Geopolitical tensions, market data, G-20 may make combustible mix
Original post on Saxo Bank’s Trading Floor
The USDCAD started slowly last week managing to trade above the previous week’s range break out level (1.0480) but unable to crack resistance at 1.0535 until Friday, but that break was shortlived.
The first US economic data releases were on the soft side led by Durable Goods which was down 7.3 percent while July new home sales dropped 13.4 percent. The data improved later in the week with jobless claims coming in as expected while US second quarter GDP grew at 2.5 percent annualised rate.
On the other hand, Canadian Q2 GDP was down 0.5 percent as expected and underscoring the diverging growth paths between the two nations. However, the economic data took a back seat to speculation that the US and perhaps an ally or two, would launch a punitive strike on Syria, for its use of chemical weapons on the rebels.
The US stayed bid against the majors and not surprisingly, oil prices climbed as well. This latter development served to act as a drag on USDCAD gains.
This week has the potential to provide some very active markets. There is a combustible mix of geopolitical tension, Central bank meetings, market moving economic data and a G-20 meeting in addition to the tapering issue, which will keep traders on their toes. Monday’s Labour Day holidays in Canada and the US will also hurt liquidity at the start of the week.
President Obama announced on Saturday that "the United States should take military action against Syrian targets" but that he would seek Congressional approval, risking a David Cameron style set-back. Already the strategy seems flawed.
The US plans an attack of limited duration and scope which, according to Obama would not be an "open ended intervention" and "we will not put boots on the ground". What a plan! It’s like giving a hockey player "two minutes for roughing" after removing the other teams star player from the game. Since Congress doesn’t return for ten days, Syrian intervention will dominate the headlines and dictate dollar direction.
Oil prices may continue to rise ahead of any military action but if it’s anything like Gulf War 1 (1990), prices may drop considerably with the onset of hostilities. (Buy the rumour, sell the fact)
The key data release this week is the US non-farm payrolls report. The consensus forecast is for a gain of 165,000 jobs in August while leaving the unemployment rate unchanged at 7.4 percent. Due to a few soft jobless claims reports in August, some economists suggest that the risk is for a below-consensus print.
Tuesday’s US ISM Manufacturing data is expected to dip to 54.5 from 55.4 in July in part as a result of previous reports slightly overstating their case.
July’s trade balance (forecast at minus $38 billion) is expected to widen as previous reports may have been exaggerated.
The Canadian data includes Merchandise trade ( Flat) and the net change in employment (30,200) mostly due to "payback" for the 39,400 decline in jobs the previous month.
This is also a big week for Central Bank meetings beginning with the Reserve Bank of Australia followed by the Bank of Canada, the Bank of Japan, the Bank of England and the European Central Bank.
The BoC is not expected to provide any surprises, leaving the bank rate at 1 percent with the accompanying statement essentially unchanged.
The Friday start to the G-20 could be more interesting, especially if the US bombs Syria despite Russia’s objections.
The short-term technicals are bullish USDCAD while trading above 1.0350 targeting 1.0610 and then 1.0660. The hourly charts have support at 1.0515 with resistance at 1.0570 slowing gains. For the week, USD support is at 1.0520, 1.0480 and 1.0440. Resistance is at 1.0570, 1.0610 and 1.0660.
Four-hour USDCAD with uptrend line and resistance
Source Saxo Bank
President Obama’s decision to delay any action in Syria pending Congressional approval demonstrates a rather indecisive style of leadership. Until a decision is announced, FX markets will be biased toward risk-aversion and oil prices will remain elevated. The headlines and official statements from US officials have the potential to overshadow this week’s Central Bank meetings and the domestic decisions and economic statements. However, as in the past, the market reaction to the discussion of any intervention will likely be reversed on the execution of a decision when markets conclude that the risk of contagion from Syria is limited, allowing tapering concerns to return to the forefront.
Range for the Week1.0510-1.0660