North American Currencies Remain Well Bid

Loonie Only Currency to Outpace Greenback Overnight

The Loonie was the only major currency to outpace the Greenback overnight, probing just south of the 1.03 mark at the London open as traders continued to favour the Canadian currency because of its commodity linkages, relatively healthy fiscal position, and technical factors, which are now driving the currency to overbought levels. Both the Bank of Korea and Bank of India were active interventionists overnight, stepping in to buy dollars and sell their domestic units – moves that helped to put a broad-based bid tone into the Big Dollar. Also adding some support to the USD rally was the first speech from Japan’s new Finance Minister Kan, who engaged in the more familiar Ministry of Finance policy of verbal intervention and talking down the yen, thereby taking a more familiar approach to currency policy than his predecessor, which resulted in the yen trading with an offered tone to lower levels throughout the overnight session.

Also lending support to the Big Dollar was a familiar risk-averse tone to trading in the overnight markets, relating to both further announced debt repayment delays with respect to construction projects in Dubai and fresh concerns over the ability of a number of E.U. members to meet their sovereign debt obligations going forward (most notably Greece, Spain, Portugal, Italy and Ireland). In both cases, the euro acted as the main escape valve for negative sentiment as the common currency came under selling pressure in face of traders looking for more stable ground by way of U.S. Treasury Bonds. The data calendar was also unkind to the euro as both euro zone retail sales and German factory orders came in below expectations.

The Bank of England did the expected overnight and sat on their hands with respect to both interest rates and their asset purchase programme, which is scheduled to come to its conclusion next month. Though the pound is still being hampered by the market’s perceived risk that the dovish BoE will extend its programme of quantitative easing next month, thereby devaluing the currency through the excess supply of pound notes being printed to purchase UK Gilts, the chances of the Bank further loosening the purse strings is, at present, probably overstated. In short, though Prime Minister Brown would probably like nothing more than a little monetary accommodation to assist his freefalling approval numbers, the Monetary Policy Committee has issues other than the Right Honourable Brown’s leadership challenges to consider. Though one can conjure more than a dozen reasons to stay short on the pound, the only reason to pare that position is the fact that nothing, not even the market’s whipping boy, can fall forever. Currencies are priced in relative terms and therefore can’t fall to zero (the Icelandic kroner is a case in point), but there are some market participants who almost seem apt to test that theory with respect to the pound sterling at present.

Somewhat interestingly, the Canadian dollar has remained well bid throughout the day’s sessions despite a comparative selloff in its commodity cousins in both Australia and New Zealand. There’s no doubt that technical factors are aiding the Loonie’s ascent, with further buying interest being piqued upon USDCAD’s breach of both the 1.0350 mark yesterday and today’s brief punch through the 1.03 level. That said, the 1.0250 area should still put some pretty stiff support on the downside while short-term momentum indicators appear to be waning somewhat. In short, the pressure is building for a correction to higher levels in USDCAD, but just how much higher is a significant point of contention amongst market participants. The selling pressure really won’t be alleviated unless we see a clear break and close above the 1.0550 area, with an ultimate top likely to come in at 1.0750, even if we should see a significant mean reverting bounce. One also has to wonder if and when Bank of Canada Governor Mark Carney will make himself heard on the matter, as the Bank has been uncharacteristically bold with respect to FX valuations and its desire for a weaker Loonie when the pair traded to these levels most recently.

U.S. initial jobless claims posted a 1K increase over last week’s reading of 433K claimants upon this morning’s release. The spirited declines in both new and ongoing claims achieved in the month of December were thus preserved, signalling to many that the U.S. labour market continues to be on the mend. This data point, along with some recently released positive manufacturing and factory figures are creating some upward bias to tomorrow’s highly anticipated Non-Farm Payrolls report, where traders are beginning to position themselves for a stronger-than-originally-forecasted reading. This positive bias is again manifesting itself in a degree of USD-buying interest from the broader market, signalling that markets are continuing to normalize somewhat as we move further away from the risk-based trading decisions that have dominated FX for the better part of the past 18 months.

By Mark Frey, Regional Director for Corporate Canada
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