Original post on Saxo Bank’s Trading Floor
FX Outlook: Led Zeppelin pattern may pulverize loonie
Led Zeppelin’s Jimmy Page turned 70 yesterday and on his personal "Stairway to Heaven", the pearly gates must be drawing ever closer. It’s the same story with USDCAD. A decisive break of the current 1.0850—75 zone leads directly to 1.1000 (psychological resistance) which if it occurs will leave USDCAD bears "dazed and confused". USDCAD is in a steep uptrend from the January 6 low in the 1.0600-10 area and retracements have been shallow. The break of both the 2013 USDCAD high at 1.0735, the 2010 Fibonacci retracement level at 1.0805 and the 2010 peak of 1.0850 have set the stage for further gains. A break of 1.1000 leads to 1.1220, the 50 percent Fibonacci level of the 2009—2011 range. USDCAD support is at 1.0780, 1.0730 and 1.0680. USD resistance is at 1.0880, 1.0960 and 1.1000.
Chart: USDCAD hourly with rare Stairway to Heaven pattern
Source: Saxo Bank
Payrolls poised for positive print
The FX market is happily and complacently long US dollars in anticipation of a very strong non-farm payrolls (NFP) release. A few key employment indicators including ADP and ISM services PMI beat forecasts recently, while other US data releases (GDP, retail sales) also exceeded forecasts, bolstering the already bullish outlook for the US economy. The consensus forecast is for a gain of 196,000 in the NFP headline figure with the unemployment rate at 7.0 percent. The average monthly gain from January to November 2013 is 193,000.
Chart: Jan-Nov US non-farm payrolls (Dec. estimated)
Is hitting the average a win or a lose?
It seems to me that there are a fair number of forecasters and analysts expecting the payrolls data to exceed expectations. In fact one large American bank has taken a poll on its trading website and 50 percent of respondents are looking for a number above 201,000. CNBC reported that Goldman Sachs adjusted its non-farm payrolls estimate to 200,000 from 175,000 after the ADP data. They also reported that JPMorgan is forecasting 215,000 jobs while RBS is at 215,000. The optimistic environment and the FX positioning of late as evidenced by the US dollar strength in recent days suggests that a consensus result will be a disappointing result. However a correction may be short lived. That’s the easy guess. The bigger question is "how far above consensus is bullish?
After it is all said and done, does it really matter?
A lot of money will change hands at 8:31 am EST when the Bureau of Labour Statistics releases the Employment Situation for December 2013. The data always gets revised and it is only one piece of many employment indicators available to the Federal Open Market Committee (FOMC). Janet Yellen, soon to be the chair of the FOMC is reputedly a big fan of the Job Openings and Labour Turnover Survey (JOLTS) and follows the Quit rate as well. For what it’s worth, Bill Gross of Pimco wrote in a note entitled "Seesaw Rider""to watch PCE inflation more than the unemployment rate". Today’s NFP report will either reinforce the belief that US economic growth is gaining momentum and warn of a possible increase in the pace of tapering or it will merely be one more piece of evidence of a more gradual economic recovery. Both outcomes are bullish US dollars although the latter would probably be bullish from a much lower level.
The loonie is not seeing a "whole lotta love"
The loonie is behaving like a fighter jet is a nose dive. There is still time to pull up but it is very close to the point of no return. The combination of a weak Canadian employment report (forecast 14,600, down from 21,600 in November) and a strong US NFP would have the loonie crash and burn in spectacular fashion — 1.1000 in a heartbeat. The Canadian dollar sentiment is very negative and reinforced by very soft data releases this week (Trade and Ivey PMI). The Bank of Canada governor, in an effort to distance himself from comments made the finance minister, went on a TV show and to many came across as dovish. Mr. Poloz, like his EU counterpart, Mario Draghi, is struggling with an inflation rate well below the Bank of Canada’s stated target. After Monday’s TV appearance, a few more pundits were chatting about the risk of an interest rate cut. Earlier he expressed concern that Canadian exports were a drag on economic growth.
Good Times, Bad Times
It’s another NFP Friday and that means "Good Times, Bad Times, you know I’ve had my share". A disappointing payrolls report will likely leave a mark on recent USDCAD long positions while providing other traders the opportunity to buy at the proverbial "better levels". The contrasting outlooks for the Canadian and US economies, especially the interest rate view, whether warranted or not, will ensure that USDCAD losses will probably shallow and short lived.