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 Sector Scopes Update January 2024 & United States Dollar Versus Canadian Dollar (USDCAD)

As we move further into January, the enthusiasm for equities and risk seen at the end of 2023 continues to fade fast. First, speculation about interest rate cuts coming as soon as March has turned out to perhaps to too optimistic. Speakers from the Fed, European Central Bank and elsewhere come out more hawkish than anticipated by some investors, downplaying immediate cuts, taking a neutral stance and even leaving the door open to more increases. In addition, recent economic data including increases in US and UK consumer prices (inflation) and positive economic news including strong US retail sales announced yesterday have weakened the case for near-term rate cuts.

These developments have sparked a rebound in traded interest rates, sending the 10-year US treasury note yield up from the 3.90s% to over 4.10% and the 10-year German bund yield up from near 2.00% toward 2.25%, sparking a rebound in the US Dollar and putting a headwind back in front of equities.

Nearly all equity indices are down in the last week, including a 1.0% drop for the S&P 500, a 1.4% decline for the S&P/TSX Composite, and a 3.75% plunge for the Hang Seng. The decline has been broadly based with all eleven major industry groups down in the last week and all groups are also down over the last month except for Health Care. Interest rate sensitive Utilities and Real Estate have declined the most in the last week, while over the last month, Consumer Staples, Energy and Materials have been leading markets downward.

Meanwhile, the second major factor impacting market sentiment has been increasing concern about the health of China’s economy and the negative impact a soft China may have on resource demand expectations. Earlier this month, Saudi Arabia cut its price for oil shipments to Asia (read China), and yesterday, the Middle Kingdom announced weaker than expected GDP and retail sales, putting pressure on energy and copper prices.

Earnings season has started with mixed results from US banks and investment companies. Just as we saw in December following reports from FedEx and Nike, investors so far appear to be looking more for reasons to take profits and head for the exits than looking for reasons to enter or add to long positions with Delta Air Lines and Morgan Stanley being particularly impacted.

Earnings season ramps up over the coming week and broadens out into more sectors including Consumer Products, Technology, Telcos, Industrials, Railroads and more. Headliners include Netflix on Tuesday, and Tesla on Wednesday.

Central bank meetings resume next week, led by the Bank of Canada (more on this below), the European Central Bank and the Bank of Japan with investors looking for hints on the future of monetary policy and when rate cuts may start. Other reports of note include Canada retail sales tomorrow, Flash PMI reports on Wednesday and US Q4 GDP next Thursday.

In this edition of Equity Leaders Weekly, we take out monthly look at Sector Scopes and consider what forces are driving trading in USDCAD along with their wider implications.

Sector Scopes Update January 2024

Since the fall of 2022, USDCAD has been stuck in a sideways trading range between $1.3100 and $1.3900. Toward the end of last year, the currency pair fell from the top to the bottom of this range as the greenback followed treasury yields lower. Once again, support came in near the bottom of this range and the pair has started to rebound.

Looking at the two sides of this pair. The US Dollar has been broadly strengthening. With US inflation bouncing recently and enough economic indicators like retail sales holding up, the potential for short-term interest rate cuts has started to fade. A strengthening US Dollar can be seen as bearish for other currencies, precious metals, and commodities, while rising treasury yields can be seen as bearish for stocks and bonds.

On the Canadian side, while Governor Macklem and co are widely expected to stay the course on interest rates we may learn more about how hawkish/dovish the Bank of Canada’s interest rate outlook is when it meets on Wednesday. While Canadian consumer prices also picked up last month, the economy has been weaker than in the US based on recent GDP and employment numbers, and as a resource exporter, Canada may be more impacted by falling oil, metal, grain and other commodity prices. Also, the Bank of Canada is much further along in its Quantitative Tightening program than the Fed is so it may have the scope and need to start cutting interest rates sooner.

Initial upside resistance for USDCAD may appear near $1.3690 then the big channel top near $1.3900. After that, the next notable upside tests appear near the $1.4000 round number and then a previous high near $1.4180.

Initial downside support appears near $1.3220 based on a 3-box reversal, then the channel bottom near $1.3090 and the $1.3000 round number.

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