Last Friday, the inflation statistics unveiled by Canada fell below expectations. Indeed, inflation reached 1.5% in annualized terms, while economists had expected a reading of 1.8%. The loonie lost some feathers on the news. The coming week is very thin in economic statistics and political meetings. Volatility in the currency market, especially on the USD/CAD and EUR/USD pairs, fades quietly while the majority of market participants give way to summer vacation and the world prepares for the start of the Olympics on Thursday in London.
Canada
The only important news this week in Canada will be unveiled tomorrow. Economists expect that the retail sales in May totaled 0.4%, an improvement from the -0.5% of the previous month.
United States
The data flow from the U.S. begins Wednesday with the statistics on new home sales. With 368,000 expected sales, many market participants believe that the bad real estate statistics in the U.S. are behind us. On Thursday, we will know the durable goods orders for the month of June. Economists expect a drop of the indicator, going from 1.3% to 0.5%. Disclosure of economic data ends Friday with the second quarter GDP on an annualized basis. Most analysts expect a statistic of 1.5% compared to 1.9% obtained in the last reading. These economists believe that the slowdown in the U.S. economic recovery will continue. Please note that the data of the last two years will be subject to revision which may greatly affect the markets.
International
Internationally, the flow of statistics begins tomorrow with the purchasing manager index of France, Germany and the euro area. Of these three statistics, economists forecast that the only one that will reach 50, therefore, demonstrate an economic expansion, is that of Germany. The only political meeting scheduled for the week is a meeting of the European Commission on Wednesday. Also Wednesday, Australia’s Consumer Price Index for the second quarter on an annualized basis will be known, as well as the IFO survey of German business climate. Friday, Germany will unveil its July inflation level in annualized terms.
The Loonie
Trust in what you love, continue to do it, and it will take you where you need to go. – Natalie Goldberg
Last Monday, we were treated to a statistic that took the market by surprise, the result of the International securities/transactions for May in Canada. While analysts estimated a net inflow of $ 7 billion Canadian dollars, foreigners bought the equivalent of 26.11 billion Canadian dollars in securities. What is surprising in all this is that this statistical record (highest reading since 1988, the year that this data began to be recorded) occurred at a time of renewed uncertainty about the future of the euro area.
Indeed, if we go back to May, we were then faced with many unknowns such as the Greek election results, and the possibility of its imminent departure from the euro area. This sluggish feeling in the markets translated into a massive sale of risky assets such as U.S. exchanges (-6%), oil (-17%) and the Canadian dollar (-4.8%). However, as shown in the chart below, of the commodity currencies, nickname given to currencies whose countries depend heavily on commodity exports, the loonie is the one that was the strongest against the U.S. dollar.
The strength of our dollar was necessarily due to the record purchases of assets denominated in Canadian dollars. But why invest in Canada? With the storm that hovered over the markets in May (and still now), investors seek safe places to put their money. We suspect that foreign investors have confidence in the Canadian economy since the majority of asset purchases recorded in May were in bonds rather than the assets of shorter maturity. This can be explained by many reasons.
First, the various central banks in the world, whether they are managing the monetary policies of developed countries or emerging economies, tend to want to lower their interest rate (which would make their bonds less attractive due to the lower returns available) or print money to stimulate their domestic economy, while Mr. Carney and the Bank of Canada seem to want to raise rates or at least leave them as is to try to control the level of household debt. This feeling of confidence in Canadian assets is even more reinforced by the fact that our country is part of the select AAA club (best credit rating assigned to the obligations of a country). That said, as long as investors will demonstrate an appetite for Canadian assets we believe that the headwinds will need to be very strong for the loonie to decide to rest.
Technical Analysis
EUR/USD: Losing Steam AgainDespite having been accustomed to a relatively stable past few days, the EUR/USD ended the week in a rather surprising fashion. Indeed, looking at charts of shorter intervals (30 min and 10 min), it seems that the ground was pulled out from under the feet of one of the most important global currency pairs. As we can see from the chart below, the trend has actually reversed abruptly on Friday (last large black candle). The euro fell by some 140 points during the day against the U.S. dollar.
The rate finally came to rest on its long term line of resistance at 1.2143, as it did on two occasions in early July. We will therefore keep an eye on all pushes under the 1.2135 level, which could open the field all the way down to the June 2010 lows of 1.1875. Moreover, the MACD indicator (moving average convergence divergence) informs us that it is still possible for the euro to continue to aggravate its position against the greenback; the fast line (orange) has not passed through the slow (blue) during the surge last week.
Fixed Income
Bonds and swaps markets remained relatively stable last week, as the policy statement from the Bank of Canada (BoC) and inflation data were pretty much in line with market expectations.
- Monday, Stat Can announced that Canadian securities purchased by foreigners had reached its highest level ever in May, breaking a 2010 record, and showing the interest for Canadian assets is still strong globally. Again, our Canadian borrowers (governments, corporations, households) continue to benefit from that trend, notably through ultra low cost of funds on debt for many of them on longer maturities (5+).
- Tuesday, as expected the BoC kept its rate at 1%, maintaining a tightening bias in its statement. The Bank mentioned Canadian growth has been moderate although global markets remain highly volatile.
- On Friday, inflation numbers were published below expectations. Indeed, the recent drop in energy prices compensated for the increase in other segments of the index, resulting in a net decrease for the month. On one side, some economists suggest that low current inflation could help the BoC maintain a low rate a little longer. On the other side, some argued that energy prices are set by global forces, therefore very hard for the BoC to control ex post.
This week, investors will watch Canadian retail sales and US pending home sales, to be released respectively Tuesday and Thursday, while the most recent GDP data in the US will be published on Friday.
Commodities
Last week, escalating geopolitical tensions in the Middle East, a region critical to the supply of black gold, led to higher risk premium in oil prices. On Monday morning, we have wind pushing in the other direction. Indeed, at 9 am, all energy prices traded 4% lower than their closing prices of Friday. Concerns from Europe resurfaced again and are shaking the entire financial market. There are still fears of sovereign debt of Spain and Italy, combined with the fact that Greece would not be able to meet its refinancing, undermining the general feeling.
Also, the Central Bank of China has warned that growth could slow further, which only pushes confidence down. The new pessimists could bring down the price of all commodities for a few days. Recall that we are 15% lower than the peak seen in February 2012 and a continuation of the decline would allow businesses to cover its fuel needs at very attractive prices.