USDCAD Open 1.1043-48 Overnight Range 1.1044-96
- Pipeline approval could prop up loonie
- Flip a coin for payroll forecasts
- USDCAD short term technicals modestly bearish
Canadian dollar bears are nervously awaiting Friday’s employment report knowing full well that traders are still well-long USDCAD and last Friday’s uptrend reversal painted a bearish bias to the technical picture. The previous release of the Canadian employment report on January 10, 2014 crushed a Canadian dollar already reeling from worse than expected trade and PMI reports. The beleaguered Canadian dollar lost over 4 percent as it was buried under an avalanche of negative sentiment. The Bank of Canada’s focus on weak inflation data and a shrinking Canada US interest rate differential further encouraged the US dollar bulls. Last Friday’s rebalancing flows for the month end fix led to "out-sized demand for USDCAD resulting in a push above resistance at 1.1210 and reportedly triggering some option barriers. However, the subsequent retracement was violent and the short term technical studies warn of an even deeper correction.
Canadian employment forecasts: Hit and miss-mostly miss
The consensus forecast for Friday’s Canadian employment change for January is a gain of 17,500 jobs, a marked improvement over the 45,900 loss posted in December. Unfortunately, the accuracy of forecasts for this data series is sketchy at best. The following chart highlights the large swings between the actual data and the forecasts.
Chart: monthly change in Canadian employment
Source: IFXA Ltd
One item that is glaringly obvious is that large surprises in either direction in one month are usually reversed in the following month. Admittedly, it is a very unscientific observation but it does suggest that there is a real risk for an "upside" surprise in the January data.
XL comin’ down the pipe
Long USDCAD traders with a medium term view may soon find out that their road to riches has taken a detour due to construction of a pipeline-the $5.6 billion, 1,900 km Keystone XL pipeline to be exact. The long delayed project will ship and estimated 700,000 barrels per day of Canadian oil sands crude to Nebraska and the approval process has just climbed another hurdle. On Friday, the US State Department released a review that essentially said that the Keystone XL pipeline would not have a significant negative impact on greenhouse gas emissions. Canada has pulled out all the stops in hopes of a favourable decision but the ball is now in President Obama’s court. A JPMorgan analyst predicts a 70 percent chance that the project wins approval.
The approval of the project may not result in an instant rally in the Canadian dollar but the fact that there seems to be good odds for a "green light" should provide a modicum of support for the Canadian dollar.
US economic growth prospects
Another cause for concern for diehard Canadian dollar bears is the fact that the US economic recovery is gaining momentum. The disappointing auto sales data released on Monday were due to lousy weather rather than a lack of buyers which argues for a big jump in February. The same goes for the housing data. Weather related issues are distorting the recent housing reports masking the fact that US home sales in 2013 were the strongest since 2006. The 10 percent decline in the Canadian dollar since September 2013 will help boost Canadian exports to a recovery US market and aid in slowing or capping the loonie’s decline.
USDCAD Technical Outlook
The USDCAD short term technicals shifted to bearish on Friday with the move to new highs and then the plunge below strong support in the 1.1090-1.1120 area, suggesting that a short term top is in place at 1.1223. The bounce off the 1.1030-50 support zone is merely corrective unless USDCAD can recover above 1.1140. The 23.6 percent Fibonacci retracement of the January 1.0600-1.1223 range at 1.1080 was broken which puts the 38.2 percent level of 1.0980 in play. In addition, the RSI indicators have started to turn down signaling additional support to the short term negative bias. The longer term studies remain bullish USDCAD noting the uptrend remains intact while trading above 1.0800.
Chart USDCAD 4 hour with Fibonacci
Source: Saxo Bank
It’s not all about North America
The Aussie and Kiwi have staged robust rallies in the past week, more from domestic actions than anything else but they have a couple of common themes with the Canadian dollar. All three currencies are in the commodity currency bucket and all three currencies rise and fall with the prevailing Chinese economic growth story. In addition, all three were aggressively sold. FX traders are still heavily long US dollars against these currencies and the recent US dollar weakness is making them nervous.
Thursday’s Bank of England (BoE) and European Central Bank (ECB) meetings add another layer of risk to USDCAD traders. If the ECB argues that the inflation risk remains balanced, it could lead to renewed US dollar selling, boosting the loonie in the process. On the other hand, if that the weak inflation data last week spurs the ECB to cut rates to as close to zero as possible, it wouldn’t help the Canadian dollar. As usual, the US nonfarm payrolls report is the 800lb gorilla. A pair of "payback" Canadian and American employment reports could wash out weak USDCAD longs, even though the currency pair is in a well entrenched uptrend.