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By HaleStewart April 22, 2018 8:00 am
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Key Currency Pairs: the Pound/Dollar and the Canadian Dollar/Dollar

           Due to high inflationary pressures, currency traders had assumed that the Bank of England would be raising rates this year.  BOE governor Carney threw cold water on that assumption during an interview with the BBC:

The governor of the Bank of England has said that an interest rate rise is "likely" this year, but any increases will be gradual.

Mark Carney said major decisions had to be taken on Brexit, including on the detail of the implementation period and the shape of a final deal.

There would also be a parliamentary vote on the future relationship between Britain and rest of the EU.

All those events would weigh on how fast interest rates rises would occur.

Two other releases added downward pressure to the Sterling.  The ONS reported the latest inflation number, with a headline 2.3% Y/Y rate.  While UK inflation was on an upward trajectory, it now appears to be moving lower:

The blue line, which is the harmonized consumer price index, rose above 2% at the beginning of 2017 where it remained for most of year.  But the last few readings have been moving lower, indicating that inflationary pressures may be subsiding.  This is probably due to the waning impact of imported inflation caused by a weak sterling.  Adding to the downward pressure was the weak retail sales number: they were down .5% Q/Q and 1.2% M/M.  The statisticians observed that weak weather depressed some purchases.  But this data series has been trending lower for the last year:

The 5-minute chart of the pound/dollar shows the negative impact of this week’s news:

The sharp drop on the 18th occurred right after the inflation number came out while the decline on the 19th happened after Carney’s BBC interview.

Here’s the 1-year chart:

Prices fell to the 50-day EMA and broke a short-term trend line.  However, the overall upward trend remains intact.

            This week, Canada maintained their current interest rate policy (please see the accompanying story here).  The opening statement from President Poloz contained the following dovish analysis:

That said, interest rates remain very low relative to historical experience. This is because the economy is not yet able to remain at full capacity on its own. Furthermore, the sustainability of this level of activity is not assured; although we expected the economy to moderate in the second half of 2017, that moderation has extended into early 2018 and has been more pronounced than expected. Governing Council considered recent economic data very carefully and concluded that the softness early this year was due mainly to two temporary factors.

….

Accordingly, we expect a strong rebound in the second quarter after a lacklustre first quarter, with an average growth rate of about 2 per cent in the first half of the year and a return to near-potential growth thereafter. Fiscal stimulus, both provincial and federal, is playing a role in this forecast. We will be monitoring the data for the second quarter very closely in the weeks ahead. 

The market understandably interpreted this as an indication the bank would keep rates at current levels.  This week’s releases supported and contradicted the bank’s analysis. Retail sales were up .4% but were flat ex-auto.  However, inflation rose to 2.3%, the highest reading in since 10/14.  7/8 categories were higher, with energy prices adding the most upward pressure.

The weekly 5-minute chart of the Canadian dollar relative to the US dollar shows a loss for the week and several modestly strong sell-offs:

Prices dropped from .796 to .79 on Wednesday when the bank announced its latest rate policy.  Prices fell on Thursday from .794-.79 while they dropped from .791-.785 on Friday with the release of the latest retail sales and inflation numbers.

This week’s price action did some technical damage to the daily chart:

Prices had been in an uptrend since March 19.  But this week’s price action broke that upward trend.

But in the longer scheme, the Canadian dollar is still weak relative to the US dollar:

The Canadian dollar is about 14% above its lows verses the US dollar.        

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