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Currency movements becoming less correlated Yesterday’s trading was notable for two reasons: the size of the moves and the fact that they were so mixed. The dollar appreciated significantly (=over 0.1%) against EUR, NZD, CHF and SEK, while weakening a similar amount against CAD, NOK, JPY and AUD. It looks as if correlation among currencies is lessening. Perhaps the market is leaving behind the “risk-on, risk-off” paradigm that previously held sway and instead currencies are moving more on idiosyncratic domestic factors. If so, that offers much more opportunities for traders to analyze the market and invest based on their views on individual countries and currencies rather than an overall global view.

The Bank of Canada’s statement following its meeting yesterday showed a less optimistic view towards the global and Canadian economies and less urgency to tighten rates. CAD initially weakened on the news, but then recovered and traded stronger after BoC Gov. Poloz refrained from commenting on the currency during his press conference following the meeting. Nonetheless, I view this move as simply a short-term profit-taking after the recent spike and expect CAD to weaken further going forward.

Although the BoC admitted that inflation has hit their 2% target earlier than expected, they said it was due to “temporary factors,” such as higher energy prices and the weakening of the CAD, not due to any change in economic fundamentals. They predicted inflation would “fluctuate around 2%” for the next two years, which implies that they have no need to tighten policy during that time. Meanwhile, their assessment of the economy was definitely more negative than it was just last month as they said “…economic activity in Canada is now projected to be a little weaker than previously forecast.” Significantly, they added that “the Bank still expects that the lower Canadian dollar and a projected strengthening in global demand will lead to a pickup in Canadian exports and business investment and, eventually, a more sustainable growth track.” In other words, the recovery still depends on a weak CAD. With the recovery depending on a weak currency to promote exports, I would expect them to maintain their neutral bias, particularly as they do not see higher inflation as a significant risk, and that any major strengthening in the exchange rate will be met by verbal intervention. All told I view the statement as dovish and generally bullish for USD/CAD.

Yesterday’s US data was largely favorable. Industrial production in June rose less than expected, but the NAHB housing market index was substantially higher than forecast (and once again over the 50 level that signifies expansion). Meanwhile the Beige Book, published ahead of the July 29-30 FOMC meeting, said that economic conditions and labor markets improved across the country, with only two districts reporting a slightly slower pace of growth since May. Wage pressures remained modest and price pressures were "generally contained.” The news is likely to reassure the FOMC that its core scenario of gradual recovery without inflationary pressures is coming to pass and that they are on the right track. It should be generally USD-positive.

Fed Chair Janet Yellen’s second day of testimony to Congress added little to what we already know about FOMC thinking.

Today: A relatively quiet day on the data front. Eurozone’s final CPI for June will most likely confirm the initial estimate of +0.5% yoy.

From the US, we get the housing starts and building permits for June. Both figures are forecast to have increased. Initial jobless claims for the week ended July 12 are expected to have increased slightly to 310k from 304k. This would bring the 4wk moving average to 311k, not much of a change from 312k previously. The Philadelphia Fed business activity index for July is anticipated to have declined.

We have three speakers on Thursday’s agenda. In the European day, we have Bank of England Executive Director for resolution Andrew Gracie and Deputy Governor for financial stability Jon Cunliffe. In the US, St. Louis Fed President James Bullard speaks.

Thursday, 17 Jul, 2014 / 11:32

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