USD/CAD Takes Out 1.10 As More Taper Expected

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Market Drivers for January 21, 2014
Dollar bid on report that Fed will taper another 10B in January
German ZEW 61.7 vs. 63.4
Nikkei 0.99% Europe 0.47%
Oil $94/bbl
Gold $1247/oz.

Europe and Asia:
NZD CPI 0.1% vs. 0.2%
EUR ZEW 61.7 vs. 63.4

North America:
CAD Manufacturing Sales 8:30 AM

Dollar rally resumed in early London trade today on the report from the Wall Street Fed watcher Jon Hilsenrath that the US central bank will reduce its bond purchases by another 10 Billion dollars at its meeting at the end of January. USD/JPY rose to a high of 104.87 as both US yields and stronger Nikkei helped to support the pair.

However, the biggest news of the night came from the USD/CAD pair which finally pierced the key 1.1000 level for the first time in more than 4 years as the rise in US rates helped fuel the rally in the pair. The deep divergence between US and Canadian monetary policies is taking its toll on the loonie which has been in steep decline since the start of this year.

While the US economy continues to expand at a reasonable pace, Canadian economic growth has slowed markedly with employment seeing a shockingly large drop last month of -45.9K versus 14.4K eyed. Labor market growth has been anemic since Q2 of last year averaging less than 15K per month.

The resulting slack in Canadian economy has forced the BOC to remain highly accomodative keeping rates at 1.00%. This week’s BOC meeting is expected to reaffirm this stance and if the central continues maintain its dovish guidance the pair could rise to 1.1100 a the week proceeds.

Today the market will get a glimpse of the Canadian manufacturing sales with consensus view looking for a print of 0.3% versus 1.0% the month prior. If the data disappoint further, the loonie selloff could accelerate as traders begin to price in the widening gap between US and Canadian interest rates going forward.

In other economic news, the kiwi saw a boost from hotter than expected CPI data which came in at 0.1% versus -0.1% eyed suggesting that the RBNZ will begin its rate tightening cycle shortly. AUD/NZD sold off on the news dropping to a low of 105.65 as the long term downtrend in the pair resumed.

In Europe the ZEW survey was mildly mixed with current conditions coming in at 41.2 versus 32.4 forecast while the economic outlook softened to 61.7 from 64 expected. Trader focuses on the outlook data and EUR/USD sold off slightly towards 1.3530. The pair remains well bid ahead of the 1.3500 level, but if the dollar rally picks up steam in North American session that barrier could fall by the wayside as currency markets begin to adjust to more hawkish US monetary policy.

Boris Schlossberg
Managing Director

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