Canadian Dollar Dives after Retail Sales, Dollar Struggles to Extend Gains Elsewhere

Canadian Dollar drops sharply in early US session after terrible weak retail sales data. Headline retail sales dropped -0.8% mom in December versus expectation of -0.1%. Ex-auto sales were even worse by dropping -1.8% mom, versus expectation of 0.0%. On the other hand, Dollar continues to struggle to extend post FOMC minutes gains despite solid job data. Initial jobless claims dropped -7k to 222k in the week ended February 17. Continuing claims dropped -73k to 1.88m in the week ended February 10. USD/CAD jumps after the releases and is on course towards 1.29 near term resistance zone. However, Dollar is staying below near term resistance against other major currencies, thus, maintaining bearish outlook.

Fed Bullard" A bunch of hikes will turn policy restrictive

St. Louis Fed president James Bullard tried to tame speculations of faster rate hike by Fed this year. He said in an interview that four rate hike this year would be "priced for perfection". And, "the idea that we need to go 100 basis points in 2018, that seems like a lot to me." He emphasized that for that to happen "everything would have to go just right". That is, "the economy would have to surprise on the upside a bunch of times during the year." And he’s "not sure that’s a good way to think about 2018." Bullard added that "a bunch of hikes this year Fed policy will turn restrictive" as "the neutral fed funds rates is pretty low."

On the other hand, Fed Governor Randal Quarles said in a speech that "after assessing the recent data, my take is that the current shortfall in inflation from target as most likely due to transitory factors that will fade through 2018, pushing inflation back up to target". And, "Against this economic backdrop, with a strong labor market and likely only temporary softness in inflation, I view it as appropriate that monetary policy should continue to be gradually normalized."

ECB minutes: Premature to change communication

Minutes of January ECB meeting showed that "changes in communication were generally seen to be premature at this juncture, as inflation developments remained subdued despite the robust pace of economic expansion." Nonetheless, ECB did acknowledge that Inflation expectations in the ECB Survey of Professional Forecasters (SPF) for the first quarter of 2018 showed average inflation expectations of 1.5 percent, 1.7 percent and 1.8 percent for 2018, 2019 and 2020 respectively. Compared with the previous survey round, this represented upward revisions of 0.1 percentage point for 2018 and 2019." Also, "longer-term market-based measures of inflation expectations had increased further, in line with the gradual upward trend observed since the middle of 2017."

German Ifo: Dipped but not change in underlying trend

German Ifo business climate dropped to 115.4 in February, down from 117.6, below expectation of 117.0. Expectation gauge dropped to 105.4, down from 108.3, missed consensus of 107.9. Current assessment gauge dropped to 126.3, down from 127.8, below consensus of 127.0. Ifo president Clemens Fuest said that "companies were less satisfied with their current business situation, but the indicator was at its second highest level since 1991." And, the data "signals economic growth of 0.7 percent in the first quarter." Ifo economist Klaus Wohlrabe said that "I would not yet speak of a change in the underlying trend, the German economy is still doing very well, but some of the steam has been let off."

Released from UK, Q4 GDP growth was revised lower to 0.4% qoq. Index of services rose 0.6% 3mo3m in December. CBI reported sales dropped to 8 in February.

Abe advisor urges BoJ to buy foreign bonds

In Japan, Prime Minister Shinzo Abe’s Koichi Hamada urged BoJ Governor Haruhiko Kuroda to "consider having the BOJ buy foreign bonds." Hamada is an emeritus professor of economics at Yale University. The idea is pushed forward by academics. In particular, at this stage of the quantitative and qualitative easing program, BoJ could be running out of domestic assets to buy. Purchase of foreign bonds from financial institutions could give them Yen cash. Such funds could be loaned out to companies and households as cheap money, to spur growth and inflation.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.2650; (P) 1.2676; (R1) 1.2728; More….

USD/CAD’s rally continues to as high as 1.2757 so far today and intraday bias remains on the upside. Rebound from 1.2246 should be targeting 100% projection of 1.2246 to 1.2687 from 1.2450 at 1.2891, which is close to 1.2919 key resistance. We’d be cautious on strong resistance from there to limit upside. On the downside, below 1.2624 minor support will turn intraday bias neutral first. But further rally would be mildly in favor as long as 1.2450 support holds.

In the bigger picture, the rebound from 1.2246 is mixing up the medium term outlook. Nonetheless, USD/CAD is staying below falling 55 week EMA (now at 1.2776), hence, the bearish case is in favor. That is, fall from 1.4689 is not completed yet. Sustained break of 1.2061 key support will carry larger bearish implication and target 61.8% retracement of 0.9406 to 1.4689 at 1.1424. However, firm break of 1.2919 will revive the case of medium term reversal and turn outlook bullish.

Economic Indicators Update