FED not Associated with Divergence

The Fed takes center stage next week. Does the retail sales print this week finally put a nail into Q3’s coffin? Bernanke’s colleague, north of the 49th, at the BoC, is itching to pull the rate trigger. This week, policy signals and tone from various G10 members has changed. With hawkish or more accurately ‘less dovish’ policy tones from the BoE, BoC and Swedish Riksbank has fixed income traders reducing expectations for further easing. In Canada’s case, it’s all about tightening. It was only a few month ago that all Central Bankers were waving the same flag, now we have policy divergence. FX traders have only just got their heads around Euro-periphery yields, now they will have to widen that scope. With respect to the Fed, they remain a non-starter, but have a lot to say.

Below are some other highlights of the week:


  • USD: US Retail Sales rose by a +0.8% last month, and for the third month retail ex-food and energy showed solid growth, +0.8%. March’s gain is two times larger than expected after the +1% February gain. With the US economy not slowing, but picking up pace, this is proof that consumers are back in a “big way”, and with the Fed meeting next week, is it the final nail in the coffin for QE3 arguments?
  • CAD: Non-residents have flocked back again to Canadian markets after a one month sell off. Foreigners have resumed their purchases of Canadian securities in February with the biggest monthly bond activity in two-years. Investors bought +C$12.5b worth of Canadian securities after a –C$4.25b prior month sell off. All of this is mostly down to the country’s AAA credit rating. It’s no wonder that the loonie has been in demand.
  • USD: February US TIC data showed that there was a net LT purchases of $10.1b. China increased their holdings, picking up +$12.7b for a net holdings of +$1,178.9b and maintains their number one spot for holding US debt.
  • USD: The Empire State Manufacturing Survey saw its headline index plunge to a new five month low, falling from 20.21 in March to 6.56 in April. There were some positives, the workweek rose, as did the employment index, rising to a new 11-month high. The negatives were the forward looking index slipping as well as the future activity index.
  • USD: US business inventories rose in line with expectations. Inventories increased by +0.6% in February, to a seasonally adjusted +$1.578t. The recent stockpiling has largely been driven by companies trying to keep with consumer demand as consumers continue to spend, look at this week’s strong retail sales.
  • USD: The NAHB Housing market index dropped from 28 to 25 this month. The decline equals January’s print and marks the index’s first slip in seven months.
  • CAD: Factory sales fell as expected in February, led by declines in the autos sector. Manufacturing declined -0.3% to +C$49.12b, following a sharp drop the previous month. The data was skewed by weak factory shipments from “vehicles and auto-parts.”
  • USD: US Industrial production remained flat for a second consecutive month in February and no revisions for the prior month. Another indicator for industrial slowdown was US capacity utilization softening to +78.6% from +78.7%. The market had been looking for a rise in both indicators to +0.2% and +78.6% respectively.
  • USD: US home building declined last month (-5.8% to +654k), but, new permits reached their highest level in four-years (+4.5% to +747k), proof perhaps that the sector continues to struggle even as builders anticipate future demand.
  • CAD: BoC Governor Carney did what was expected of him and kept rates on hold this week. However, his tone was more hawkish, influencing FI dealers to re-price their yield curve believing that the BoC could raise rates as early as January 2013 or sooner. The Bank is clearly uncomfortable with keeping interest rates below inflation when household debt continues to grind higher, and with the economy poised to reach capacity by early next year.
  • IMF: Boosted their economic growth forecast to +3.5% from 3.3% for this year.
  • CAD: The BoC Monetary Policy report reiterated the hawkish sentiment already expressed by Governor Carney after he left o/n rates on hold earlier in the week. The BoC increased its forecast for growth in the first three quarters for 2012. Q1 to Q3, growth is now pegged at +2.5% vs. +1.8% in December. Q3 is expected to rise to +2.4% from a previous estimate of +2.1%. The already high ratio of household debt to income is also expected to rise further.
  • USD: The weekly EIA report showed that crude inventories rallied again to a double of estimates, +3.9m vs. +1.5m barrel.
  • USD: Initial jobless claims disappointed last week, easing -2k to +386k with an upward revision to the prior week +8k. The market had expected to drop to +370k. The trend is disturbing, especially with prior week’s constantly get revised higher. Big picture, in election year, the job landscape does not seem to be improving fast enough for Obama. The Fed will have to keep the potential of using QE3 on the table to support the economy. Bernanke will surely be questioned on this next week.
  • USD: Existing home sales dropped -2.6% to +4.48m last month. Market had been expecting a stronger print of around +4.62m. It’s worth noting that distressed sales fell to +29% from +34% of the total, implying that non-distressed sales were up on the month. It’s a small win along with the mention that a lack of inventory in some markets has appeared.
  • FED: The Philly Fed Business outlook saw a slip in the headline of -4pts to +8.5 for this month, suggesting that slower manufacturing expansion is occurring in that region.
  • USD: The Conference Board’s Leading Economic Indicators index rallied by +0.3% last month. Digging deeper, the coincident index rose +0.2%, while the lagging index was up +0.3%.
  • CAD: Annual inflation eased considerably in March, falling below the +2% mark for the first time in 18-months (+1.9%), on the back of slower price increases in gas and electricity. The result has plummeted from February’s print of +2.6%. It was a similar store for the ‘core’, falling to +1.9% from +2.3%. On a m/m basis, CPI climbed +0.4%, while the core rose +0.3%
  • G20, IMF and World Bank meet in Washington this weekend.


ASIA Week in FX




  • Week starts with CNY flash PMI and Aussie CPI and PPI
  • CAD quiet with Core retail sales
  • USD, JPY and the Kiwi’s bring us CBank rate announcements
  • New and Pending Home sales are delivered to us from the US
  • GBP gives us preliminary GDP while the US advance
  • In mid-week we get to see consumer confidence in the US


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments.
He has a deep understanding of market fundamentals and the impact of global events on capital markets.
He is respected among professional traders for his skilled analysis and career history as global head
of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean
has played an instrumental role in driving awareness of the forex market as an emerging asset class
for retail investors, as well as providing expert counsel to a number of internal teams on how to best
serve clients and industry stakeholders.
Dean Popplewell