Canada’s GDP comes in very disappointing and one wonders if the USD/CAD sell-off has gotten overdone. Meanwhile, the influences on the aussie are many and confused ahead of tonight’s key RBA decision.
Canada – Mind The Gap
Canada’s February GDP rolled in at a shocking -0.2% vs. +0.2% expectation and the YoY data shows Canadian growth. This is a real surprise to the market - the recent move higher in Canadian rate expectations has been the most pronounced among the major currencies – with 2-year swaps rising a head-spinning 50 bps since the beginning of the year. And yet we see growth in the Canadian economy coming in slower than in the US despite mild weather and very strong oil prices earlier this year. And what about in the pipeline?
A Canadian economy with some of the world’s most over-leverage consumers and a massive housing bubble? Something doesn’t add up and there is likely a strong divergence in the coming reality vs. current expectations. The market was certainly caught off guard by this data, though the CAD move has been fairly muted so far as 2-year swaps were as much as 6 bps off their highs in today’s trade. The first step for the bear market in USD/CAD to turn here soon is for the CAD bears to full take back the 0.9850/0.9900 area. We’ll see – plenty more short-term event risks in the pipeline that will either delay or accelerate this outcome.
RBA Cash Target – Not Just The Cut
The question for the RBA tonight is not whether they cut, but by how much. The market is looking for higher probability of a 25-bp cut, but a large minority think that a 50-bp cut is likely. Both views are understandable, but given the momentum of the RBA’s rhetoric change, I am sympathetic with the 50-bp cut view, though I’m not any more tilted than the market in my assessment of the actual odds of a larger cut (also see Andrew’s post on the RBA decision). It just seems that if the bank feels there is far more uncertainty now and observes that inflation is clearly off the boil, moving 50 bps now is an easier thing to do than it was not so many weeks ago.
Regardless, tonight’s RBA decision and the market’s reaction to it look critical for whether the aussie can hold the rally stance against the US dollar. The AUD/USD picture of late has been very confused by the dissonance of inputs: the market is excited about the prospects of QE3 (USD negative) and have been bidding up risk appetite again (USD negative, AUD positive) and the metals complex and mining stocks have performed very well as well (aussie positive), but expectations for the RBA have gone very steeply south in recent weeks (AUD negative). Another aussie negative factor? Mining billionaires making announcements like this one. Sounds like a financial Titanic disaster waiting to happen to me… That kind of thing is so typical of a boom in its final throes.
Chart: AUD/USD
Just ahead of tonight’s RBA meeting, AUD/USD has been trying to poke its head back above the recent 1.0450 area resistance. The aussie will need a lot of support from externals to get much going above recent highs, though the lack of momentum during the previous sell-off is a warning sign for the bears. Volatility has been dropping almost everywhere of late – let’s see if we get something going this week in the likes of this normally high-beta pair. Still prefer the downside, eventually.
Odds And Ends
USD/JPY – mind the round 80 number and the 80.05 daily Ichimoku cloud boundary. Markets are certainly supportive of the JPY with risk moving off today and bonds rallying – but we’ll need to see more of the same to see JPY stronger still. This week's event risks and inter-market action will be key for the JPY outlook. It is already looking fairly resilient given the lack of weakening after last week’s new easing measures from the BoJ. It’s also “Golden Week” this week – does that mean low volatility because traders are absent or high volatility because the market is thin and stop orders could be set off?
Recommended reading of the day: Hugh Hendry’s Eclectica Fund investment letter – his first in a long time. Mr. Hendry is always worth a read and there is some deep macro stuff worth considering in this piece, which is a meaty 16 pages of observations. Fear for China and Japan, in Mr. Hendry’s view. (To that, I would certainly add the aussie, if he proves correct on his negative view of Asia.)
Note the slightly higher PCE Core reading, which is the highest since late 2008 and might play into the market’s QE3 expectations since the PCE data is considered a Fed favourite.
Looking Ahead
Remember that this is a very busy week ahead, with global manufacturing PMI day tomorrow (starting with Australia and China tonight). Wednesday sees the ISM non-manufacturing release. We’ll preview the ECB as Thursday draws near (BoE meeting not until next week this time around), and as EUR/USD continues to fibrillate in a narrow range after teasing higher on Friday.
Economic Data Highlights
- Germany Mar. Retail Sales out at +0.8% MoM and +2.3% YoY vs. +1.0%/+0.5% expected, respectively and vs. +2.1% YoY in Feb.
- Spain Feb. Total Housing Permits fell -36.2% YoY vs. -22.9% in Jan.
- Sweden Mar. Household Lending out at +5.0% YoY vs. +4.9% expected and +5.0% in Feb.
- Euro Zone Apr. CPI Estimate out at 2.6% YoY vs. 2.5% expected and 2.7% in Mar.
- Canada Feb. GDP out at -0.2% MoM and +1.6% YoY vs. +0.2%/+2.1% expected, respectively and vs. +1.7% YoY in Jan.
- Canada Mar. Industrial Product Price out at +0.2% MoM vs. 0.0% expected.
- Canada Mar. Raw Materials Price Index out at -1.6% MoM vs. +0.3% expected.
- US Mar. Personal Income out at +0.4% MoM vs. +0.3% expected.
- US Mar. Personal Spending out at +0.3% MoM vs. +0.4% expected.
- US Mar. PCE Deflator out at +0.2% MoM and +2.1% YoY vs. +0.3%/+2.2%. expected, respectively and vs. +2.3% YoY in Feb.
- US Mar. PCE Core out at +0.2% MoM and +2.0% YoY vs. +0.2%/+2.0% expected, respectively and vs. +1.9% YoY in Feb.