Weekly comment: GBP, CAD win the race; NFP, FOMC minutes
Well, another year down.
Which currency did best this year? Oddly enough, it depends entirely on which day you start measuring. If you take it from the last day of 2018 to the last day of 2019, it’s CAD, with GBP coming in second.
But if you take it from the first trading day of 2019 to the last (2 January to 31 December), GBP and CAD switch places, with GBP narrowly edging out CAD (5.16% to 4.53%).
GBP’s performance surprised me, but in fact the guru community did pretty well here – at the beginning of 2019, when GBP/USD was at 1.26, the consensus forecast for year-end was 1.36. The story of how it got there is well known and not worth discussing in great length – basically, the currency plunged until August, when it began to look less likely that Britain would crash out of the EU without an agreement, and it gradually recovered. GBP added a burst when PM Boorish Johnson defeated the appalling Jeremy Corbyn in what must be one of the greatest examples of a “lesser of two evils” election ever – Tweedledum vs Tweedledummer.
Note though that GBP/USD remains well below the 1.4877 (EUR/GBP above 0.7653) level it hit on the day of the 2016 EU referendum, when it looked like “Remain” was likely to win.
What happened with CAD?
CAD finished 2019 at the high of the year, or looked at more properly, USD/CAD finished at the low (1.2990).
The graph above shows that the currency began appreciating after the last Bank of Canada meeting on 4 December. The graph below shows that rate expectations changed notably then, with expectations of further rate cuts
The signing of the USMCA (the Treaty Formerly Known as NAFTA), plus indications that the Great Umbrella, D. Trump, had folded on the US-China trade war has spurred hopes that the trade issue that’s dogged the Canadian economy will end, bringing peace, prosperity and the Age of Aquarius to Canada.
Moreover, CAD is still generally tracking energy prices, although not necessarily on a day-to-day basis.
The graph below shows the correlation between daily changes in WTI futures and USD/CAD over the last five years (the correlation is measured over a rolling 120-day period). As you can see, although the relationship isn’t as strong as it has been at some times in the past (-0.67%), it’s still significant at -0.32%, meaning when oil prices go up, USD/CAD tends to do down, which is what you’d expect.
The end of the US trade wars is not only good for Canada specifically (the US takes 70% of Canada’s exports) but also good for global growth, which should help oil prices to recover. So it’s good for Canada both directly and indirectly. And with every measure of Canadian inflation right in the middle of the Bank of Canada’s target range, that makes loosening even less likely. Bullish CAD.
What’s the best bet for 2020?
The market’s forecasts, as divined by the median of all the forecasts in Bloomberg, are for EUR to be the best-performing currency over the year. Even so, the dollar is expected to fall only 2.7% vs EUR, which is a fairly narrow range for a year when the dollar is expected to fall vs most currencies.
Note though that although these forecasts are described as “market consensus,” in fact there is no consensus (or very little). They’re merely the median of a lot of people’s forecasts. Overall, they range from 1.06 to 1.21 at year-end. In other words, some people think EUR is likely to weaken, while others think it will do much better than the median – indeed, some people have an end-Q1 forecast that’s more bullish than the market consensus end-year forecast.
How well do you think these experts will do? Remember that these forecasts are made by people who are making at least a six-digit salary and employing cutting-edge economics. I’ve made a spreadsheet that lists all the currency forecasts available in Bloomberg, with a function that uses Excel’s “random” function to predict whether the currency will be up or down over the coming year. Next year at this time I’ll dig out this spreadsheet and see how the proverbial monkeys throwing darts did in relation to the highly paid FX analysts. Come back a year from now and let’s see whether throwing all that money and brainpower at the problem performed better than just flipping a coin! (Disclaimer: I freely admit that I used to be one of those highly paid investment bank analysts, too. Maybe that’s why I’m so cynical about these forecasts – I know how they’re made.)
Indicators next week: NFP time again!
As the year starts up, we have little on the agenda this coming week. The main point will be the monthly speculation over the US nonfarm payrolls (NFP).
The market looks for a healthy ADP report of 158k – well above the recent average of 120k. That’s partly because of mean reversion, and also expectations that the big miss last month will be rectified.
The ADP report massively underestimated the initial NFP figure last month by 199k. That’s about 3x the six-month average of ±64k.
Over time though the two series do tend to move fairly closely together. The fit is even better for the final figure of the NFP (the ADP report is designed to predict the final NFP figure, not the initial one). So it’s reasonable to think that if the ADP underreported the NFP last month, it should be significantly higher this month, although as you can see from the graph above that doesn’t always hold – big moves in one direction are often followed by a big move in the opposite direction, but not always.
The NFP is also expected to show some mean reversion. After last month’s blow-out surprise, this month the figure is expected to be a bit below the recent average.
The unemployment rate is forecast to stay at the 50-year low of 3.5%.
Average hourly earnings are expected to show a robust 0.3% mom rise, which is enough to keep the yoy rate unchanged at a healthy 3.1%. It would add to the market’s conviction if wages were accelerating, but as long as the growth rate isn’t slowing, that’s probably enough to show that the labor market is reasonably tight.
I think figures like this would be show that the US labor market is still healthy. It might not get people thinking about a rate hike, but it would add to the view that a rate cut is becoming increasingly unlikely. That should tend to support the dollar.
The US also gets a hefty dose of Fedspeak on Thursday, when Fed Gov. Clarida (V), New York Fed’s Williams (V), Chicago Fed’s Evans (NV) and St. Louis Fed’s Bullard (NV) speak. Evans and Bullard tend to be at the more dovish side of the FOMC, so even though they’re not voters now we should pay attention to what they say – if they’re not arguing for further cuts any more, then the center really has shifted.
For the Eurozone, the EU-wide consumer price index (CPI) comes out on Tuesday. But that’s usually an anti-climax after today’s German CPI. They’re all expected to be pretty similar – both the headline and core EU-wide CPIs are forecast to be 1.3%, which would be a slight acceleration for the headline figure but the same pace for the core index, which is the more important one.
Also, Germany’s trade balance and industrial production come out on Thursday.
Weekly update written by special guest analyst: Marshall Gittler, Chief Strategist & Head of Education at ACLS Global
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