Will BOC Sound Alarm over Loonie Strength?

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Market Drivers Mar. 9, 2016

Asia bourses end lower
UK Industrial Production improves
Nikkei -0.84% Dax 0.75%
Oil $37/bbl
Gold $1257/oz

Europe and Asia:
AUD Home Loans -3.9% vs. -3.0%
GBP UK IP 0.2% vs. 0.0%
GBP UK MP 0.7% v. 0.2%

North America:
CAD BOC Rate Decision 10:00

Another relatively subdued night in the FX market with no newsflow to drive trade, but risk aversion flows left their mark on majors with both USD/JPY and EUR/USD lower as EUR/JPY sales kept the pressure on.

The EUR/USD dropped to 1.0960 and remained lower in early European dealing. The pair has been at a virtual standstill around the 1.1000 level this week as traders await the ECB meeting this Thursday. Economic performance in the region remains sluggish and traders are looking to see what other stimulative measures Mr. Draghi will roll out.

The consensus view is that ECB will almost certainly cut the deposit rate another 10 basis points into negative territory but it appears that both the ECB board and analysts are divided on the subject of additional QE. Even if the ECB offers no new fresh initiatives it’s difficult to imagine that the euro could rally much further given its negative yield. The pair has essentially been held aloft by risk aversion unwinds and by counter trend rally against the buck, but as along as equities remain relatively calm, the euro will feel further downside pressure over the near term horizon.

Meanwhile in UK the Industrial Production and Manufacturing Production reports printed better than forecast at 0.2% vs. 0.0% and 0.7% vs. 0.2% respectively in a first burst of positive data in weeks. Manufacturing may be starting to benefit from lower exchange rates, but the much bigger issue for cable is Brexit and no exchange rate differentials will help UK manufacturing if the country decides to leave the EU. Cable saw a modest jump ahead of the data, but the pair remains essentially standstill at the 1.4200 level as it is appears the short covering rally in losing momentum and traders look for further clues from the polls.

Lastly in North America today the US calendar is barren but BOC holds its monthly meeting. With oil prices off their lows Governor Poloz is likely to sound a more upbeat note, especially since Canadian economic data has not shown the type of collapse one would expect with the sharp decline in commodities. With oil prices above the $35/bbl rate Canadian mining sector corporates may avoid the threat of bankruptcy which in turn should relieve some of the downside pressure on BOC. However with loonie now a full 14 big figures off its lows. Governor Poloz is sure to express some concern about the currency strength and that’s likely to keep USD/CAD bid above the 1.3000 mark unless crude starts to climb into the $40’s

Boris Schlossberg
Managing Director

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