Loonieviews February 7, 2014

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Michael O’Neill

Filed in Loonie Views

Canada, Just now

Welcome to the Grand Illusion

"Welcome to the Grand Illusion, come on in and see what’s happening, Pay the price, get your tickets for the show"

The old traders among you will recognize the lyrics from Styx’s 1977 album of the same name while the younger traders will recognize it as an apt description for a nonfarm payrolls Friday. FX markets churned and chopped throughout a fairly active week only to land back close to where everything started last Monday with traders rolling the dice on their monthly US nonfarm payrolls predictions.

Once again, the US data didn’t lack for excitement posting another well-below consensus result of 113,000 vs. the forecast of 185,000. The "big dollar" fell off a cliff. As usual the knee jerk reaction was overdone and the dollar has bounced from its lows. The economists and strategists who were predicting an upward surprise to the consensus are frantically scrutinizing the Bureau of Labor Statistics release for precious nuggets to justify their optimism. They have clamped on to two items in the report: 1) the unemployment rate dropped to 6.6 percent from 6.7 percent despite an increase in the Labour Participation rate which rose to 63 percent from 62.8 percent. 2) The weather effect may have hurt the data.

Source: MarketWatch/Bureau of Labor Statistics

The week in review

The week didn’t start out with an upbeat tone as equity markets suffered their worst day of 2014 on Monday. Emerging market currencies (EM) were all down and JPY touched the week’s high at 100.77. A well below forecast read of the US ISM manufacturing index had many hands wringing until it was dismissed due to "weather issues". Tuesday brought a modicum of relief when US equities stopped dropping but the real excitement occurred "down under". The Reserve Bank of Australia made a u-turn, shifting their focus from a strong currency to concern over rising inflation. The AUDUSD rallied and hasn’t looked back. Wednesday was a write-off with traders focused on the next day’s Bank of England (BoE) and European Central Bank (ECB) meetings. As expected, the ECB provided the entertainment. They left interest rates unchanged (as expected) but to some Mario Draghi’s press conference left the door open to future rate cuts with his comments about "seeing through" the present uncertainty, presumably EM weakness, and wanting to see more data. US and Canadian data releases provided more entertainment with poor Canadian trade data undermining the loonie while gains in US jobless claims offset a weak US trade number.

Loonie soars on strong jobs report

The Canadian dollar rallied in conjunction with the weak US Labour data and a better than expected Canadian employment report. Employment rose by 29,000 while the unemployment rate declined by 0.2 percent to 7.0 percent. Even though the report was better than forecast, the economy failed to recover all the jobs reported lost in the December release and the unemployment rate sits where it was a year ago.

Chart: Canadian employment

Source: StatsCanada

Are winds of change lifting loonie?

The USDCAD started 2014 under pressure. Weak economic data, a dovish Central bank and a US Federal Open Market Committee (FOMC) committed to tapering. In Australia, the central Bank was trumpeting the benefits of a weak currency while in Europe, the ECB was seen to be on the cusp of a rate cut. When the FOMC announced another 10 billion of taper at the end of January, EM traders appeared to have been jolted out of a slumber and EM currencies were slammed. Suddenly FX markets were in risk aversion mode and JPY and CHF rallied. The AUDUSD rally triggered by this week’s shift in tone by the RBA and an improvement in Australian exports to China has spilled over into the other commodity currencies, NZD and Canada, providing some much needed support. The US data has been decidedly mixed and today’s NFP report was another below consensus result while the Canadian data surprised to the upside. All of the above have given the loonie a bit of a lift which may have more to go in light of the still very long USDCAD positions outstanding.

USDCAD technical outlook

The short term USDCAD technicals are bearish following last Friday’s key reversal. The break below 1.1140 took out strong support and the break of 1.1080 argues that a short term top is in place. The steepness of the correction this week suggests that we may see a period of consolidation in the 1.0980-1.1080 zone. A break below 1.0980 risks a return to 1.0810 while a move above 1.1110 negates the downside pressure

Chart: USDCAD 4 hour

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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