Economic Data Supports EUR and CAD while GBP Struggles

EUR, CAD rally, GBP trades heavy vs. USD

The Euro is trading with a well bid tone this morning, gaining a bit more than a cent before receding slightly as we head towards the London close. The Institute for Economic Research's Ifo Business Climate Index unexpectedly rallied today, providing fresh incentives for traders to take the currency higher while also casting further doubt on the possibility of a future rate cut from the European Central Bank (ECB). Not only was the headline reading substantially above the market's consensus expectations at 103.5 (expectations were at 102) but the index also rallied from last month's reading of 102.4. Additionally, both the current assessment and expected economic conditions indicators surprised to the upside as well, showing a rather robust change in sentiment within the Euroland.

The Canadian Dollar is also rallying this morning, propelled by higher-than-expected consumer price data as well as the continued advances of both gold and oil. The Canadian headline consumer price index (CPI) advanced 1.7% y/y in April while the core reading, which strips out volatile food and energy prices came in at 1.5%. Economists had expected figures of 1.4% and 1.3% respectively. The question now is whether or not price pressures at the current level, while still well below the Bank of Canada's target of 2%, are high enough to preclude the bank from initiating one more interest rate cut to its benchmark rate. As such, today's additional data will at the very least cause a re-pricing of the market's expectations with respect to interest rates, explaining at least part of the Loonie's rally this morning.

The Pound Sterling has failed to keep pace with the broader market's advance against the Greenback today due to the release of the Bank of England's (BOE) Monetary Policy Committee's (MPC) meeting minutes from May 7th and 8th. Although the MPC voted 8-1 to maintain interest rates at 5%, considerable debate existed as to whether or not the downside risks to growth pose greater risk to the broader economy than inflation. Although the BOE has paused for the time being, its next move will more than likely be an interest rate cut, thereby sapping the strength of the newly resurgent Pound.

US Federal Reserve offers FOMC minutes at 2pm EST

The USD Federal Reserve (Fed) will release the minutes from its April 30th Federal Open Market Committee (FOMC) meeting at 2pm EST today, providing traders with a glimpse as to what they can expect from policy-makers going forward. With the present economic uncertainty and the Fed signalling a potential shift in policy to a more neutral stance on interest rates, traders are craving a bit of direction and fresh incentives; something the Fed minutes rarely fail to deliver.

Just as the Canadian and European units rallied today as much because of what the day's positive data implies for the future direction of interest rates as they rallied for the data itself, the USD is vitally dependent upon the future direction of Fed policy. The notion of whether or not the Dollar is approaching a medium-term bottom is solely dependent upon the direction of interest rates. If the Fed signals, through the release of the minutes, a pause in its rate easing cycle, the Dollar will likely firm and bounce slightly. If however the minutes reveal a committee that is still more worried about the downside risks to economic growth than the building inflationary pressure in the US economy, you can safely expect another large sell-off in the currency. Stay tuned; it should make for a rather exciting day.

FX 101: Solving the confusion over the bid vs. offer

From time to time, we attempt to provide a bit of insight into how the FX market functions in the World Market Update. If there is a particular topic that you would like us to address, please let us know and we will attempt to address it in a later edition.

Quoting on the wrong side of the market is a right of passage in this business. Everyone has done it at some point and for those who haven't, it's simply a matter of time. For customers or those on the buy side of the market who are accepting prices quoted by a dealer, it can also be confusing as to which side of the market your price should be on. Without a solid understanding of the direction of the currency pair you're trading, it will also be extremely difficult to determine whether the forward points on a future dated transaction allow you to exchange your currency at a premium or a discount.

Most market participants have no difficulty in determining the bid from the ask when they're dealing in their domestic or home currency after doing their first few deals. However, confusion usually erupts when doing a trade in a currency pair that differs from your standard FX requirements or if you happen to have to execute a trade in a currency that is not your home unit. The following is intended as a guide to help you determine which side of the market you should be dealing on, thereby allowing you to trade with confidence.

AUD, GBP, NZD and EUR are all quoted in European terms against the USD, that is, the foreign currency is always the unit currency or the first currency in the pair (i.e. AUDUSD etc.). There are a few other minors and exotics that are quoted as such, but in general, most other currencies are quoted in American terms with the USD being the unit currency. This is important as once you understand the pair and direction (which currency are you buying and which are you selling), determining which side of the market you should be expecting to be quoted on is a breeze.

FX rates are always quoted in terms of the unit currency, where 1 of the "unit" currency yields X of the terms or settlement currency (the second currency in the pair). For example, a USDCAD exchange rate of 0.9950 means that 1 USD will yield .9950 CAD. Since the rate on the bid is always lower than the rate on the offer, no matter if the pair is quoted in American or European terms, it is then easy to determine whether you're on the bid or offer when asking for a quote. If you're buying the unit currency from your dealer, you will always receive a price that is higher than the price at which you sell it (as your dealer always wishes to buy low and sell high). As such, the price you will receive will be on the offer.

Put another way, I like to think of it as follows when I'm a price maker or showing prices to customers. I always think of what I'm doing with my customer as it relates to the unit currency. I buy the unit currency and sell the terms or settlement currency on the bid and I sell the unit currency on the offer and buy the terms. For example, with AUDUSD, I buy AUD from the customer on the bid, thereby selling them USD. Alternatively, I sell (or offer) the unit currency, AUD, on the offer and buy the second currency; USD.