The euro has shown some impressive resilience in recent months but the latest German industrial production raises fresh questions. More below. The Canadian dollar was the top performer Tuesday while the pound lagged. The Bank of Canada decision is due up next. T
The plunge in German industrial production on Tuesday may have served as a wake-up call for policymakers. It fell 1.9% compared to an expected 0.3% rise. The October number was also revised to -0.8% from -0.5% to compound the pain. The industrial sector is critical in the German economy and the sharp slowdown could mean Q4 GDP growth is flat or negative.
The ECB has tried to remain upbeat but rate hikes in 2019 are looking increasingly remote, and with oil prices much lower, there are few cost pressures. The ECB has stubbornly tried to save face but expect more emphasis on downside risks.
Notably impressive was how the euro held its ground despite the poor data. It continues to trade above 1.14 and has been carving out higher lows since early November. This is largely a reflection of lower prospects for Fed hikes but that emphasizes that the US dollar has more carry to give up than the euro, even in a downside scenario. Also, falling oil prices is more of a net-positive for the Eurozone than the US, which is a marginal exporter.
For now, there's no reason to expect any significant uptrend in the euro and next week's Brexit vote certainly poses risks but, if data continues to disappoint and the euro holds, it could be the start of a bigger turn. Our long in EURUSD remains +90 pips in the green but we're is concerned with the pair's lag behind improving German-US spreads.
Looking ahead, another central bank is also in the process of climbing down from overly-hawkish guidance. The BOC meets Wednesday in what's sure to be a change of tone. Rates aren't in the focus but the statement will have to address lower exports, cheaper oil and slower global growth. At the same time, Poloz is consistently optimistic and he could try to retain a hawkish bias. If so, that would keep the six-day rally in the loonie on track.