With very little data on the US data calendar, expect markets to focus on digesting last week’s strong employment data. It’s all about the language when the ECB is involved. The market has priced in an ECB repo rate +25bp hike to +1.25% this Thursday. Expect the market to focus on the press conference for guidance on further policy intentions beyond this week’s decision. If Trichet mentions ‘monitor closely’ or ‘monitor very closely’ it’s a good bet that that he his ‘giving us the green-light’ to expect further near-term tightening, thus supporting the EUR in the month of the ‘carry’ trade.
Before the rate decision, the market will have to contend with a Portuguese bill issue on Wednesday and a Spanish bond auction on Thursday, most likely keeping peripheral funding concerns in the forefront. Analysts believe that a successful Spanish auction would likely help systemic concerns ease further even as concerns about Portugal remain elevated. The USD is higher against the EUR -0.26%, CHF -0.11% and JPY -0.05% and lower against GBP +0.14%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.10%.
The loonie has bettered its three year high on the back of stronger commodity prices and economic data from its largest trading partner. Everyday was a winning day for the currency outright last week, gaining +1.8%, as commodities and equities gained. Its the currency’s longest winning streak in three months after crude printed a two and a half year high. Global economic data seems to be coming in stronger than the market initially thought, and providing renewed support for the currency. Despite a Canadian government being toppled, the ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates continues to give the loonie its bid tone as traders happily sell historical funding currencies against CAD.
With ‘carry’ historically the go to trade this month, has investors looking to buy the currency on dollar rallies. The Federal political uncertainty is expected to have a limited affect on the Canadian dollars strength. The currency will be supported in the long term by its fundamentals, a sound financial system and a strong job environment (0.9634).