Bank of Canada's Outlook Crushes the Canadian Dollar

The Bank of Canada's monetary policy announcement was one of this week's most important event risks and it did not disappoint in terms of sparking volatility. The Canadian dollar was not only the day's biggest mover but it was also the worst performer. The loonie lost approximately 0.8% of its value against the greenback and more than 1% of its value against the Japanese Yen. To everyone's surprise, the BoC chose to overlook all of the recent data improvements, focusing instead on moderating growth, considerable trade and geopolitical uncertainty and the ongoing slack in the labor market. They attributed any rise in inflation to temporary factors and said continued cautiousness is needed on rate moves. Having raised interest rates twice this year, the Bank of Canada wanted to make it clear that heading into the New Year, they have no immediate plans for tightening.  This cautious outlook leads us to believe that tomorrow's IVEY PMI report will be softer and USD/CAD will trade higher.  With oil prices falling nearly 3% and Canadian 10 year bond yields dropping close to 4bp, USD/CAD hit 1.28 today.  We could see 1.29 if these moves in global markets continue.

Meanwhile the greenback traded higher against all of the major currencies except for the Japanese Yen and New Zealand dollars. The simultaneous slide in the EUR/USD and USD/JPY suggests that the primary catalyst was risk aversion but with only a modest decline in the Dow and 10 year Treasury yields bouncing off their lows, the selling in Asia and Europe didn't exactly carryover to North America.  According to ADP, 190K jobs were created in the month of November, which was right in line with expectations. Non-Farm Payrolls is the last piece of market moving data on this week's calendar and as we near the report, all signs point to a potential disappointment in the headline number, which explains why USD/JPY is held back.  But wage growth and the unemployment rate are what really matters and a satisfactory increase in average hourly earnings could easily overshadow fewer job growth. The Senate also voted to start talks with the House today on reconciling the two chambers' tax bills and as the tax conference begins, we should hear more on the areas of compromise and disagreement.  While there are many hot issues such as the amount of the corporate tax cut and state and local tax deductions, we firmly believe that the GOP's motivation will get a deal will be done by year-end.   Meanwhile the U.S. government could be shut down this weekend and Congress has until midnight on Friday to approve a short-term spending package to keep the government open.  Tomorrow's jobless claims and Challenger layoff reports should not have a significant impact on the currency. Instead, traders should keep their eye on the newswires and yields.

Both euro and sterling ended the day lower against the greenback despite stronger German factory orders and a higher Eurozone Retail PMI index.  There was no data from the U.K.  The Eurozone economy continues to perform well but risk aversion, the prospect of a Fed rate hike next week and Germany's political troubles continue to plague the currency. With that in mind, there's a lot of support between 1.1750 and 1.1800 so we would not be surprised if EUR/USD starts to move higher from here. Revisions to the Eurozone's Q3 GDP report and German industrial production numbers are due for release tomorrow and while GDP changes are difficult to predict, the uptick in factory orders points to stronger manufacturing activity.  Sterling on the other hand continues to struggle as Brexit talks stall. With the DUP refusing to budge on the Irish border, Prime Minister May is in a very difficult position and at risk of being pushed out of the government. The EU Summit is scheduled for next week and according to Michel Barnier, the EU's chief Brexit negotiator, the U.K. has 48 hours to agree on a potential deal or negotiations will not move to the next stage.  The next meeting is scheduled for Friday evening and it remains to be seen whether May will be able to find an amicable solution to the Irish border issue by that deadline.

Last but certainly not last, the Australian dollar also traded sharply lower today while the New Zealand dollar held steady. AUD was pressured by softer GDP growth while the New Zealand dollar was supported by a healthy increase in house prices.  Looking ahead, Australia's trade balance is scheduled for release along with the PMI construction index. Both currencies appear vulnerable to additional losses.