Did the geyser burst for CAD? Low economic growth – Canadian growth fell by half in the third quarter – plus weaker oil prices and a weaker USD have undermined the Canadian dollar. Add, too, a frail housing market hit by quick-fire Bank of Canada rate rises following an over-extended 25-year price appreciation bender. Down on the loonie? A touch. Even as the USD fell this week USD/CAD managed to find small gains, here and there. “CAD has been on a weakening trend of late with GBP/CAD now attempting to breach April's highs,” says Equals Money market strategist Thanim Islam. “Lower job numbers today and we could easily see further gains on this pair.” The Bank of Canada (BoC) ducked a meeting in November following October’s cautiously worded 50bp rate rise, resisting a 75bp move. The BoC meets on Wednesday to decide whether to hike rates to 4.25%, a 50bp rise, or dial it down to 25bp.
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The very robust US labour market data released on Friday was a shock for equity markets, which had surged in the aftermath of Powell's speech confirming a slower pace of rise in December. Non-farm payrolls (NFPs) came in at 263k, which was significantly higher than the 200k that had been anticipated, and average hourly wages rose 5.1% y/y, well above the 4.6% expected. The job report came as a surprise following an event hosted by the Brookings Institution on Wednesday, at which Powell emphasized the need to slow the pace of rate hikes as early as the December FOMC meeting, therefore solidifying a 50 basis point hike rather than a 75 basis point boost. Markets celebrated as they repriced Fed rate forecasts lower and factored in about 50 basis points of cuts in the second half of 2023. Fed rate expectations must now be reassessed in light of red-hot labour market statistics, as a higher-for-longer rate path gains traction. US Treasury yields rebounded after the release of the NFP report. The yield on the 2-year Treasury note increased by 12 basis points to 4.42%, and yields on the 10-year note surged by 8 basis points to 3.59%. The Treasury yield curve remains inverted, with the yield spread between the 10-year and 2-year maturities reaching -0.75%, the highest level since September 1981. The S&P 500 (US500) index retraced more than half of its post-Powell speech gains, dropping to 4,035 points as of 2:30 pm GMT and gaining 0.8% for the week. The tech-heavy Nasdaq 100 (US100) fell below 12,000 points also retracing nearly half of its weekly gains (1.9%). European equity indices were more steady. German Dax (DE40) held at about 14,500 points, flat on the week, while FTSE 100 (UK100) rose 1.5%, buoyed by positive Brexit developments. The Chinese domestic equity market (CN50) was the largest outperformer, gaining 7% on the week, as Chinese authorities further eased Covid restrictions amid widespread protests.
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A sharpening Japanese yen, up 10% since October, maybe straggle behind GBP’s 16%-plus gains in the same period, but is JPY’s rally enough to lift it back on the ‘safe haven’ podium, alongside near neighbour CHF? USD/JPY sank again this morning, down 1.1% helped by signalling from Bank of Japan (BOJ) policy member Asahi Noguchi that the BOJ might wind in its stimulus marathon, under certain very tight conditions. Should wages climb with trend inflation – think wage and services pressures – then the BOJ could respond. It’s still a big If. "Trend inflation hasn't reached 2% yet. But if there's a certainty that level will be met, it won't be surprising for the BOJ to shift monetary policy," Reuters reported Noguchi as saying at a news conference. FX strategist and finance consultant at Keystone, Francis Fabrizi “USD/JPY has increased its bearish momentum after falling from 140.600 yesterday and breaking below the ascending trendline seen on the weekly timeframe.” “This morning it is attempting to reach the 134.650 support level. If it is successful in dropping below this level, 132.000 will be the next target level, indicating the end to the current bullish trend.” “If the price is unable to break and hold below 134.650, I believe we will see a pullback towards 138.000.” Service and wage pressures are yet to see a bump. Meanwhile, the prevailing BOJ orthodoxy remains: Governor Haruhiko Kuroda is deeply resistant to pull stimulus measures until limping domestic demand and wage growth meaningfully climb. Capital fx market specialist Piero Cingari says stretched levels in the USD/JPY daily chart are clear enough. “The RSI is detecting oversold once more, and the 200-day moving average is only 1.5% below current levels.”
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Both copper and iron ore prices showed significant gains lately, as investors keep a close eye on China reopening developments, which are crucial to both industrial metals. China consumes about 52% of the world’s copper, making it the world's largest consumer of the brown metal. China is also the largest consumer of iron ore globally, with it importing about 80% of the iron ore it uses, mostly from Brazil and Australia. Copper, although slightly down on Friday, was still up about 5.4% this week, with a monthly gain of approximately 11.6%. At the time of writing, copper was trading at about $3.8 per pound. Iron ore has had a more pronounced upswing, with a weekly gain of about 6.1% and a monthly jump of more than 28%. At the time of writing, iron ore was trading at about CNY 724 per tonne. This was primarily due to China already eased some of its zero-COVID-19 restrictions in some areas following increasingly violent protests. China has recently been easing its rigid zero-COVID-19 restrictions, following mass protests across the country, sparked by a high-rise building fire in Urumqi, which led to the deaths of 10 people. This has led to widespread outrage, with citizens blaming ongoing restrictions for the delay in emergency services. The Chinese government has responded by loosening zero-COVID restrictions in Urumqi, as well as several districts in Guangzhou and Shanghai. Furthermore, in some localities of Beijing, COVID-19 patients with relatively mild cases of the virus have been allowed to self-isolate at home, as opposed to in the hospital, or whole buildings and localities cordoned off earlier. This has also been supported by the fact that top pandemic officials are highlighting that the Omicron strain of the virus has been losing strength, through herd immunity improving significantly, as well as more people getting vaccinated. Although cases are still quite high, they are less severe than before, with fewer deaths than in countries such as the UK and the US. This has led to widespread speculations that China may now be willing to turn away from its rigid zero-COVID policy and perhaps end mass lockdowns altogether. This is also because so far, China’s policy of introducing mass lockdowns whenever cases rise has not been working very well, leading to a delay in herd immunity as well as hitting the economy very hard. To counter these effects and revive the economy, the Chinese government has already issued a slew of stimulus measures, which are focusing heavily on the infrastructure and real estate sector, amongst others. This is going a long way in boosting copper and iron ore prices, which are heavily reliant on these sectors.
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