Canada’s conservatives swept to victory and will now be able to form a majority government after years of awkward maneuvering with minority status. The NDP will now form the opposition as the Liberals party was absolutely gutted. What does this mean for CAD?
Ahead of Canada’s election, the consensus expected the result would be a solidified minority government for the Conservatives. Then, as the NDP surged so strongly ahead of election day, the fear even arose that the NDP might become the kingmaking party. Both beliefs were justified it turns out. The Conservatives garnered enough support to form an absolute majority for the first time, and the NDP finished strongly enough to take second place and become the official opposition party. All of the developments at the margin came at the cost of the gutted Liberal party, with . With the sitting government solidifying its policy mandate, this should mean little direction change for policy going forward as the Conservative leadership looks to lower corporate taxes and is generally seen as pro-business. This bolsters the support for AUDCAD to switch course and possible head lower as we have discussed in our recent updates (AUD overcooked on commodity themes while CAD is underappreciated due to political uncertainty and the exposure to the US economy.) The prospects for that trade could also be affected by the price of oil.
Weak UK data
A terrible Manufacturing PMI data point (54.6, a big miss from the 57 expected and a downwardly revised 56.7 of Mar.) out of the UK dampened enthusiasm for the GBPUSD rally that had recently taken out key resistance levels and the pair reversed sharply on the day. We suggested yesterday that the bubbly London property market might be providing some of the inflows of capital into the UK to support the pound at these levels (conjecture – it could also be the weak USD move simply getting emotional) since interest rate differentials were not supportive of the move higher. This data point reminds us that the likelihood of policy response from the BoE is probably fairly similar to the Fed’s if growth proves unsatisfactory, a development that is perhaps more likely in the UK in the nearest term because of the austerity measures that went into force as we rolled into the new year. The 1.64 area is critical for GBPUSD and EURGBP is now facing the 0.90 level after having traded below that level for more than a year
Chart: GBPUSD
GBPUSD plummeted on the day after a downside surprise in the PMI data. The first support area around 1.6600 was taken out and the really critical area around 1.6425 is up next as well as the ascending trend-line. The uptrend suffers a critical blow on a close below the first of these levels.
A terrible Manufacturing PMI data point (54.6, a big miss from the 57 expected and a downwardly revised 56.7 of Mar.) out of the UK dampened enthusiasm for the GBPUSD rally that had recently taken out key resistance levels and the pair reversed sharply on the day. We suggested yesterday that the bubbly London property market might be providing some of the inflows of capital into the UK to support the pound at these levels (conjecture – it could also be the weak USD move simply getting emotional) since interest rate differentials were not supportive of the move higher. This data point reminds us that the likelihood of policy response from the BoE is probably fairly similar to the Fed’s if growth proves unsatisfactory, a development that is perhaps more likely in the UK in the nearest term because of the austerity measures that went into force as we rolled into the new year. The 1.64 area is critical for GBPUSD and EURGBP is now facing the 0.90 level after having traded below that level for more than a year
Chart: GBPUSD
GBPUSD plummeted on the day after a downside surprise in the PMI data. The first support area around 1.6600 was taken out and the really critical area around 1.6425 is up next as well as the ascending trend-line. The uptrend suffers a critical blow on a close below the first of these levels.
Australia RBA
The RBA’s rhetoric was relatively dovish, particularly given the extreme rally in the Aussie in recent weeks. The RBA called its current cash target “mildly restrictive” and it gave little forward guidance. In reference to the Aussie’s strength, Mr. Stevens said that it could “exert additional restraint” on trade-related sectors of the economy. The meeting and the generally risk negative tone after the weak US close of equity markets saw forward rate expectations for the RBA lowered a couple of notches and the Aussie weakened against most currencies overnight – particularly the lowest yielders like the JPY and USD. After a spectacular run for the currency, it may finally be time for a bout of consolidation, though if the risk/commodity rally reignites, the Aussie might come clawing back. The first key support area for AUDUSD comes in around 1.0580.
The RBA’s rhetoric was relatively dovish, particularly given the extreme rally in the Aussie in recent weeks. The RBA called its current cash target “mildly restrictive” and it gave little forward guidance. In reference to the Aussie’s strength, Mr. Stevens said that it could “exert additional restraint” on trade-related sectors of the economy. The meeting and the generally risk negative tone after the weak US close of equity markets saw forward rate expectations for the RBA lowered a couple of notches and the Aussie weakened against most currencies overnight – particularly the lowest yielders like the JPY and USD. After a spectacular run for the currency, it may finally be time for a bout of consolidation, though if the risk/commodity rally reignites, the Aussie might come clawing back. The first key support area for AUDUSD comes in around 1.0580.
