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US Dollar Hobbled by Weak Data

Published August 15, 2016
  • Overnight market action was rather positive for risk once again as Chinese equities jumped to a 3% gain on expectations of further stimulus from Beijing following a string of disappointing data
  • London, Frankfurt and Paris all followed suit with healthy gains and New York and Toronto are expected to open higher as well with oil and the Canadian dollar in tow as the global risk rally lifts all boats
  • Japan reported that its economy once again has stalled with year on year growth in the second quarter, printing a mere 0.2% well below expectations for 0.7%
  • This is very illustrative of the current environment: weak data keeps interest rates low which helps fuel demand for riskier assets
  • The US is another prime example as July's strong labour market data has now been all but eclipsed by Friday's weak retail sales and consumer confidence numbers – once again, the market is finding Fed rate hike expectations less and less plausible
  • The US has created an average of 190k jobs a month over the last 3 months, however, that encouraging data has yet to materialize in other readings on the economy; wages, retail sales, sentiment, producer prices and manufacturing data have all stayed stubbornly subdued
  • The lack of crossover from the labour markets to other parts of the economy likely has the Fed confused and thus much less likely to raise rates in the near term
  • This has resulted in a change of fortune for the USD which is at its lowest on a trade weighted basis since Aug. 3 and whose uptrend against the Loonie looks like it has come to an end for now
  • With WTI oil prices near $45 a barrel compared with sub $40 two weeks ago, USDCAD has traded to a 4 week low at 1.2925
  • Seasonally, the Canadian dollar and oil don't do very well in the second part of the year loosing 3.8% and 13.7% respectively on average over the last 5 years between Aug and Dec, however, in the short term this trend may not be ready to take hold just yet
  • Finally, note that volatility readings are very low across all assets – generally a sign of complacency that could bring rapid changes from current prices

Charts: (1) USDCAD uptrend under threat, 1.2975 key closing level to watch today. (2) WTI gains accelerating.