SHiFT Connect MarketWatch – December 7, 2017

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loonie slides as BoC dampens January rate hike expectations

The Canadian dollar fell on Wednesday against its U.S. counterpart after the Bank of Canada held interest rates steady and showed enough caution to dampen expectations for a hike early next year.
   
The central bank left its benchmark interest rates on hold at 1 percent, as expected. Despite rising employment and participation rates, other indicators point to ongoing, albeit diminishing, slack in the labor market, the central bank said.
           
Investors had been interested in how the Bank of Canada would characterize the labor market after data on Friday showed a much stronger-than-expected jobs gain in November.
 
I think on balance their overwhelming focus remain on the uncertainties, so they provided no clue of a rate hike anytime soon. Chances of a rate hike in January fell to 28 percent from 41 percent before the announcement, the overnight index swaps market indicated.          
   
The central bank raised rates in July and September for the first time in seven years but has since worried about a number of uncertainties that could have an impact on the economy, including renegotiation of the North American Free Trade Agreement.
 
By late afternoon the Canadian dollar was trading at C$1.2760 to the greenback, or 78.37 U.S. cents, down 0.6 percent. The currency's strongest level of the session was C$1.2654, while it touched its weakest since Friday at C$1.2777. On Tuesday, it touched its strongest in six weeks at C$1.2624. Adding to headwinds for the loonie were lower prices for oil, one of Canada's major exports.
  
U.S. crude prices were down 1.48 percent at $56.77 a barrel even after data showed a bigger-than-expected draw in U.S. crude stocks.
 
The U.S. dollar rose slightly against a basket of major currencies helped by optimism about progress on tax reform legislation and lawmakers' efforts to avert a U.S. government shutdown on Saturday.            
   
The labor productivity of Canadian businesses fell by 0.6 percent in the third quarter, the second consecutive decline, as the number of hours worked grew faster than business output.
           
Canadian government bond prices were higher across the yield curve, with the two-year up 7 Canadian cents to yield 1.499 percent and the 10-year rising 32 Canadian cents to yield 1.855 percent. The gap between the 2-year yield and its U.S. equivalent widened by 1.4 basis points to a spread of -30.3 basis points.
 
The U.S. dollar edged higher against a basket of major currencies on Wednesday, on optimism about progress on U.S. tax legislation and lawmakers’ efforts to avert a U.S. government shutdown on Saturday.
 
The U.S. dollar index, which measures the greenback against six rival currencies, was up 0.17 percent at 93.54. The U.S. dollar is finding some support on expectations that Congress is going to pass tax legislation sometime this year.
 
Republicans in the U.S. House of Representatives began staking out their positions on final tax legislation on Tuesday, days ahead of talks with the Senate to shape the tax package.
 
Republicans hope to approve a final bill and deliver it to President Donald Trump’s desk before Christmas. If they succeed, it would be the first major U.S. tax overhaul in 31 years and the first big Republican legislative victory since Trump took office in January.
 
Democratic leaders in Congress on Monday accepted an invitation to meet Trump and Republicans for talks to avert a shutdown, even as the Democrats pressed demands on funding priorities and protecting young immigrants.
 
The U.S. dollar index moved higher after data from a payrolls processor showed U.S. private-sector employment growth eased in November even as the manufacturing sector added the most jobs in at least 15 years.

The U.S. dollar was 0.36 percent lower against the Japanese yen. The yen tends to benefit during geopolitical or financial stress as Japan is the world’s biggest creditor nation and there is an assumption that Japanese investors will repatriate funds should a crisis materialize.
 
Sterling extended an earlier decline to hit a one-week low after the Sun newspaper’s political editor said on Twitter a Brexit deal is unlikely this week. Sterling was 0.42 percent lower against the dollar at $1.3385.
 
Wall Street’s main indexes were little changed on Wednesday, with technology stocks clinging on to modest gains and helping offset losses in energy shares after oil prices slipped more than 2 percent.
 
Investors are evaluating the details of the new tax code as the Senate Republicans attempt to reconcile their version of the bill with that of the House of Representatives.
 
The Dow Jones Industrial Average was down 14.5 points, or 0.06 percent, at 24,166.14 and the S&P 500 was down 2.15 points, or 0.08 percent, at 2,627.42. The Nasdaq Composite .was down 4.75 points, or 0.07 percent, at 6,757.47.
 
Oil prices fell after a surprise rise in U.S. inventories of refined products suggested demand may be flagging.
 


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