Loonieviews Midweek Update

Durable Goods not so durable but AUDUSD rally could be

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Michael O’Neill

Filed in Loonie Views

Canada, Just now 26 March 2014 at 16:26 GMT+0


· Durable Goods report not US dollar supportive.

· AUDUSD on center stage

· Balance risks for loonie

Today’s Durable Goods report may have been the marquee release for US data this week but AUDUSD is the star of the show. Durable goods rose 2.2 percent m/m, handily beating the 1.0 percent consensus forecast. As usual the devil is in the details and this report’s details were mixed. The drop in the non-defense capital goods orders excluding aircraft component, dropped 1.3 percent taking a little of the bloom off the rose. Nevertheless, the US dollar has managed a slight bid.

The paucity of prime data releases this week, a steep reduction in USDJPY trading activity due to the March 31 Japanese year end and the variety of headlines carpet bombing the markets has FX majors trading sideways within the recent ranges. All except for the Australian dollar. Glenn Stevens, the governor of the Reserve Bank of Australia (RBA) provided a fairly upbeat economic outlook in a speech in Hong Kong today suggesting that further growth in the domestic housing market is helping to offset the effects of reduced mining capital expenditures. He still maintains that the Australian dollar is too high but he dialed down the rhetoric to such an extent FX traders rushed to buy AUDUSD.

Feast or Famine

Last week was chock full of market moving data, central bank policy announcements and geo-political risks. Traders feasted on remarks from the governor of the Bank of Canada (BoC), Janet Yellen’s first press conference as Chair of the Federal Open Market Committee (FOMC), the minutes from the Bank of England (BoE) as well as bountiful top tier economic data releases. A headline from a Q & A session with the BoC governor led to a sharp spike higher in USDCAD. Similarly, Janet Yellen’s dot plot and quantification of "considerable time" being six months put the US dollar in demand across the board. In both cases, the headlines were misleading and by the end of the week, the US dollar had started to pare back some of its gains.

This week, for the most part, has been a famine. The G-8 became the G-7 meaning that Russia paid a very small price for Crimea. The only thing missing is for President Obama to proclaim "Peace in our time". USDJPY trading seems to be closed for the Japanese year end on March 31 and Mario Draghi’s apparent attempts to talk down the EUR ahead of the European Central Bank meeting next week are being ignored.

AUDUSD in the spotlight

The Australian dollar was able to grab the spotlight as it was the only G-10 currency to show signs of direction. The break of the 200 day moving average at 0.9140 and the RBA’s tacit capitulation of verbal intervention have 0.9530 in the cross hairs. The 200 day moving average should now revert to support.

Chart: AUDUSD daily with 200 day moving average

Source: Saxo Bank

Balanced risks in USDCAD in the short term

USDCAD has been in a strong uptrend since the beginning of January but has struggled to make headway above the 1.1240-60 area resistance zone. As previously stated, various positioning models including the IMM Commitment of Traders report indicates that short Canadian dollar positions are at very high levels. If accurate, that implies a lack of new buyers limiting further US dollar gains. The recent weak Canadian economic data releases may be more a factor of this year’s extreme winter season rather than an indication of a slowing economy. If so, then the upcoming data should surpass expectations and provide the loonie with some support. Last week’s USDCAD rally was a result of the headlines taking Mr. Poloz’s interest rate comment out of context. The fact remains that the Bank of Canada believes that the existing "Neutral" policy stance adequately reflects the existing economic risks as determined by the BoC. However, in the longer term there is still a good risk that USDCAD punches through resistance and checks out 1.1550 due to diverging interest rate paths. The Bank of Canada is neutral but Poloz’s speech was fairly dovish. On the other hand, the FOMC chairwoman left the impression that US rates were heading higher, sooner than previously indicated. This divergence will limit any Canadian dollar gains and ensure that the current 1.1080-1.1260 range remains intact.

Chart USDCAD daily with uptrend line and support

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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