Loonieviews March 24, 2014

The circus comes to town

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Michael O’Neill

· US data releases to keep dollar supported

· Russia and G-7 will keep traders alert

· USDCAD may be stuck in new range

A new week unfolds with disappointing HSBC China PMI being ignored by the commodity currencies. AUDUSD trade dipped on the news but subsequently rallied and is currently higher than when the data was released. Eurozone flash PMI’s came in as forecast but data wasn’t the main attraction today. The G-7 meeting in Holland in the face of what some believe is a growing threat from an expansionist Russia will force traders to watch the headlines. And Russia isn’t the only aggressor. Turkey shot down a Syrian fighter plane, usually a provocative action, although you won’t see any twitter comments as the Turkish government is blocking that site.

The week that was

St Patrick’s Day festivities distracted traders in many regions at the start of the week as they shifted focus from political tensions around Crimea to the Federal Open Market Committee (FOMC) meeting in Washington. The FOMC statement and Janet Yellen’s press conference gave the US dollar a bid and forced market analysts to revise their rate hike timing projections because it sounded like rates would be rising 6 months after the end of the asset buyback program. This meeting was supposed to be all about forward guidance but instead provide enhanced guidance on the "Dot-Plot". The dot plot shifted slightly to earlier in 2015 and all markets were caught offside. Michael Hanson, Senior US economist at Bank of America pointed out in a story on Investing.com that " the dot plot collects the views of all 16 participants and not just the 9 voters on this year’s FOMC. Thus, nearly half the dots are drawn from individuals with no say in policy decisions. Nevertheless, despite Ms Yellen’s plea that markets shouldn’t read much into the dot plot, the markets proclaimed it gospel. The week ended with the US dollar still bid, the Malaysian Airline’s 777 still missing, and Russian troops parked on the Ukraine border.

The week that is

The Big Top is in town featuring a full three-ring circus. Ring 1) A host of Fed speakers will be making the rounds attracting more attention than usual on hopes that they will provide a bit of clarity on the FOMC’s intentions, much like what occurred last May after Ben Bernanke alluded to a September 2013 start to tapering.

Ring 2) Russia vs. the G-7- A NATO general has warned that Moldova may also be on Russia’s annexation list and G-7 leaders are meeting in the Netherlands today to discuss a response to Russia. Meanwhile, in what could be a scene out of 1980’s My Bodyguard, an empowered Ukrainian Foreign Minister, said on Sunday that the prospect of war with Russia is growing.

Ring 3) is the center ring and filled with US data releases, many of which could provide support for the view that the US economic recovery is well on its way. The key releases include:

Tuesday: February New Home Sales (Forecast 0.445m, m/m) The forecast is lower than January’s data as weather likely played a role.

Chart: US New Home Sales

Source: Tradingeconomics.com/US Census Bureau

Wednesday: February Durable Goods Orders (Forecast 1.0 percent, ex-transportation 0.3 percent m/m) This data is likely to have surpassed expectations due to strong prints from other indices and as payback for the two weak prior releases.

Chart: US Durable Goods

Source: Bloomberg

Friday: February Personal Income and Spending: Forecast: Income 0.3 percent, Spending 0.3 percent m/m) Expectations are for income and spending to firm although if it misses the forecast, weather will be blamed.

Friday: March Reuters/Michigan Consumer Sentiment Index (Forecast 80.6 vs. previous 81.6)

The Canadian dollar outlook

The outlook for the Canadian dollar this week is modestly negative due to the prevailing and conflicting interest rate outlooks between Canada and the US. The Bank of Canada governor wouldn’t rule out rate cuts while the Fed chairwoman appeared to have moved the first interest rate hike to April 2015. The reaction to the Bank of Canada (BoC) governor not ruling out a rate cut was, in my opinion, taken out of context. He explained that the BoC policy was neutral and reiterated that "neutral means literally neutral" which means a rate cut is not on the horizon. However, the governor also reported that the domestic economy is suffering from structural issues which will slow the closing of the output gap. There aren’t any Canadian data releases this week to temper the possible effects of better than expected US data results on USDCAD which should limit Canadian dollar gains. On the other hand, the possibility of various Fed speakers providing improved clarity about the timing of a US rate hike could limit US dollar gains.

USDCAD technical outlook

The intraday USDCAD technicals are bearish while trading below 1.1235 with the move through minor uptrend support at 1.1220 putting pressure on minor 1.1205 support. Longer term, the USDCAD uptrend from the beginning of the year remains intact above 1.1080. The break of the 1.1240-60 area argues for further gains to 1.1530. The risk this week is that traders may find it difficult to establish new long dollar positions at levels near or at 5 year highs, preferring to buy a "better levels". As a result we may see a week of range trading in a 1.1160-1.1260 band

Chart USDCAD 4 hour

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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