Range of the Week: 1.2900 – 1.3400
Press conferences took on greater importance than releases of economic indicators last week. Among the items of particular interest were President-Elect Donald Trump’s first press conference in six months, Barack Obama’s farewell speech and a speech by U.S. Federal Reserve (Fed) Chair Janet Yellen. Fluctuations in the U.S. dollar (USD) and the release of U.S. retail sales numbers also drew our attention.
The eagerly anticipated press conference from Donald Trump proved rather disappointing for market watchers, as his participation in the various businesses in the Trump Organization and his ties to Russia were the main topics of discussion. The President-Elect, who will officially take office on January 20, did not provide details on his plans for tax reforms or infrastructure spending, sending the U.S. dollar into a nosedive against most major currencies. Canadian observers would certainly have also liked more details on a potential 10% customs tariff that the Trump administration has mentioned it wants to implement to tax imports and subsidize U.S. exports. Our economists believe that if such a measure were put in place, Canadian exports of non-petroleum goods would be the most affected. The previous day, outgoing President Barack Obama delivered a speech that was totally different from Trump’s usual tone, calling for political engagement and inclusion. He notably stated that democracy was threatened every time we take it for granted and that a fear of change posed a greater risk to democracy than bombs or missiles.
Meanwhile, Janet Yellen appeared upbeat while speaking to a panel of educators in Washington and stated that the U.S. economy did not face any serious short-term obstacles. The Federal Reserve Chair notably pointed to low unemployment, rebounding wage growth and inflation currently close to the Fed’s 2.0% target as encouraging signs. These remarks were therefore in keeping with the December upgrade to the median key rate projections for the coming years, as Fed members anticipate three rate increases in 2017 and three more in 2018. Ms. Yellen also noted that she would not like to see the changes made by the Dodd-Frank Act in the wake of the financial crisis completely reversed, as the Trump administration has stated that it wants to repeal the legislation. Given this particularly lively political context, the U.S. dollar, which had been enjoying a tailwind since November, ended the week down substantially against the other major currencies, gaining ground only against the pound sterling. Among the reasons put forward by analysts to explain the generalized slump in the USD, two themes appear to be emerging:
- Excessive expectations had been placed on Mr. Trump’s press conference
- A wave of profit-taking on long USD positions
Considering these reasons, these experts are stressing that current levels could represent an appealing opportunity to buy U.S. dollars. In their opinion, the economic fundamentals do not appear to have changed drastically, an opinion that Ms. Yellen appears to share (see previous paragraph). According to our economists, the 0.6% growth in U.S. retail sales in December supports this point of view, despite the fact that an increase of 0.7% was expected. Moreover, they note that consumer discretionary spending, which is particularly dependent on economic cycles, has been solid in recent months. This is consistent with strong job creation and a near-record level of consumer confidence. In short, USD buyers should quickly take advantage of this decline in the currency!
This week, we’ll be keeping an eye on the Bank of Canada’s key rate decision Wednesday morning and the statement accompanying the decision. We will also get a look at Canadian retail sales and inflation data will be announced on both sides of the border.