CAD spurred by BoC inaction & oil jump

<p>The euro slumped to fresh 11-year lows as markets awaited Thursday’s ECB decision, while US services ISM edged up to 56.9 in February from 56.7, […]</p>

The euro slumped to fresh 11-year lows as markets awaited Thursday’s ECB decision, while US services ISM edged up to 56.9 in February from 56.7, further widening the gap between services and manufacturing sector. The eurozone’s own services PMI edged up to a slower than expected 53.7 in February. Thursday’s ECB announcement will revolve around the sharing arrangements of profits and losses of the purchased bonds between the eurozone’s 19 central banks; the scope of bonds that can be purchased and the prices of purchase, considering that most bonds are offering negative yields and would incur a loss if held until maturity.

The ECB may offer a new forward guidance about the macro metrics requiring a change in the pace of bond purchase, set to start at a monthly rate €60 bn. Will it be mainly a rise in inflation? And to what level?

PMI enforces sterling selloff

GBP dropped for a 3rd consecutive session after the important services PMI fell to 56.7 in February from January’s 57.2, disappointing expectations of a rise to 57.3. The index has shown only two monthly rises over the last six months, with the chart displaying a pattern of lower-highs.

Sterling’s deterioration emerged despite the release of higher than expected construction and manufacturing PMIs. Broadening USD gains did help weigh on the pair, and a close below the $1.5310—55-day moving average—risk extending losses towards the next support of $1.5219. Just as the decline in GBPUSD occurred despite the lack of any weakness in UK fundamentals, we could expect a subsequent stabilisation without any real positive fundamentals in the days to come.

One possible source of GBP boost –aside from the usual monetary policy related variables—could be this month’s budget statement, which will show the govt to have met forecasts from its Autumn Statement as the January statement showed a surplus of £8.8bn against last year’s £6.5bn. Any news supporting chances of the incumbent party remaining in power in this year’s elections could provide the market-friendly boost for the currency.

Bank of Canada’s rate hold signals one-&-done

The Canadian dollar rose across the board after the Bank of Canada announced keeping rates unchanged at 0.75%, stating that “inflation is now more balanced” and current degree of policy stimulus remains “appropriate”. The BoC added that the negative impact of lower oil prices “may be even more front-loaded”, allowing for the possibility of downward revision to Q1 GDP.

On the positive side, the BoC said easing financial conditions will “mitigate” the impact from the oil price shock on overall economic growth. It viewed oil market dynamics to have been progressing as had been anticipated in the January meeting.

The BoC was especially encouraged by last week’s release of January headline CPI, which came in at a hig+her than expected 1.0% y/y and more importantly core CPI remaining unchanged at 2.2% y/y. The Statement showed the BoC will remain on hold for the foreseeable future as long as oil prices remain stable.

One forward-looking indicator suggesting further loonie gains is the divergence between the decline in USDCAD and the ongoing rise in CAD net shorts versus the USD as seen in the CFTC’s Chicago Mercantile Exchange’s futures flows. With net CAD shorts at an 11-month high of 36,245 contracts and CAD near 2-month lows vs USD, markets should witness considerable declines in CAD shorts in the upcoming data. All this to the benefit of CAD vs USD.

Crude Oil Mar 4 2015

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