A light economic data stream has financial markets exhibiting some semblance of calm, with corrective forces dictating price action in currency markets. The re-opening of the Greek stock market was met with massive selling pressure on Monday, with bank stocks on the chopping block as investors rushed for the exits to dump exposure to anything that might be subject to haircuts or bail-ins on depositor funds. The fire sale for financials has continued today with further double digit losses, though the broader Athens Stock Exchange is only off around 1.0% as the stampede of capital outflows has abated for the time being. Chinese stocks were also able to steady themselves, with the Shanghai Composite snapping a three-day crumble after regulators tweaked with short-selling rules to ban intraday shorts. The rationalization of the policy tweak is to try and restore confidence in the marketplace for retail investors by dampening market volatility and increasing stability against sharp downward moves, which appear to have helped today as the Shanghai Comp finished up by 3.7% by the end of the Asian session.
In currency markets the notable mover overnight was the Australian dollar, gaining well over 1.0% against the greenback on a combination of a less dovish central bank and a strong retail sales report. As expected the Reserve Bank of Australia decided to leave the overnight cash rate unchanged at 2.0%, though it was the dropping of language that a further fall in the aussie was both likely and necessary that resulted in the strong bounce the antipodean currency is seeing this morning. The absence of the RBA trying to jawbone the aussie lower telegraphs to markets that it is pleased with the price action of its domestic currency, and the less dovish slant has led to a bout of short-covering in the AUDUSD. The stronger than expected retail sales report for June also helped the antipodean currency generate a firm bid tone, with retail sales increasing by 0.7% on a m/o/m basis as opposed to the 0.5% that had been expected. The kiwi and loonie are riding along on the aussie’s coattails this morning, with the commodity-linked currencies managing to claw back some of Monday’s losses. Bouncing energy prices have also helped the loonie regain some of its lost ground, though with WTI and Brent both regaining the $45 and $50 handle respectively, the follow through bonce in the loonie has been feeble.
To say that the loonie has had its wings clipped recently would be a vast understatement given the currency’s performance over the past month; instead, the waterfowl appears to be flightless, with the prospects of an event materializing which cauterizes the bleeding becoming scarce. The proverbial perfect storm for the Canadian dollar largely stems from three main factors, all of which appear to still have room to further play out the ongoing narrative.
Crashing commodity prices and the resumption of oil’s downward spiral has played an important part in the sub-par performance of the loonie when compared to the American dollar, choking off business investment and depressing consumer spending; the performance of the non-energy export sector has been sluggish at picking up the slack thus far, and it is very likely Canada falls into a technical recession when second quarter GDP results are reported. The uncertain outlook for energy has translated to confusion and hesitancy from corporations, with the downturn in business investment and the “puzzling†lack of improvement in the export sector leaving the Bank of Canada with an outwardly dovish stance towards monetary policy. The reverberations from the last interest rate cut are still filtering through currency markets, with Governor Poloz telegraphing to markets there is the potential for further rate cuts, along with being open to considering the implementation of a “Quantitative Easing†style balance sheet expansion if things get more drastic. Finally, while this has been general market consensus for quite some time, the Federal Reserve appears to moving closer to normalizing interest rate policy with either a September or December liftoff. While we are still in the September camp as far as the initial rate hike is concerned, we do acknowledge the Fed’s propensity to get cold-feet, and thus believe there is an outside chance the move on rates doesn’t come until December. The drop in the US Employment Cost Index for the second quarter dented Fed funds futures marginally last week, but the realization the Fed is still on board for raising rates this year as long as the inflation picture doesn’t deteriorate in the coming months (as opposed to having to improve) has negated the ECI data from last week. In addition, the Core PCE data (the Feds preferred inflation measure) that was released on Monday confirms the inflation picture is remaining stable to improving at a modest clip, and bolsters the argument the September Fed meeting will likely be a cliff hanger; however, the broader picture as monetary policy paths diverge is that it does little to increase the shine of the loonie.
While we would attribute the loonie’s poor performance to begin the new trading week as a result of the three above narratives, the addition of election uncertainty does not do the domestic currency any favours. With the surprise election of the NDP as the result of the provincial election in Alberta earlier this year, investors are nervous as to what an NDP government may look like for the whole of Canada. Given the Conservatives are currently trailing in the polls, the thought of a minority NDP government in Canada might not be as surprising as one might have thought at the beginning of 2015. In terms of what a change in leadership would look like for the broader economy, that would have to be assessed over a long time frame; however, as Harper and the Conservatives are thought to be pro-business and friendly for investors, a shake-up in leadership might not be seen as so favourable in the short-term.
Therefore, over the short-term the financial market climate is not conducive to seeing a change in trend of any of the aforementioned points, and we would recommend for corporations that are naturally short USD to continue strategically adding exposure on dips. For now, the trend is not the Canadian dollar’s friend, though participants who are naturally long USD shouldn’t use this time to get complacent, as the short loonie trade is extremely one-sided at the moment, and short-covering could become evident if this week’s US Non-Farm Payrolls surprises to the downside and advocates for pushing out US rate expectations.
Further reading:
EUR/USD, USD/JPY, GBP/USD Pivot Points, TA – August 4 2015
GBP/USD: Trading the British Services PMI
