A rebound in risk appetite after yesterday’s wash-out in equity markets was apparent overnight, with the rally in hydrocarbons continuing to put pressure on the greenback as the hopes and dreams of dollar bulls starts to fade. Market participants have been intently focused on the negative implications surrounding the blow-out of the March trade deficit in the United States, and the probable revisions associated with the net export drag pushing Q1 GDP growth into negative territory. Though extenuating circumstances like the port closure in Q1 are likely to have skewed the trade balance numbers somewhat, and April figures will need to be confirmed before concerns around second quarter growth are raised, yesterday’s sluggish export performance increases speculation the relatively strong greenback will start to become more of a focus for the Fed, causing the FOMC to potentially hold off raising rates until 2016.
The derailing of the one-way trade in the big dollar has no doubt been a result of relatively weak first quarter economic performance, but this has been exacerbated by the fading deflation threat in Europe as oil prices rebound, and green-shoots in credit and lending growth begin to emerge as the ECB asset purchase plan gets underway. The better than expected performance from the Eurozone was lent credence overnight as final PMI readings for March showed the composite reading for the zone ticked up to 53.9 from the flash estimate of 53.5, further questioning the strength of the macro divergent monetary policy theme that was playing throughout the start of 2015. While we realize the momentum is not on the side of dollar bulls, April employment data for the US will play a big part in rationalizing whether a rebound in the second quarter is feasible. EURUSD pushed into the low 1.12s ahead of this morning ADP employment report, though developments from the non-monetary policy meeting the ECB is holding on Greece will also drive price action into the latter half of the week.
As we head into the North American open, oil prices are careening higher on the back of yesterday’s supportive API data and resurgence in overall risk appetite after yesterday’s sell-off in equities. Front-month WTI is nearing in on the $62 level, which has been one of the driving forces behind today’s strength in the loonie. Also pushing the loonie higher has been its correlation to the Australian dollar, which is running higher against the greenback on expectations the RBA will be on hold for the foreseeable future after the last interest rate cut. Not reflected in the performance of the loonie has been the surprise result of Alberta’s provincial election, with the left-leaning New Democrats taking a majority government and ending a 44-year run of power for the Conservatives. The NDP is expected to be far less accommodative towards the province’s energy industry, with a promised review of the current royalty program and a hike to corporate taxes. While the potential for an overhaul of the royalty program for the heartland of Canada’s energy industry could prove harmful at a time when energy prices are still at depressed prices, the net effect will likely take some time to before judgement can be passed.
On the economic data front, employment figures as registered by ADP for April came in well below estimates of 200k with a print of only 169k new jobs being created in the United States, consequently squeezing tighter the greenback and pressuring USDCAD lower. While the data does not leave many optimistic Friday’s BLS Non-Farm Payrolls will turn up roses, one must also remember last month’s ADP data was quite off the mark in terms of a leading indicator heading into the official statistics, so caution should be heeded positioning into Friday’s report.
Further reading:
ADP for April
RBA
