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No News Is Good News for Loonie, Euro

No News Is Good News for Loonie, Euro

2013-02-22 19:00:00
Kathy Lien, Technical Strategist
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Dismal retail sales data hurt the Canadian dollar, while not even strong German IFO data could reverse the downward spiral seen recently in the Eurozone economy and EUR/USD currency pair.

With no US economic data on the calendar this morning, the US dollar (USD) is holding steady against the euro, has edged higher against the Japanese yen (JPY) and Canadian dollar (CAD), and has retreated against the British pound (GBP), Australian (AUD), and New Zealand dollars (NZD).

Today is one of those days where individual performance is leading to the inconsistent performance of the dollar. The only piece of data released from all of North America today was from Canada, and unfortunately, the disappointments compounded losses in the Canadian dollar. Canadian retail sales fell 2.1%, the most in more than 2.5 years.

While part of the decline was caused by lower auto sales, purchases of furniture, electronic goods, and spending at department stores also plunged in the month of December. In fact, holiday shopping last year in Canada was so weak that retail sales fell two out of the last three months of the year, and this means that spending will contribute negatively to Q4 GDP.

Combined with the meager 0.1% growth in consumer prices, we understand why the Bank of Canada (BoC) decided to tone down its level of hawkishness last month. USDCAD has been on tear this month, rising from a low of 0.9933 to a high of 1.0232 today. The latest move took the currency pair right to its 200-week simple moving average (SMA), but if USDCAD manages to break new highs, the next level of resistance isn't until 1.04.

Even Good News Proves Bad for the Euro

Meanwhile, stronger-than-expected German IFO numbers failed to help the euro. The single currency spiked higher after German business confidence hit a 2.5-year high but trended lower quickly thereafter. As we warned at the beginning of the week, the biggest risks facing the euro were the European Commission's growth forecasts, the Italian elections, and the Federal Open Market Committee (FOMC) meeting minutes, and all have contributed to the euro's decline.

This morning, the European Commission slashed its 2013 GDP forecast to -0.3% from +0.1%, but what really made the euro drop to session lows were the reports that long-term refinancing operation (LTRO) II repayments fell short of expectations. Banks are set to repay only EUR 61.1 billion next week, versus a forecast of EUR100 billion, and the miss in LTRO repayment suggests that banks have less excess liquidity, or free capital.

With only a few more days to go before the Italian elections, the lack of a clear frontrunner continues to weigh on sentiment. None of the candidates are expected to win a majority, and right now, it appears that Pier Luigi Bersani is leading slightly in the polls, and if he wins, he will most likely form a coalition government with Prime Minister Mario Monti's centrists.

This is probably the best-case scenario for Italy since it would offer assurance of continued reforms. However, the elections are close and can still go either way. The worst-case scenario for investors and the euro would be a win by former Prime Minister Silvio Berlusconi because he plans to abolish unpopular property taxes that were the cornerstone of Monti's austerity measures. A return to the free-spending days of Berlusconi would be a big hit to confidence and would increase the risks of a downgrade for Italy. Along these lines, the uncertainty surrounding the Italian elections also poses a risk for the euro.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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