Range of the Week: 1.2800 – 1.3250
The U.S. dollar lost ground against the other major currencies for the fourth straight week to end the month down more than 2.5%, making it the worst January for the greenback since 2012. What’s behind the downturn? According to our economists, comments from the new U.S. administration appear to be largely responsible. President Trump and certain members of his entourage have, among other points, stressed that the dollar was “too strong” and that Germany was benefiting from a “grossly undervalued” currency. Moreover, markets continue to await details from the administration regarding its promised economic measures (renegotiating NAFTA, tax cuts, public investments, etc.). In their most recent “Forex” publication, our economists reiterated that a number of indicators, including the situation with Canadian and U.S. bond yields, favour a rebound in the USD.
This was the context in which the U.S. Federal Reserve (the Fed) announced its decision to leave its key rate unchanged last Wednesday. Despite the release of several positive economic indicators in the United States, the Fed took care to adopt a very cautious tone in its monetary policy statement. In the opinion of many observers, the institution is looking for more details on the economic policy of the new administration in Washington. In short, “status quo” sums up last Wednesday’s decision nicely.
In addition to the Fed’s decision, a number of attention-worthy economic indicators were announced. Early in the week, the monthly variation in the Core PCE deflator came out in line with expectations at 0.1% for the month of December, leaving the annual reading unchanged at 1.7%. Our economists note that this inflationary measure, which is closely watched by the Fed, has not reached the 2.0% target established by the U.S. central bank for close to five years, which suggests that inflation remains moderate.
On Tuesday, Canadian GDP variation came out stronger than the consensus among economists, with a 0.4% increase in November and an annualized gain of 1.6%. Data for the previous month were also revised slightly upward. Manufacturing industries saw solid growth, placing our economy in a good position to expand further in the fourth quarter. Lastly, markets were particularly interested in U.S. job figures released on Friday, as the Fed often uses the labour market as a bellwether for the economy. The reading came in much stronger than expected, with 227,000 new jobs created compared to an expected 180,000. The private sector created 237,000 jobs, including many in cyclical sectors such as construction and manufacturing, which appears to signal that the economy is on a solid footing and in expansion mode. The USD and U.S. yields had almost no reaction to the news however, although it would have been logical to expect a rising trend in both. Markets may have been more hung up on the reduced annual variation in average wages, which is likely to disappoint the Fed somewhat.
During this particularly eventful week, the USD/CAD pair wavered within a range of around 180 basis points and 2- and 5-year Canadian government bond yields ended the week down 4 basis points. Stock markets were somewhat more volatile, however, with fourth quarter 2016 earnings season underway for many major corporations. A number of companies saw their shares climb further to the release of better-than-expected results, including Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Siemens and Merck (NYSE:MRK) & Co. However, others turned in disappointing profits, including Amazon (NASDAQ:AMZN), BCE, MetLife (NYSE:MET) and Mastercard. In the United States, the S&P 500 Index ended the week up very slightly, while the Nasdaq and Dow Jones nudged downward. In Canada, the S&P/TSX Composite Index also ended the week slightly in the red.
This week, other major players will post earnings, including Mondelez International, GlaxoSmithKline, Suncor Energy, Domtar and L’Oréal to name a few. We will also be keeping an eye on U.S. trade balance data, wholesale inventories and the University of Michigan Consumer Sentiment Index. In Canada, housing starts and the new housing price index will be released. We will also get a glimpse at the country’s job market with Friday’s employment figures.