Sweden Riksbank
The minutes of the most recent Riksbank meeting (as well as the generally risk-negative tone this morning) saw SEK downside as they showed the Riksbank judging that the recent rises in the CPI are not feeding into inflation expectations. There was some worry expressed about inflation feeding into wages, however. Two dissenters again voted against the decision to raise rates, while the lone dissenter the last time around looking for a larger hike agreed to the 25-bp hike at this recent meeting. The 55-day moving average is obviously a critical one for EURSEK as support. It is currently around 8.90. To the upside, the pair recently found resistance ahead of the 200-day moving average, which comes in at around 9.10 now, but is rapidly falling.
The minutes of the most recent Riksbank meeting (as well as the generally risk-negative tone this morning) saw SEK downside as they showed the Riksbank judging that the recent rises in the CPI are not feeding into inflation expectations. There was some worry expressed about inflation feeding into wages, however. Two dissenters again voted against the decision to raise rates, while the lone dissenter the last time around looking for a larger hike agreed to the 25-bp hike at this recent meeting. The 55-day moving average is obviously a critical one for EURSEK as support. It is currently around 8.90. To the upside, the pair recently found resistance ahead of the 200-day moving average, which comes in at around 9.10 now, but is rapidly falling.
Looking ahead
As USDJPY slips to a new low today, remember that Japan is out for its core Golden Week holidays tomorrow and Thursday in addition to today. 80 is the big round number to focus on there, both for psychological reasons and due to the Ichimoku daily cloud level in play in that area.
As USDJPY slips to a new low today, remember that Japan is out for its core Golden Week holidays tomorrow and Thursday in addition to today. 80 is the big round number to focus on there, both for psychological reasons and due to the Ichimoku daily cloud level in play in that area.
We ought to keep an eye on the precious metals market as well – the kind of volatility we have seen in gold overnight can shake people’s confidence in the marketplace more generally and create volatility across the board if this generates a degree of uncertainty and the desire to take risk off the table. Some are calling the gold hiccup (looks more like a seizure to us) a kind of “flash crash” due to market dynamics. Going back to last May’s flash crash, remember that after the initial shock, things appeared relatively calm for almost a week before concern gripped the market again and it visited the lows seen during the crash itself within three weeks of the May 6 crash.
On the economic calendar, we have the UK Services PMI up tomorrow as well as the US ISM non-manufacturing and ADP Employment number. The interest around the US employment report this Friday is heating up after a few weak initial jobless claims readings of late. Thursday sees another claims reading heading into the payrolls report Friday.
Also keep an eye on the debt ceiling issue in the US, which is also heating up. There are mechanisms in place, one should note, that would allow for debt payments to be made (effectively meaning no default) even if the ceiling is not raised. (See WSJ article here for more on this story)
Also keep an eye on the debt ceiling issue in the US, which is also heating up. There are mechanisms in place, one should note, that would allow for debt payments to be made (effectively meaning no default) even if the ceiling is not raised. (See WSJ article here for more on this story)
Be careful out there.
Economic Data Highlights
- New Zealand Q1 Average Hourly Earnings out at +0.3% QoQ vs. +0.5% expected and +0.6% in Q4
- China Apr. Non-manufacturing PMI out at 62.5 vs. 60.2 in Mar.
- China Mar. Leading Index out at 101.71 vs. 101.42 in Feb.
- Australia RBA leaves Cash Target unchanged as 4.75% as widely expected
- UK Apr. PMI Manufacturing out at 54.6 vs. 57.0 expected and 56.7 in Mar.
- EuroZone Mar. EuroZone PPI out at +0.7% MoM and +6.7% YoY vs. +0.7%/+6.6% expected, respectively and vs. 6.6% in Feb.
- UK Apr. CBI Reported Sales out at 21 vs. 15 expected and 15 in Mar.
Upcoming Economic Calendar Highlights (all times GMT)
- US Mar. Factory Orders (1400)
- US Weekly API Crude Oil and Product Inventories (2030)
- US Apr. Vehicle Sales (2100)
- New Zealand Mar. Building Permits (2245)
- UK Apr. BRC Shop Price Index (2301)
- Australia Apr. AiG Performance of Services Index (2330)
- Australia Mar. New Home Sales (0100)
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