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Briefing highlights

  • The Canadian dollar and the January effect
  • Markets at a glance
  • U.S. jobs market surges
  • Teck warns on quarterly profit
  • Imperial Oil posts quarterly profit
  • Exxon Mobil results top estimates
  • From today’s Globe and Mail

The January effect

Before you get euphoric over the Canadian dollar’s recent ascent, remember what Royal Bank of Canada says is a January effect on the currency.

Indeed, warned RBC chief currency strategist Adam Cole, there’s a risk the loonie could fade now that we’re into February.

“We continue to see compelling evidence that AUD, NZD and CAD – all highly cyclical and relatively illiquid in G10 terms – are prone to overcrowding in January and subsequent reversals,” Mr. Cole said in a report this week, referring to the Australian, New Zealand and Canadian dollars by their symbols.

Those are versus the U.S. dollar. Add to the list the Swedish krona versus the euro, again over a long time frame.

RBC has tracked this January effect back to 2000, its report looking at 18 currencies. The four in question “show fairly consistent evidence of overshooting in January” and then falling back.

“Of course, our results are based on only 19 observations for each currency pair and could be spurious (and structural changes in markets make adding older observations to the sample questionable),” Mr. Cole said.

“Nonetheless, there are intuitive reasons to think that these four currencies might be prone to overcrowding,” he added.

And look at this chart, which shows said effect for the Canadian dollar, not always but more often than not over nine years.

“All four are illiquid compared to the majors,” Mr. Cole said, noting that the Australian dollar, with the most liquidity of the group, is nonetheless only about half as liquid as the pound and a quarter that of the euro.

“All four are also generally highly correlated to global risk appetite and growth expectations, making all of them good candidates to express a positive or negative view on the global cycle in the year ahead, again suggesting there is a prior reason to think they may be prone to overcrowding at the turn of the year.”

Thus, the risk of the Canadian dollar slipping.

“There is a risk of that, indeed,” Mr. Cole added in an interview. “That has been the pattern in recent years.”

This comes as the loonie rose above 76 US cents this week.

You’ve also got to take into account the sudden change in the outlook for the U.S. dollar after the Federal Reserve signalled a pause in its rate-hiking cycle as it held its benchmark steady on Wednesday.

The earlier “bullish dollar bias was predicated on the concerning slowdown and outright softness in growth in key regions, most notably the euro area but also China, which we had assumed would support the dollar despite what our economist had expected to be a rather short-lived Fed pause,” said Paul Meggyesi, foreign exchange strategist at JPMorgan Chase.

“But the likelihood of this pause now extending well beyond mid-year, maybe into 2020, has tilted the tactical pendulum more convincingly against the dollar,” he added, though “we don’t necessarily expect the dollar to fall precipitously from here.”

Capital Economics, on the other hand, doesn’t expect the softness in the U.S. currency to last.

“Given our view that equity markets around the world will come under pressure again this year, we think that the dollar will benefit from safe haven flows,” said markets economist Simona Gambarini.

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Markets at a glance

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What to watch for today

Markets will get a sense of the state of the world's manufacturing sector as purchasing managers index readings pour in from across the globe.

"The manufacturing sector has been struggling for several months now, and recent events have shown that there is little evidence of a pickup in the short term," said CMC Markets chief analyst Michael Hewson.

"The end of 2018 saw a number of major economies flirting with stagnation at best, with a number in contraction territory, including Italy and France," he added.

"Investors will be hoping that instead of the January blues we’ll see a pickup in economic activity, or at least some evidence that the slowdown is slowing."

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