Morning Commentary: A Reversal of Fortunes

Foreign Exchange - Morning Commentary

A Reversal of Fortunes

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
As we had discussed on our Week Ahead report on Sunday night, we thought market psychology had gotten way too negative about future growth. A combination of a great U.S. jobs report combined with a more market-friendly messaging from Fed Chairman Powell appears to have put a short term bottom in risk-taking for now. The DJI is attempting to navigate three straight days of positive returns; the last time that happened was in early November.
The rallying point for U.S. and global equities has rippled through other asset classes and, combined with a modestly positive outlook for the U.S.-China trade talks this week, has helped to change market psychology in the short term.  Commodity prices are improving and interest rates are rising while the U.S. dollar remains largely range bound but near the bottom of its most recent range.
One currency that has experienced a complete reversal of fortune is the Canadian dollar (CAD). From October 1 to the end of the year, the CAD was one of the weakest major currencies depreciating by nearly 6% against the U.S. dollar. This corresponds and correlates by nearly 100% with the falling price of commodities and in particular, the price of oil which had dropped nearly 40% from its peak in early October.
As risk sentiment has recently improved and as oil is correcting higher, the CAD has reflected that positive outlook. Since the end of the year, the CAD has appreciated by nearly 2.50% and is attempting six consecutive days of appreciation and has been a top performing currency in the New Year. The market was clearly caught wrong-footed (short CAD) which has added to the sharp advance. The peak of nearly 1.3600/$ corresponds to the most recent forecast by RBC market economists where they see a gradual strengthening towards the 1.3100/$ level.
While the overall change in market psychology is welcome, confidence and expectations remain somewhat fragile and can turn quickly. Continue to expect the unexpected and remain tactical in the short term.
  • EZ economic data continues to disappoint with the EZ economic sentiment index seeing its worst losing streak in a decade as December data disappointed again. German November Industrial production data also disappointed today falling by 1.9% against expectations of a gain of 0.3%. Industrial production has fallen by nearly 4.7% YoY and has fallen for three months in a row.  Today's data put a dent in the recent appreciation of the euro.
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