The equity bulls were out en-masse yesterday, leading the S&P to its best day of 2014 with a 0.61% gain after the US trade deficit narrowed by more than expected and increased the odds GDP for Q4 would come in better than expected on the back of a pick-up in exports for November.  In contrast, the CAD had its worse day of the year, bringing the Loonie to May 2010 lows, as a larger than expected trade deficit, a dreadful Ivey PMI, and dovish comments from Bank of Canada Governor Poloz, all weighed on the commodity-linked currency.  The Ivey PMI for the month of December cratered to 46.3 from the 53.7 registered in November, with the employment index dropping from 60.3 to 53.4, and supplier delivers falling off a cliff to 43.9 from November’s 51.6. Â
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The combination of dampened export growth and the dismal PMI reading have overnight index swaps pricing in a 12% chance of seeing an interest rate cut from the BoC at their meeting on January 22nd, and although it is still a long shot and highly unlikely in our minds, the shift of positioning in the interest rate market underpinned the fall in the CAD.  Rubbing salt in the wound of an already beleaguered currency, Governor Poloz had an interview with CBC in the afternoon, and stated that his most worrying concern at the moment was the consistent underperformance of inflation, and that rates would be on hold until the economic data persuaded the BoC otherwise.  The continued commentary from the BoC on stagnant inflation and persistent slack in the economy was music to the ears of Loonie bears, with selling pressure in the CAD igniting further momentum and pushing USDCAD to test a key resistance level at 1.0800, the 38.2% fib level off the post-crisis rally in CAD.  Yesterday’s move reinforces the continuation of the up-trend in USDCAD, although it is likely the 1.08-1.0850 level will attract some decent demand for corporates trimming some of the their long-USD exposure, so we could see a bit of a reprieve and small consolidation before the next leg higher.
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The overnight session was characterized by broad-based USD strength, with the big dollar moving higher against most major currencies. Â USDJPY was pushed higher on the strength of the buck, with the pair trying to test the waters at the 105 handle, and the subsequent weakness of the Yen propelling the Nikkei to a 1.94% gain.
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Sentiment muddled a bit as we move through the European session, with major indices mixed heading into the North American cross; the FTSE is up 0.26%, while the Stoxx is unchanged, and the Dax is down 0.07%.  Motley data this morning from across the Atlantic has done little to bolster confidence of the investment community, but the lack of further deterioration has participants unwilling to place any large positions ahead of the ECB meeting tomorrow.  On the bright side of things, Retail Sales in the common-currency bloc accelerated over the month of November, coming in with a 1.4% increase on expectations of only a 0.1% bump.  Moderating some of the positive feeling around a robust November for consumers in the Eurozone, the unemployment rate remained at an all-time high of 12.1% in November (after October’s 12.2% was revised lower), with the jobless rate in Italy increasing to 12.7% (a new record high as well.)  The astounding youth unemployment rates continue to wane in the periphery, with Italy and Spain hitting 41.6% and 57.7% respectively.  While in the short-term the ECB might be worried about funding and liquidity requirements, the longer-term structural issues of having over half of your youths out of work for a sustained length of time, is potentially more troublesome further down the road.  Â
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The data from the EUR zone earlier this morning comes in advance of the ECB’s meeting tomorrow, and while it has not come to a point where the economic data has faded enough where the ECB is expected to announce any new liquidity measures, the focus will be on Draghi’s press conference and the ECB’s updated assessment of the zone.  It is likely Draghi will remain dovish in regards to the outlook for growth moving forward, continuing to signal the ECB has a number of policy options available should these be needed to bolster liquidity and support economic progression.  In our view it is only a matter of time before the ECB will adopts some form of monetary stimulus campaign, although this is likely not to emerge until later in Q1 of 2014.  In regards to what sort of measures the ECB could take, speculation has increased that the ECB can provide additional liquidity by authorizing another LTRO, or end the sterilization of their SMP purchases; however, the challenge in the zone is not lack of liquidity per se, but funding for small and medium size private businesses, so expect any sort of increased liquidity effort to morph into a program aimed at targeting SME’s as opposed to liquidity for the big banks.  The EUR was lower against the big dollar throughout the overnight session, with the weakness accelerating after the ADP employment number, which dragged EURUSD into the high-1.35s.
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Heading into the North American open, equity futures are pivoting close to unchanged before the opening bell.  Private payroll firm ADP released their assessment on the employment situation in the US, with the number of new jobs created amounting to 238k, well above estimates of 200k.  The strong print did little to shake equity futures, although a slight offered tone was witnessed post-release.  In currency markets, the increased probability of a strong Non-Farm Payrolls number on Friday boosted the USD across the board, with USDCAD spiking through 1.0800 on a knee-jerk reaction to the numbers.  A similar jobs number on Friday would increase expectations the Fed could look to increase the trimming pace of asset purchases, potentially moving north of the market consensus of $10bn per month, which would continue to underpin the strong fundamental position of the USD.
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With the ADP numbers out of the way, the minutes from the FOMC meeting when the taper was announced are due out at 2:00pm EST, and will be heavily scrutinized as to how the discussion surrounding the taper proceeded, and if there are any additional clues for how the FOMC will handle the gradual unwind of its asset purchases moving forward.  Since the meeting back in December, the communication from policy makers at the Fed has been one supporting a measured trimming of asset purchases at subsequent meetings should the incoming data continue on its recent path, with even the lone dissenter from the taper decision (Boston Fed President Rosengren who thought the Fed was not doing enough to hit its inflation target) seemingly more comfortable with the taper framework.  Yesterday Rosengren gave a speech in Hartford where we he advocated for a steady, measured pace of cuts to the asset purchase program during the coming meetings.  With the inflation doves starting to capitulate and give into the gradual taper mentality, there is little to suggest we will see anything in the minutes that would put downward pressure on the USD given the sentiment in the Fed, unless it is revealed that a significant conversation took place in regards to lowering the unemployment threshold, and a further strengthening of forward guidance is in the cards.  While we feel like a great deal of emphasis in the market has been placed on a gradual unwind of the Fed’s stimulus program, it is unlikely we see a severe shift away from that thought process in the Fed minutes, and thus can’t envision much downside for the USD after the release.
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