Copperbottom-A new connect-the-dots-to-chaos game
· Copper market chaos-real risk or noisy distraction
· Canada-South Korea Free Trade Agreement-no support for loonie
· Separation anxiety-again
Some FX and commodity prices are being roiled by the increasingly hysteric reactions to the "connect-the dots-to chaos game being played out in various markets in what can best be described as a time-release panic. China reported its first ever bond default last week which barely made a ripple in any markets probably because they were focused on the upcoming US nonfarm payrolls release. Then on Saturday, China announced far weaker than expected trade data which was met with a collective yawn in FX markets the following Monday. However, the news spanked copper traders and AUDUSD dropped about 0.0050 points in sympathy. The Tuesday North American session was fairly bland although equity markets dipped and copper prices sagged putting pressure on other commodity prices. Overnight, copper touched a four year low, global equity indices sank and risk aversion is mounting. The "copper-plated" question one needs to ask is "Are these events a precursor of another global economic collapse or are they merely "flash-bang distractions" in a top tier data starved environment.
Loonie down but not out
The USDCAD drifted inside its well defined 1.1070-1.1130 range overnight largely unscathed by the copper events. That changed when North American traders finished their morning coffee and drove USDCAD through weak stops at 1.1130 reaching 1.1150 so far in what to me appears to be a nod to "maybe there is something to this move". However, the US dollar upside has stalled near the 1.1150 level and retreated which could be construed as a sign of a lack of conviction in the move or further evidence that the market is already well long USDCAD (or both). The downward pressure on the Canadian dollar may get a bit of a reprieve tonight with potentially bullish news and data from the Antipodeans. New Zealand is widely expected to announce an interest rate hike (25 bps price in) but a bigger bump would give the kiwi a lift. If the Australian employment data rebounds from last month’s ugly print, AUDUSD may recoup some recent losses and the loonie may benefit (slightly)as part of the commodity bloc. The Chinese data (Retail Sales, Industrial Production) could gum up the woks if they are seen to disappoint. Thursday’s US Retail Sales data (forecast 0.2 percent m/m) may serve to shift the FX focus back to US economic growth prospects and take some of the sting out of today’s drift into risk aversion.
The good news isn’t really good
Canada’s Prime Minister, Stephen Harper proudly announced the signing of a free trade agreement with South Korea yesterday trumpeting the prospect of thousands of new jobs in a wide range of sectors including industrial goods, agricultural and agri-food products, fish and seafood and forestry products. The auto sector union, Unifor, describes the deal as a "disaster" stating that South Korea is one of the most closed automotive markets in the world, noting that the America’s auto and auto parts trade deficit with South Korea widened after their deal. At first blush, Canada’s signing of a free trade agreement with South Korea appears to be good news for the Canadian economy and by default the Canadian dollar especially considering the benefits to Canada that accrued after the signing of the North American Free Trade Agreement (NAFTA). The reality is somewhat different. The US market is 84 percent of Canadian exports, while South Korea is a mere 3.4 percent. The $1.7 billion increase in the $1.8 trillion dollar Canadian economy, which is that the Canadian government expects from this deal, is rather insignificant. To some, a Canada/South Korea free trade agreement may be a good thing but to USDCAD traders it is meaningless.
Canada Exports 2004-20013
The bad news could be worse
April 7 is election day in Quebec. The Parti Quebecois (PQ) could turn their minority government into a majority especially with the help of a daddy-made billionaire media mogul (he inherited it) Pierre Karl Peladeau. The Parti-Quebecois raison d’etre is separating from Canada and Peladeau provides the party with business credibility which will go a long way in assuring the economic viability of a sovereign Quebec. In Canada the Quebec separation issue is like a recurring cancer that can’t be eradicated by radiation treatment. The election of a majority PQ government will be seen as a relapse and even though a referendum would be years away, the incessant commentaries, headlines and political posturing will be the proverbial albatross around the neck of the loonie, limiting or slowing any gains.
USDCAD Technical outlook
The short term USDCAD technicals are bullish with the break of 1.1090 and confirmed by today’s break of 1.1130 with only the 1.1150-60 area defending a retest of the 2014 high at 1.1224. A failure to break through the 1.1150-60 zone may lead to further 1.1080-1.1160 consolidation. Only a move below 1.1080 would negate the upside pressure and re-target 1.0980.
Chart: USDCAD 4 hour
Source: Saxo Bank