Loonieviews March 17, 2014


LOONIEVIEWS

"Green is good" says St. Patrick Gekko (Gordon’s Irish cousin)

· Bank of Canada Speech may signal policy shift

· US government not practicing what it preaches

· FOMC -looking forward to guidance

· The loonie idled in Asia but high stepped like a Lord of the Dance during the European session as USDCAD dropped through 1.1080 to test support at 1.1050, perhaps in a nod to St. Patrick’s Day. March 17 is the day a large swath of the green clad people dine on Crubeens, Colcannon or Coddle while washing it down with pints of Smithwicks, Killbeggan or both, to celebrate the death of a Scottish or Welsh snake charmer, 1,553 years ago. St Patrick’s Day isn’t the only celebration going on as Russians in Crimea are heralding the news that close to 95 percent of citizens voted to quit the Ukraine and rejoin Russia. The celebration is a tad more subdued in the Ukraine.

Beating the band

The Peoples Bank of China (PBOC) announced a widening of the CNY trading band on Saturday, expanding it from 1 percent to 2 percent precipitated by an urge to introduce an element of two-way risk into the currency pair. The action did not have an immediate impact on G-7 FX trading except to make traders a litt le more alert for risk sentiment shifts.

Do as we say, not as we do

Even as the US and the EU express outrage over Russia’s actions in the Ukraine, US Navy Seals hijacked a North Korean oil tanker loaded with Libyan crude. The Cyrenaica Political Bureau of Libya authorized the ship to be loaded but they are considered a rebel group by the various warlords acting as the Libyan parliament. Why this internal Libyan matter became the US Navy’s business is anyone’s guess. North Korea wants the US to explain how their "annexation" of the oil tanker differs from Russia’s action in Crimea.

FOMC is the key

Wednesday’s Federal Open Market Committee (FOMC) rate decision and press conference is getting a lot of attention because it is Janet Yellen’s first as Chair. The prevailing sentiment is that because various Fed speakers since the last meeting have indicated that weak US data was due to inclement weather and not because the economy was faltering, there will be another $10 billion reduction in purchases of Mortgage Backed Securities and Treasuries. The key question is about "Forward Guidance" and what changes will be made to the transparency provided for markets. By definition "Forward Guidance" is rather opaque- a reference to a future estimation. The uncertainty surrounding the forward guidance will likely put a damper on early week trading.

Other US Data on deck

Tuesday: February Housing Starts (Forecast 915,000) The looming FOMC meeting will likely limit any impact on FX markets from this data. In addition, severe weather may have also played a role

Tuesday: February CPI (Forecast 1.2 percent y/y, Core 1.6 percent y/y) This is another important data series that won’t be important this month because inflation in the US is not an issue and the FOMC meeting is the next day.

Key Canada Data releases

Tuesday: Bank of Canada Governor, Stephen Poloz Speech. The text of the speech is available at 11:40am EDT.

Friday: February CPI (Forecast 0.9 percent y/y; Core 1.1 percent y/y) Unlike the US CPI release, the Canadian data will impact the loonie especially if it is below forecasts as that would renew concerns for a rate cut.

Friday: January Retail Sales (Forecast 0.8 percent m/m; Ex-autos 0.9 percent m/m) The market is looking for some payback from the weather related drop in December. One should temper one’s enthusiasm for a rebound due to January weather being pretty bad as well.

USDCAD Outlook

The Canadian dollar will remain an afterthought for FX traders as its direction will be determined by external forces. The European Union, Great Britain and the USA’s threatened sanctions in response to Russia’s foray into the Crimea and Russia’s reaction will keep the fuse burning for any risk aversion blow-up, but so far, the West’s actions look like they will be more of a scolding than a spanking. It is interesting to note that despite a reduction in net long US dollar positions as reported in the Commitment of Traders report, long USDCAD positions remain at elevated levels. The speech tomorrow by the BoC governor could endorse the market conclusion that the BoC has shifted to a neutral policy stance which would eliminate one of the key factors for selling Canadian dollars since last October. A stronger than expected CPI print on Friday would confirm it.

USDCAD short term technical outlook.

USDCAD is trapped within a 1.0920-1.1220 band and has been since the beginning of the year. For the past week the price has bounced between 1.1040-1.1150 but appears to have a mildly bearish bias while trading below 1.1090. A breech of 1.1040 would extend losses to 1.0990 and a break of this level would negate the 2014 uptrend and warn of a steeper drop. A move back through 1.1105 puts 1.1040-1.1150 consolidation back on the table. A move through the 1.1220-60 zone would risk further gains to 1.1560

Chart: USDCAD 4 hour

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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