- EUR did not benefit from modest sales report
- Weaker euro aids eurozone export numbers
- Loonie on the back foot ahead of BoC
- Any Poloz surprise should crush the loonie bear
The market is not expecting any surprises in a few hours from either the European Central Bank (ECB) or the Bank of Canada (BoC). This ECB meet is being touted as the most “drama free” policy meeting in a number of years. President Mario Draghi and his fellow cohorts are expected to hold policy steady, especially since eurozone conditions seemed to have improved since the launch of the bank’s quantitative easing (QE) program in March.
In general, it’s a bit early to tell how well the QE program is doing, but consumer confidence has always been a fickle indicator. As usual, the post-meeting press conference will draw most of the market’s attention. With European yields at record lows, and the ECB technically running short of product that qualify for purchase, there is a strong possibility that Draghi could announce a broadening of the range of bonds eligible for purchase under QE. He may also announce greater flexibility on the bond maturities that can be bought.
Single Unit Lacks Stamina
The 19-member single unit remains confined to its tight trading range (€1.05-€1.08), again falling to take out yesterday’s psychological topside (€1.0695) with any momentum despite the modest U.S. retail sales print (+0.9% versus +1.1%). Disappointing U.S. data has the fixed-income market recalibrating the timing of the Federal Reserve’s rate hike — the majority thinks September is when it will happen. Not helping the dollar was the International Monetary Fund trimming its growth expectations for the U.S., and upgrading its forecast for the eurozone.
Nevertheless, disappointing economic releases out of China has given the leverage back to the dollar bulls, temporarily at least. In the overnight session, Chinese data continued it string of disappointing releases with first-quarter gross domestic product hitting its slowest quarterly growth rate in six years (+7.0% versus 7.0% expected, year-over-year). Growth in China’s industrial production, fixed-asset investment, and retail sales data all decelerated.
The worry about China is that most people think that the government will be able to do what it’s always done and manage the growth rate through more spending and further credit easing. For the time being, with inflation a relative non-issue, it will allow for more government intervention. However, when the Chinese economy does get larger, the impact of those policies eventually become weaker, and we start all over again.
Weaker Euro Paying Dividends
Other data out of Europe this morning showed that rising exports helped widen the eurozone’s trade surplus in February (+€20.3 billion versus +€14.4 billion, year-over-year). Exports were up +4% on the year, while imports were unchanged. This would suggest that the EUR weakness is paying off and should please the ECB. However, everyone needs a stronger eurozone, but there will come a time that the global growth imbalance will become more of an issue, especially with the U.S. Thankfully the global economy is still a long way from that scenario yet.
The Bank of Canada: An Unknown Entity
Today’s BoC meet should be a straightforward process, but one cannot rely on that with Governor Stephen Poloz having already surprised the market this year with his one and done “insurance” rate cut. With the BoC, there is always a small possibility of a rate cut, however, the oil market has stabilized over the last little while and the Canadian job numbers last week showed a vast improvement (+28,6000 jobs and +6.8% unemployment rate) which both go a long way in giving the governor some wriggle room. What the market should be most interested in is that the BoC will also publish its quarterly monetary policy report. The forecasts for the Canadian economy will be important to watch as they can give traders some idea of what kind of outlook the central bank is assuming and the possible scenarios for the benchmark rate.
The loonie is under pressure ($1.2533) ahead of today’s meet. It’s off its high print yesterday ($1.2445) now that the U.S. dollar has found a safe-haven bid following the disappointing Chinese numbers overnight. A no-change decision is the expected consensus, however, a surprise rate cut would hit CAD hard, as per the shock cut on January 21. Any negative surprises and investors can expect the first line of resistance to be quickly tested topside ($1.2667).