norway is perhaps even more energy dependent than Canada and therefore susceptible to an energy price decline from today’s levels, this is where the market’s expectation of further QE measures on the part of the BOC will weigh on the loonie. All else being equal, in a volatile commodity price environment, traders who want to take a flier on a commodity-linked currency will take their chances with the Antipodeans or Nokkie, thank you very much. This is due to the fact that at least their central banks aren’t likely to be engaging on a policy path that will lead to printing money to beat sixty, with all of its inflationary and currency-defeating effects. Though we still like the Canadian dollar’s long-term prospects, a continued retracement and significant period of consolidation is likely to take place before the next leg lower in USDCAD.
A Light Data Day in NA to Close the Week
The US data calendar will take a breather on Friday, with no major economic releases to provide fresh incentives to the market–though most of us are suffering from a serious case of indigestion in terms of trying to make sense of all of the competing signals that have been sent in the last few sessions. Canada, however, has already seen a slight improvement in retail sales in January after December’s rather disastrous result. Consumers opened their wallets and spent 1.3% more than the previous month in January versus economists’ expectations of a 0.5% improvement, excluding sales of automobiles. Headline sales, including autos, were up 1.9% on the month to $33.7B against expectations of a more modest 1.0% gain. In a rare piece of good news for the auto sector in this economy, sales surged by 3.8% on the month on the heels of December’s 11.8% fall off a cliff. Despite the positive data, the loonie is trading with an offered tone on equity and commodity market weakness.
Have a great weekend.
By Mark Frey, VP FX Trading
Custom House Ltd.
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| tags:global economic growth, Gold, Hang Seng, rally, retail sales, STI, TSE, USD
