Loonieviews Mid week March 19, 2014


Ride the lightening-fade the move

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Michael O’Neill

Filed in Loonie Views

Canada, Just now 19 March 2014 at 15:28 GMT+0

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· Focus is on FOMC forward guidance

· Neutral really means neutral says BoC

· USDCAD rally may be misguided

The Federal Open Market Committee (FOMC) interest rate decision and statement later on today has garnered far more attention then it rightly deserves, mostly because it is Janet Yellen’s show. There doesn’t seem to be much debate on the monthly asset purchase program being pared down to $55 billion per month. The discussion surrounds changes to the FOMC’s forward guidance. The risk seems to be that the market may be getting ahead of itself. Fed speakers are on record stating that they believe winter weather has negatively skewed the economic data which may mean that the economy is not as weak as the data indicated. That being said, the weather hasn’t improved significantly yet so perhaps this meeting is still too soon to make significant changes.

Out with the old-in with the new

Canada’s Finance Minister, Jim Flaherty, resigned yesterday despite prior assurances that he would complete his electoral term. Apparently, the rumoured private sector position he accepted is worth far more to him than keeping his word to his constituents. His replacement is reportedly the Natural Resources minister, Joe Oliver, an obvious choice since the governments most important natural resource is its Finance department. In a rare move for a government, they have selected a bright capable and qualified former investment banker. Mr. Oliver has an MBA from Harvard and he is not a career politician having only been elected in 2011. From a Canadian dollar perspective, this is a neutral decision as he is likely to maintain the status quo and deliver a budget surplus on schedule.

"Neutral means literally neutral"

The Bank of Canada governor (BoC) Stephen Poloz gave a speech in Halifax yesterday titled "Redefining the Limits to Growth". Apparently FX traders thought it was called "Sell the Loonie" because by the time the press conference was done, the Canadian dollar had dropped over 1 percent from its overnight peak. Mr. Poloz was attempting to explain why Canada was experiencing lacklustre economic growth in a recovery attributing part of the problem to demographics, specifically an aging baby boomer population. In a nutshell, "boomers" are saving for retirement and not spending and the type of savings don’t contribute much to productivity. He went on to warn that the first quarter growth would be on the soft side and suggested that "interest rates may remain lower than we have experienced in the past for a longer period". Mr. Poloz also said that he "couldn’t rule out rate cuts" but went on to explain that "when we say neutral we mean literally neutral. Given the risks that we have identified and given the way those risks are expected to play out around our forecasts, we think interest rates are at the right place" The FX market was unsettled by the tone of his speech but the headlines screaming "couldn’t rule out rate cuts", misguided as they were, sealed the Canadian dollars fate.

Ride the lightning-Fade the move

The USDCAD reaction to the yesterday’s BoC governor speech is a bit of an enigma especially if you read the speech and listened to the press conference. Yesterday’s USDCAD rally erased 5 successive days of grinding gains in one fell swoop triggered by misleading headlines and supported by what can best be described as an underlying bearish Canadian dollar bias. The domestic currency has not recovered from the Bank of Canada’s removal of the tightening bias in their October interest rate statement and USDCAD has been on a steady uptrend ever since. Weak data, in part due to weather issues, has contributed to the bearish loonie bias. Arguably, the Canadian dollar negatives were fully reflected around 1.1150 supported by the USDCAD’s failure to extend gains above 1.1220. The bearish bias sentiment was called in to question following the BoC’s interest rate statement on March 5. That day, the bank was viewed to have adopted a "neutral" policy stance. The USDCAD edged lower due to: a) a loss of upside momentum b) the Bank of Canada’s shift to a neutral policy stance c) mildly improving economic data. What has changed? The Bank of Canada has a neutral policy stance meaning rates can go higher as easily as they can go lower. The recent economic data has been favourable-inflation was higher than expected, Tuesday’s manufacturing data showed a healthy jump. The Quebec election and the "Sovereignty" chatter is just noise although depending on the April 7 results, it could become a different matter altogether. The Bank of Canada did not say that they would be cutting rates. Mr. Poloz said he couldn’t rule out a rate cut (in answer to a question). Fade this USDCAD rally but recognize that you are wrong if it breaks above 1.1260.

USDCAD technical outlook

The short term USDCAD technicals are bullish supported by the break of resistance at 1.1090 and again at 1.1160 targeting the 1.1220 and 1.1240-60 areas. A break of 1.1260 targets 1.1560 without a lot of resistance in between. A move below 1.1120 would argue for further 1.1050-1.1220 consolidation.

Chart: USDCAD daily

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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