Loonie Swoons; What Will Draghi Do?

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Midday Market Drivers for March 6, 2013
ADP beats helping fuel Dollar rally
Loonie Swoons on dovish BOC
Nikkei 2.13% Europe 10.12
Oil $90.62/bbl
Gold $1574/0z.

Europe and Asia:
AUD GDP 0.6% vs. 06%
EUR Euro-zone GDP -0.6%
EUR Euro-zone Household Consumption

North America:
USD ADP Employment Change 198K vs. 172K
USD Factory Orders -2.0%
USD US Fed Releases Beige Book 14:00
CAD BOC Rate Decision rate on hold for foreseeable future
CAD Ivey PMI 51.1 vs. 56.2

The dollar continued to gain ground in midday North American trade as better than expected ADP report added to the positive sentiment towards the greenback that has been building for several days. The ADP showed a gain of 192K versus 178K expected providing yet another upside surprise to the US economic calendar this week.

US data has been remarkably resilient since the start of the year despite the contractionary impact of higher payroll taxes and budget sequester cuts. The ADP report showed that US businesses continued to hire in the face of these macro obstacles and if it accurately forecasts the NFP report due Friday then investor sentiment towards US assets is likely to turn even more positive.

It is becoming more evident by the day that US economy is pulling away from the rest of the G-3 and the dollar which typically used to attract only safe harbor flows, is now increasingly viewed as growth currency. The contrast could not have been sharper earlier in the session when the data from Canada along with the BOC statement was released.

Although Canadian economic performance remains positive, it is clearly lagging US results. Today’s Ivey PMI disappointed with a 51.1 read versus 56.2 expected, but true blow to the loonie came from the BOC statement which noted that,”Current policy ‘will likely remain appropriate for a period of time.”

With lackluster growth and little price pressures the BOC appears to be in no hurry to tighten monetary policy anytime soon. The loonie therefore swooned in the aftermath of the announcement with USD/CAD hitting a high of 1.0338. The pair faces some resistance near the 1.0350 level, but if Friday’s employment reports show that the divergence in labor demand between Canada and US continues to widen the pair could break through the 1.0400 and target 1.0500 near term as flows move south of the border.

The EUR/USD meanwhile tumbled below the 1.3000 level on persistent dollar strength but the pair remains supported ahead of the key 1.2950 level. However, tomorrow’s ECB meeting could prove pivotal. Although few investors are anticipating any policy change, the pressure on European monetary authorities is increasing by the day.

Italy remains a quagmire,while growth in the rest of the union is likely to be negative for the sixth quarter in a row. With France now deep in contractionary territory, only Germany is generating any growth in the region. That’s why some analysts believe that ECB would be wise to lower rates another 25bp especially in light of the fact that price pressure with the EZ are actually decreasing. if Mr. Draghi were to surprise the market in this fashion the EUR/USD would very likely pierce the 1.2950 support and target longer term lows near the 1.2700 level.

Boris Schlossberg
Managing Director

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