BoC expects Gross Domestic Product growth to be 1.1% year-over-year (Y/Y) this year, down from its 1.9% forecast in April. Policy makers said that Gross domestic product probably “contracted modestly” in the first half. However, they did not call it recession. ‘‘The lower outlook for Canadian growth has increased the downside risks to inflation,’’ policy makers said.
Bank also reduced the net exports contribution to GDP by 0.8% to 0.6% from 1.4%. A stronger U.S. economy and a weaker Canadian dollar should contribute to higher export growth.
There has been a big shift in the inflation tone over the past few months:
April: “Risks to the outlook for inflation are now roughly balanced”
May: “the Bank’s assessment of risks to the inflation profile has not materially changed”
This time (July): “The lower outlook for Canadian growth has increased the downside risks to inflation”
“The Bank anticipates that the economy will return to full capacity and inflation to 2 per cent on a sustained basis in the first half of 2017.” In the April’s forecasts, the bank expected the economy to return to full capacity at the end of 2016. I can tell that the Bank is running scared.
Damages from low oil prices has been extensive. Canada is the world’s fifth-largest oil producer and lower oil prices will definitely not help the economy. The damages from lower oil prices shrank the economy in the first half of the year.
Recently after Iran deal has been reached, oil prices fell sharply. It’s currently trading around $48. If the the deal is finalized, it won’t be very good for Canada economy since Iran might want to double its oil production, leading to much lower oil prices.
The bank also said “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.” If conditions get worse, they will cut rates again.
Oil is not the only problem for Canada. Other concerns are potential bubbles in housing and consumer debt.
According to BoC’s Monetary Policy Report (June), “the vulnerability associated with household indebtedness remains important and is expected to edge higher in the near term in response to the ongoing negative impact on incomes from the sharp decline in oil prices and a projected increase in the level of household debt.” (Page 30).
Over the past few years, housing prices in Canada have skyrocketed. Lower borrowing costs will just add fuel to the fire (DEBT + HIGH PRICES IN HOUSING MARKET WITH LOW INTEREST RATES = NOT A GOOD COMBINATION) . There just might be a bubble in the housing market. But, BoC does not think so.
The next BoC meeting is on September 9th, about a week before the U.S. Federal Reserve meeting, the day that many believe lift-off from the zero interest rate policy will take place. CPI and non-farm payrolls data for July and August will decide whatever the Fed will hike or not.
Rate-cuts and plunging commodity prices, especially crude oil, has caused sell-off in Loonie. Ever since the first rate-cut of the year (January), Loonie (CAD) has weakened significantly. With strengthening dollar (USD), USD/CAD has skyrocketed. When looked at monthly chart, USD/CAD has developed ‘Cup and Handle’ formation. While this is a sign to short USD/CAD, I would be very careful because fundamentals for CAD are too weak. If I were to short it, I would put my stop above the resistance line (Bold Red line).
Last Wednesday (June 10, 2015), Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 0.25% (25 basis points) to 3.25% for the first time since March 2011. According to RBNZ, further easing may be needed if future economic data are weak (“We expect further easing may be appropriate. This will depend on the emerging data.”). They believe Kiwi (NZD) is overvalued and “…further significant downward adjustment is justified.”. I can tell that they badly want Kiwi to decline.
In 2014, RBNZ raised rates four times from 2.50% to 3.50% (March, April, June, July), before pausing further hikes due to price depreciation in oil and dairy.
RBNZ lowered interest rates to boost inflation as growth in New Zealand slows. They are responding to slowing growth as dairy prices fall and inflation is not showing any signs that it will increase. The inflation is near zero and the central bank wants it at 2%, same as other major countries. Consumer Price Index (CPI) inflation currently stands at 0.1%. Fonterra Cooperative Group ltd., the world’s biggest dairy exporter, is a New Zealand company and is responsible for about 30% of the world’s dairy exports. The average prices of dairy has been declining, reflecting on lower inflation. Lower cash rate should help support dairy farmers which will lead to more spending.
The central bank also changed its growth forecast. They see inflation reaching their target–2%–by 4th quarter of 2016, from previous forecast at 3rd quarter of 2017. Why do they think that they will reach their inflation target by the end of 2016? They believe lower rates combined with currency decline (NZD, or Kiwi) will speed up inflation. However, they cut Gross Domestic Product (GDP) forecast for next year from 3.8% to 3.3%.
Housing prices in Auckland, New Zealand’s largest city, have increased significantly. Lower borrowing costs (lower rates) might cause housing bubble which can have devastating effect across the country. Graeme Wheeler, governor of RBNZ, said a lack of housing supply is the main cause of surging market prices.
Immediately after the release, NZD (Kiwi) came crushing down. Kiwi against the US Dollar (NZD/USD) fell almost 200 pips to 0.7017, lowest since September 2010. After the immediate drop, I closed my short on NZD/USD, taking almost 800 pips profit. The reason for the close? The pair did not close below the support level around 0.7025. During this kind of news, the pair should have easily closed below the support level. Unfortunately, it did not. Therefore, I closed my position. As of right now, it’s below the support level and I would go short again once it rebounds little bit (and technical analysis of course).
