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Talking Points

• Japanese Yen: falls as equities carry over the rally from North America
• Euro: Trade Balance better than forecast
• Pound: Mortgage intervention may be in place
• US Dollar: Philly Fed and LEI on tap

Since yesterday euro bulls have tried to make a run at the 1.60 four separate times but have been repelled each time with the defense of option barriers at that level remaining in tact. Still it may just be a matter of time before this seminal level falls taking out the many stops likely placed there.

The economic backdrop from the EZ continues to be supportive with tonight’s Trade Balance data showing a surprising surplus of 2.1 Billion euros versus expectations of -2.1 billion deficit. The fact that the region’s producers are able to export demonstrates that despite record high exchange rates the EZ economy has not yet been materially impacted to downside. Tonight’s news should allow the ECB to maintain its hawkish posture for the time being and may provide just enough momentum to finally tip the price over that key level.

The pound also saw a boost today, after a Reuters report suggested that UK authorities mortgage intervention plan could be announced as early as next week alleviating some of the risk concerns that plagued the unit recently. Cable rose to within a few points of the 1.9800 level in mid-morning London trade as the result of the news. Sterling continues to suffer from perception that UK rates are inevitably headed lower, however, given yesterday’s relatively string employment data, the pace of rate cuts may be less aggressive than some pound shorts assumed, providing some near term support for the currency.

Finally, today’s North American trade will focus on US LEI and Philly Fed numbers both of which are expected to improve. The greenback was aided by better than expected Industrial Production data yesterday which indicated that the lower dollar may finally be helping US manufacturers and if Philly Fed confirms this pattern, euro shorts may be able to hold off the rush to 1.60 for a while longer. The one fly in the ointment to this scenario would be worse than expected weekly jobless claims, which would once again raise the possibly of a larger than expected 50bp cut from the Fed.

DailyFX

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The Euro has reached 1.5958 Dollars breaking 1.59 resistance and, according to the Mataf.net Technical Team, to enter into a consolidation period: “1,5958. EUR USD broke 1,5900 resistance. EUR USD is in a consolidation after the last bullish movement. The volatility is high. Bollinger bands are deviated. ForexTrend 1H, daily (Mataf Trend Indicator) is in a bullish configuration.” For the next sessions, the Mataf.net technical team foresees futrther climbing for the Euro: “The price should find a support above 1,5900. The uptrend should continue to gather momentum. The target is expected at 1,6400.”
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In a research note, two economists from Morgan Stanley predicted that the Euro will soon come crashing down, failing in its bid to rival the Dollar as a viable reserve currency. They observed that in the beginning of the decade, the Euro was viewed as joke from an economic standpoint. Since long-term economic fundamentals can’t reverse themselves in only a few years, they reasoned that the Euro’s rise must instead be a product of financial (capital flows) trends. Furthermore, as the EU becomes further integrated, a need will develop to diversify capital outside of the EU, thus reversing the trend of the last few years of diversification within the EU. The Globe and Mail reports:

The euro is overvalued because institutional investors…world have been diversifying out of their home markets at the same time as European investors have largely been diversifying within their home market.

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Forex trading involves substantial risk of loss, and may not be suitable for everyone.

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Forex trading involves substantial risk of loss, and may not be suitable for everyone.

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The tight Canadian credit markets have remained a concern for the BoC. Therefore, the central bank will infuse another C$2 billion in liquidity into the market on April 17, when they purchase securities with treasuries. The MPC’s fretting has led to expectations that they will cut rates by 50 points at their upcoming April 22 meeting.

What Are The Markets Facing?

The tight Canadian credit markets have remained a concern for the BoC. Therefore, the central bank will infuse another C$2 billion in liquidity into the market on April 17, when they purchase securities with treasuries. The MPC’s fretting has led to expectations that they will cut rates by 50 points at their upcoming April 22 meeting. Despite concerns over lending standards and a U.S. downturn, the Canadian economy has remained resilient. A strong labor market, built on the commodity boom has fueled domestic growth and saw the economy generate another 14,600 jobs in March. Likewise record oil prices have seen the physical trade balance reach a nine month high of C$4.9 billion, as energy exports have increased. Another positive sign for the economy is the recent tripling of expectations in factory shipments on higher automobile orders. Nevertheless, Governor Carney has cut rates 100 points since the subprime crisis started, as the U.S. slowdown is expected to eventually impact the Canadian economy. The only obstacle to a rate cut may be the upcoming inflation report, as rising energy and food costs have increased worldwide, leaving many policy makers reluctant to reduce interest rates. However, with current the current CPI level of 1.8% below the central banks target of 2% and expected to go lower, an uptick would not raise concerns for Canadian decision makers.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bonds have consolidated ahead of the upcoming BoC rate decision. The combination of bullish fundamental data and returning risk appetite has offset the speculation of a future rate cut. Easing inflation may give CGB’s a boost as it would clear the way for another rate cut by the MPC. An appreciation in prices may reduce expectations of further easing and weigh bonds lower.

FX – USD/CAD

The recent anti-dollar sentiment currently in the markets has pushed the USD/CAD below the 200 Day SMA and support at 1.0040. Parity will be the next level of resistance for the pair, as the psychological level hasn’t been breached since March 19. The “loonie strength is somewhat surprising considering the anticipation that the BoC will cut rates at their next meeting.  The upcoming inflation data isn’t expected to have an impact on the central banks decision. Nevertheless, traders will keep an eye on the data as it is traditionally significant factor in the MPC’s decision making process. Therefore, a surprise increase in inflation may perpetuate the current Canadian dollar rally. However, if prices continue to ease, then there will be a clear path for rate cuts and the potential increase in interest rate differential will put downward pressure on the ‘Loonie” which may send the pair back above its 200 day SMA.

Do you think the USD/CAD will return to parity? Discuss the topic with other traders in the USD/CAD Forum.

Visit our recently updated Canadian Dollar Currency Room for specific resources geared towards the Loonie.

Equities – S&P/TSX Composite Index 

The S&P/TSX Composite Index is coming off of consecutive days of gains led by energy stocks, which received a boost from record oil prices, which rose above $13 a barrel. The index has broken through resistance and is currently receiving a boost from better than expected manufacturing shipments. The recent commodity boom and a belief that the credit crisis is nearing an end as seen the equities rally over 100 points since mid March. The upcoming inflation data is expected to show prices easing, which will allow the BoC to cut rates unfettered. This scenario would create a bullish stock environment that may push the index toward 14500. However, a significant  rise in inflation may spark fear that rising prices will reduce the chances of a rate cut and begin to deter consumer spending, The bearish news may weigh on the index, reversing its current gains with support at the 13600.