Dollar swoons; more weakness is likely

Loonie and kiwi grounded for now but may soon take flight

On Monday May 2nd, Canada will take to the polls in parliamentary elections as the minority Conservative party, headed by Prime Minister Harper, defends its run that started back in 2006. Opinion polls have shown a surge in support for the New Democrats (NDP), considered at one point to be a minor opposition party, over the Liberals, previously the leading opposition party. While both the NDP and the Liberals have pledged to reverse tax reductions of $6.3B annually for businesses, the NDP is viewed as favoring more stringent spending and tax hikes. As a result, growing NDP popularity has grounded the loonie relative to other commodity currencies – AUDCAD reached multi-year highs around 1.0440/45 this past week.

On Thursday, the RBNZ left its policy rate on hold at 2.5%. While an unchanged OCR was expected, the overall dovish tone of the accompanying statement took the market by surprise – the RBNZ noted ‘higher oil prices and the elevated level of the New Zealand dollar are both unwelcome’ and ‘current policy likely to be appropriate for some time’. The comments were interpreted as a signal that rates would remain low for an extended period of time and sent NZDUSD spiraling lower to below the 0.8000 big figure.

The loonie and kiwi have been grounded this week but both may be setting up to take-off again. While upcoming Canadian elections have weighed on the loonie, we think the ultimate impact is likely to be minimal. To start, the election is not likely to have any material effects on monetary policy as there has been no mention of exerting political pressure on the BoC in any campaigns. Furthermore, the most likely outcome is for another minority Conservative government despite the current cloud of uncertainty surrounding the elections. However, there is the risk for the surge in NDP support to translate into an increase in seats which would likely keep pressure on the loonie.

Nevertheless, we think any CAD weakness may provide opportunities to jump on board a future ‘loonie’ flight fueled by prospects for BoC tightening on the back of a firm Canadian economic recovery, elevated commodities, and accelerating inflation.

Inflation is picking up pace in New Zealand as well evidenced by the rise in Q1 CPI to 4.5% from 4.0% y/y. Price gains may accelerate at an even faster pace on the back of earthquake reconstruction efforts which is likely to put pressure on the RBNZ to tighten sooner than expected. Accordingly, we think pullbacks in NZD may also be viewed as opportunities to take a cheaper seat on the flight to continued kiwi upside.

Key data and events to watch next week

United States: The slew of April sentiment data comes through this week along with the all-important payrolls figure on Friday. Monday sees ISM Manufacturing for April. Wednesday sees the ISM non-manufacturing report for April and ADP employment report. Thursday has unit labor costs and productivity from the first quarter. Friday’s Non- Farm payroll report (the market is looking for 180k), and the unemployment rate, expected to remain steady at 8.8 per cent in April, will be the highlights along with hours worked and average hourly earnings data.

Eurozone: The week will be dominated by the ECB meeting on Thursday (see above for preview). Other than that it’s a fairly light data week with PPI out on Tuesday and retail sales due for March out on Wednesday where the market is looking for another monthly contraction of 0.1 per cent.
United Kingdom: The Bank of England meeting on Thursday is the highlight; the Bank is expected to remain on hold. PMI manufacturing data is released on Tuesday along with the latest CBI sales report for April. The construction sector PMI along with the money supply is released on Wednesday with PMI services sector data released on Thursday prior to the BOE meeting. Rounding off the week on Friday is the PPI input and output price data for April.

Japan: It is Golden Week holidays so the data calendar is fairly light, but there are a few things to be aware of including labor cash earnings for March on Monday and the monetary base on Friday.

Canada: The week starts with Industrial product prices and raw materials prices for March that will be looked at closely for evidence of growing inflation pressure in the Canadian economy. Monday’s National elections will be watched closely for a potential change in government. Then on Thursday there is the Ivey Purchasing manager manufacturing survey for April. On Friday, Canada announces its labor market report also for April; the unemployment rate is also released, which is expected to remain steady at 7.7 per cent.

Australia and New Zealand: A busy data week for Australia with the highlight being Tuesday’s RBA meeting, the bank is expected to keep rates on hold. Prior to that on Monday TD Securities releases its inflation data for April then there is the house price index for Q1. On Wednesday there is housing market data including HIA New Home Sales for March. On Thursday we see building approvals data and retail sales for March that are expected to rise by 0.5 per cent over the month. In New Zealand the week gets started with ANZ Commodity Prices for April, along with labor market costs data for the first quarter. On Tuesday we get building permits for March. On Wednesday we get the unemployment rate for the first quarter, which is expected to edge lower to 6.7 per cent from 6.8 per cent in Q4.

China: It is a fairly light data week. PMI Manufacturing will be released on Sunday for April and the market is looking for the index to edge up to 53.9 from 53.4 in March. Non-manufacturing PMI is released on Tuesday with the China HSBC Services Sector PMI released on Thursday.

Brian Dolan is chief currency strategist at

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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