Another news that might support NZD/USD to go lower are positive US economic news and upcoming rate-hike, unless future US economic reports are negative and the tone of the Fed changes to raising the rate later on.
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Update on MSFT: I’m still watching MSFT (Microsoft stock ticker) for good entry. I will go long on it in the future at a good entry price. Microsoft stock and other blue chip stock fell after Intel slashed revenue outlook due to weak PC demand. The decrease in the price of MSFT is still a good buying opportunity.
Last Wednesday, Reserve Bank of New Zealand left the Official Cash Rate unchanged at 3.5%. NZD (Kiwi) quickly reacted by rising as it disappointed traders who were looking for rate cut. In a statement by the Reserve Bank Governor Graeme Wheeler, cited that the New Zealand dollar “…remains unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals.” I still believe that RBNZ will intervene and send NZD down, if not by rate-cut. I would be short on NZD/USD, at this time.
Upcoming: Bank of Japan (BoJ, Late Monday/early Tuesday – March 16/March 17 EST), Federal Reserve (Wednesday – March 18 – 2 P.M EST) and Swiss National Bank (SNB, Thursday – March 19 – 4:30 A.M EST).
BoJ will either hold or increase the stimulus package. If they do, JPY (Yen) will be bearish–sending USD/JPY further up–after rising to over 121.00 this week. If they don’t, we have to watch for their tone. It will be either bearish or bulling on the Yen, depending on what BoJ say, or react.
Federal Reserve will be watched very closely after a very positive non-farm payrolls last week. This week, U.S stocks were a roller coaster. There was a hard sell-off in equities and a bullish USD (U.S Dollar), due to an increasing chance of rate-hike. On Thursday (March 12, 2015), Retail Sales came out very negative. Retail Sales fell 0.6% (-0.6%), worse than expected of 0.3%, following -0.8%. Core Retail Sales (excluding automobiles which accounts for 20% of Retail Sales) fell 0.1% (-0.1%), worse than expected of 0.6%, following -1.1%. However, it was little better than previous report in February. I believe people who are saving money from low oil-prices are probably paying off their debts, before they spend on “wants”. The U.S market reacted positively because some people thought that negative Retail Sales would hold-off the Federal Reserve from raising the interest rates. On Wednesday, the Fed might also drop “patient”, signaling that rate-hike is very close.
SNB might set a new floor to the exchange rate (EUR/CHF). I would not trade CHF (Swiss Franc) because of two reasons. One, it’s too violent and there is no clear direction yet. Second, SNB does not know what it’s doing after what they did in January. But, I would still watch out closely, as it might affect other pairs, such as EUR and USD.
This week was full of financial news. I will be talking about some of them, which I consider too important to pass up. I will also give my views on them.
Last Monday (March 2, 2015), a report showed that Consumer Price Index (CPI) Flash Estimate ticked up to -0.3% year-over-year from previous -0.6%. Markets were expecting -0.4. The data was little positive. However, It remained in negative territory for the third consecutive month. There are deflation in euro zone. The deflation might soon end later in the mid-year, as Quantitative Easing (QE) program starts this Monday (March 9, 2015).
Last Thursday (March 5, 2015), European Central Bank (ECB) kept the interest rates unchanged. During the press conference, the President of ECB, Draghi stated that the QE would start on March 9. ECB raised its projections for the euro area, “which foresee annual real GDP increasing by 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017.” Remember that these are just projections and can change anytime. Plus, central banks are not right all the time. Mr. Draghi felt confident as he talked about the future of Euro zone. He believes Euro zone will greatly benefit from QE program and some areas already have since the announcement of QE last January.
This week, EUR/USD fell all the way to 1.0838, lowest level since September 2003, due to positive U.S jobs reports, Greece worries and QE program starting next week. I was already short on EUR/USD and I still believe it has a room to go further down.
Last Monday (March 2, 2015), Reserve Bank of Australia (RBA) announced that they will leave the interest rate unchanged at 2.25%. In February meeting, RBA cut by 0.25%. This time, they did not. RBA is in “wait and see” mode, for now. I believe another rate cut is coming in the two meetings, depending on future economic reports. In the Monetary Policy Decision statement by RBA Governor, Glenn Stevens stated that the Australian dollar “remains above most estimates of its fundamental value…A lower exchange rate is likely to be needed to achieve balanced growth in the economy…Further easing of policy may be appropriate…”. I believe RBA is open to further cuts and it will come in the next two meetings. However, positive economic reports might change that direction. As economics reports come out from Australia, we will have better sense of what RBA might do.
Last Monday (March 2, 2015), Building Approvals report came out and it was very positive. It was expected at -1.8%. It came out at whooping 7.9% up 10.7% from previous -2.8%. It shows that more buildings are being built. Thus, creating jobs. However, Building Approvals reports show that building approvals tend to jump around every month. If the report continues to be positive, it might convince RBA to keep the rate unchanged.
Last Tuesday (March 3, 2015), Gross Domestic Product (GDP) came at 0.5%, up only 0.1% from previous report (0.4%). It came out little bit weak from what was expected, 0.7%. It’s still very weak and it might have larger impact on RBA’s future actions. I believe RBA will cut because GDP is not improving much.
Last Wednesday (March 4, 2015), Retail Sales and Trade Balance reports came out from Australia. Retail sales came out at 0.4% as expected from previous 0.2%. Trade balance on goods and services were a deficit of $980 million, an increase of $480 million from December 2014 ($500 million). All these numbers are in seasonally adjusted term. I believe the gap in Trade Balance from the last two reports might convince RBA little bit to cut the rate again.
I would be short on AUD. I believe it has the potential to go further down to 0.7500. The best pair would be to short AUD/USD (Positive U.S news and upcoming rate hike).
Last Thursday, Bank of England (BoE) kept the interest rate unchanged at 0.50% and Quantitative Easing (QE) programme at £375bn. In March 2009, the BoE’s Monetary Policy Committee (MPC) unanimously voted to cut the interest rate to 0.50% from 1.00% (-.50%). The interest rate still stays unchanged and QE stays steady, for now. If future economic reports such as wages, and inflation declines or comes out negative, rate cut might come. If it does not, rate hike might come sooner than expected. I believe it will get better and MPC will decide to raise the rate, sending Pound (GBP) higher.
This week, Pound (GBP) fell after rising last week, due to little negative news from UK and that BoE rejected higher rate for some time being because of concerns in oil prices and inflation. I would not trade GBP at this time. If I’m going to trade GBP, I would analyze its chart first. Did you notice that last week GBP/USD had-daily bearish engulfing pattern and this week there is-weekly bearish engulfing pattern?
Last Tuesday (March 3, 2015), Canadian Gross Domestic Product (GDP) came out little positive at 0.3% from previous -0.2% on monthly basis. It was expected at 0.2%. On quarterly basis, it came out at 0.6% following 0.8% in third quarter.
Last Wednesday (March 4, 2015), Bank of Canada (BoC) left the interest rate unchanged at 0.75% following 0.25% cut last month. Ever since BoC cut the rate last month due to falling oil prices; oil prices has risen and been in $50 range. If oil price continue to fall, I believe they will cut the rate again. There is strong relationship between Canada and oil. As oil gets weaker, Loonie (CAD) gets weaker. Why? Canada is ranked 3rd globally in proved oil reserves. When making a trade decision on CAD, I would look at the oil prices. Of course, I would also look at news and technical. For example, if I want to trade USD/CAD, I would look at both U.S and Canada economic news (rate hike/cut, employment, etc) and technical on chart. If U.S economic news are strong, Canada economic news are weak and USD/CAD is just above strong support line, I would definitely go long on it. However, let’s say if USD/CAD is just below strong resistance line, I would wait for confirmation of a breakout and if the news are in my favor, I would go long.
Last Friday (March 6, 2015), Building Permits and Trade Balance reports were strongly negative. Building Permits came out at -12.9%, following 6.1% the previous month, expected of -4.2%. Trade balance on goods and services were a deficit of -2.5 billion, following -1.2 billion the previous month, expected of -0.9 billion. Both reports were negative, which sent CAD lower. At the same time, U.S non-farm payrolls came out strong, which sent USD higher. As a result, USD/CAD skyrocketed. The reports will definitely be on BoC committee’s mind. As of right now, I would be short on USD/CAD.
This week, USD/CAD was mixed as BoC kept the interest rate unchanged, after cutting it last month (negative for USD/CAD) and strong U.S jobs report (positive for USD/CAD). I would be short on it as I said in the last paragraph.
Last Friday (March 6, 2015), U.S jobs report came out very strong except the wages. Employment increased by 295,000 (Expected: 240k) and unemployment rate went down 0.2% to 5.5% (Expected: 5.6%). However, average hourly earning fell 0.1%, following 0.5% the previous month (Expected: 0.2%). But, that hourly wages part of the report did not stop U.S Dollar from rising. It was very positive for the U.S dollar because there is little higher chance of rate hike coming in the mid-year.
Since U.S economic news tends to have impact on global markets, here’s what happened; U.S Dollar rose, U.S stock fell, European stock rose, Euro dived, Gold prices fell and Treasury Yield jumped. EUR/USD fell to 1.0838, lowest level since September 2003. USD/JPY rose to 121.28, a two-month high.
So why did U.S stocks sold off? It sold off because of upcoming rate hike, which can be negative for equities, specifically for dividend stocks. As economy is getting better, it should help boost corporate profits. At the same time, strong dollar can hurt them. Rate hike can only make dollar even stronger.
In two weeks, the Fed will be meeting and I believe they might drop the “patient” in its March policy statement.
I would be long USD. The best pairs would be to short EUR/USD (Euro zone delfation, Greece crisis and QE program) and short NZD/USD (RBNZ keeps saying that NZD is too high and they will meeting next week, rate cut?) as I’m already short NZD/USD, and long USD/JPY (Upcoming U.S rate hike and extra stimulus BoJ might announce).
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