Loonieviews April 30, 2014


USDCAD Open 1.0957-62 Overnight Range 1.0946-1.0964

USDCAD enjoyed a lively overnight session, advancing, retreating and then advancing again, albeit within a 20 point range ahead of today’s Canadian and US GDP data and the FOMC meeting. Elsewhere, Kiwi rose on better data but then reversed. The BoJ’s Quarterly Report led to USDJPY buying. EURUSD moved lower following the EU CPI data but the move was short -lived and it is now trading 30 points higher than when the data was released. Canadian and US GDP releases will still be impacted by weather effects so a better than expected print will be the surprise. Today’s month end rebalancing flows could prove disruptive prior to 11: am. afterwhich markets will be becalmed awaiting the FOMC meeting. It is not expected to be a game changer leaving geopolitical worries and Friday’s nonfarm payrolls data to drive trading.

The intraday USDCAD technicals are slightly bearish below 1.1010 but need to see a break below 1.0940 to extend losses to 1.0905. A move above 1.0980 argues for a test of 1.1010 which if broken would target 1.1040.

Today’s Range 1.0940-1.0980


Loonieviews April 29, 2013


USDCAD Open 1.0971-76 Overnight Range 1.0970-1.1027

"London’s calling and they wanted Canadian dollars"

USDCAD traded quietly in Asia aided in part, by Japan being closed for a holiday. Everything changed during the European session when the floor fell out of the nearly two week old 1.0990-1.1050 range. There doesn’t appear to be a single catalyst but the old adage of "what goes up, must come down" may be applicable. Tomorrows Canadian GDP could surprise to the upside, the ECB remains on hold, the FOMC will offer no surprises and the 50% Fibo retracement of the 2014 range has held which all combined may have led to the correction. The BoC governor’s speech to the House of Commons Finance committee, if dovish, could reverse today’s gains.

The intraday technicals are bearish with the move below minor support at 1.1010 and then 1.0990. The 100 day moving average at 1.0959 provides additional support at 1.0660. A move below 1.0940 targets 1.0910 while a move above 1.1010 targets 1.1050. For today, USD support is at 1.0960 and 1.0940. Resistance is at 1.0990 and 1.1010.

Today’s Range 1.0960-1.1010

Loonieviews April 25, 2014

FX volatility will follow political tension and data risk rise

Michael O’Neill

FX Consultant / IFXA Ltd


• Month-end may bring volatility
• Bank of Canada tones down loonie rhetoric
• Big gains expected in non-farm payrolls

The week is ending the way it started – very slowly. Australia and New Zealand were closed to enjoy Anzac Day, and the light US economic calendar should encourage European traders to try for an early start to this weekend. The 800-pound gorilla (bear) in the market is the brinkmanship in the Russia/Ukraine dispute. US Secretary of State John Kerry is making more threats of sanctions against Russia after already poking the bear by moving troops into NATO countries. Between Captain America and Comrade Putin it is easy to see how events can go pear-shaped in a hurry.

The week that was

This week started off slowly as a large number of traders enjoyed an extended Easter holiday on Monday. Tuesday brought news that the US planned to deploy troops near Russia, planting risk aversion seeds although traders seemed more concerned about Wednesday’s European PMI data, the Bank of England (BoE) minutes and US New Home Sales. The flurry of movement following the data was short-lived and the majors settled back into quiet trading. Thursday was the highlight of the week for some currency pairs. The Reserve Bank of New Zealand (RBNZ) surprised no-one, with a quarter-point bump in the overnight rate (OCR) but seemed to surprise a lot of people with the tone of the statement. NZDUSD spiked to 0.8635 from 0.8565 before the news but had given back all its gains and then some by the time North America called it a day. In Europe, the European Central Bank president Mario Draghi used a speech in the Netherlands to warn that a higher EUR could derail the recovery, which only had a short-lived effect on the currency. A strong US Durable Goods report improved the bigger picture outlook for US growth but the data failed to provide much support to the dollar.

The week that will be

Month-end rebalancing flows, the Bank of Japan (BoJ) Monetary Policy Statement, the Federal Reserve Open Market Committee (FOMC) meeting and the US Nonfarm Payrolls (NFP) report dominate a data-rich week. A slew of economic reports from the European Union (EU) on Wednesday climaxing with the April CPI release (forecast 0.8 percent, year over year) could add to any volatility created by month-end portfolio flows. Meanwhile, the FOMC meeting is likely to be anti-climatic, in part due to an absence of a press conference. Furthermore, since the March meeting, various US Federal Reserve speakers have gone to great lengths to assure markets that "even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run". There haven’t been any data releases since that March statement was written to change their view.

NFP forecasters and King Joffrey

King Joffrey Baratheon, ruler of the Seven Kingdoms, and Nonfarm payrolls forecasters have one thing in common and that is they all choke on big days. With the effects of record setting, severe US winter weather starting to recede, recent US data releases have surprised to the upside. NFP forecasters have been guilty of jumping the gun, anticipating large increases for the past three months and being largely disappointed. The current consensus forecast for Friday’s report is for a gain of 203,000. Last month, the forecasts were similar and as the release date neared, forecasters were busy revising their estimates higher. They were disappointed. This month may be different. Thursday’s Challenger Job Cuts report and Jobless claims data is likely to encourage higher "guess-timates" for NFP and they may be right. Citibank economists are already on record looking for a print north of 300,000.

Chart: Change in nonfarm payrolls

Source: TradingEconomics.com

Poloz passes on panning loonie

USDCAD traders were a tad nervous ahead of the Bank of Canada (BoC) governor’s speech on Thursday in Saskatchewan. On two previous occasions Stephen Poloz had used his turn at a podium to warn of the possibility of interest rate cuts to stem deflation risks. On both occasions, promising Canadian dollar rallies were stopped in their tracks. He did refer to the currency using a dog analogy though, comparing the Canadian dollar’s ever changing value to walking a dog. Poloz appeared to have a more balanced view on the loonie, and trumpeted the benefits of higher oil prices to the Canadian economy. However, the governor was vague on how the Alberta, Saskatchewan and Newfoundland oil booms were benefiting the 40 percent of the Canadian population residing in Ontario, whose manufacturing based economy has been decimated by the recession. Essentially, his speech was more about reminding the oil sector how lucky it is rather than providing any additional monetary policy insights.

USDCAD outlook for next week

The key data release for Canada next week is GDP. (Forecast, 0.5 percent) The Bank of Canada remains concerned about the slow progress of export gains, which suggests that the GDP data won’t provide any support for the loonie. The risk of a surprisingly strong US NFP print and a lack of domestic data combined with a modestly bullish USDCAD technical outlook suggests further USDCAD gains over the coming week.

The short-term USDCAD technicals are bullish while trading above the uptrend line support at 1.0940, which is guarded by support from the 100-day moving average at 1.0951. This area should contain any US dollar weakness. However, as it stands now, there is also formidable resistance in the 1.1050-80 area, which has capped upside.

Chart: USDCAD 4-hour with support in red

Source: Saxo Bank

Loonieviews April 24, 2013


USDCAD Open 1.1020-25 Overnight Range 1.1018-1.1034

The USDCAD languished in another narrow range overnight while other G-10 currency pairs enjoyed sporadic bouts of activity. Kiwi led the way with the RBNZ hiking rates by 0.25 basis points which was widely anticipated. The ensuing statement was a tad on the hawkish but by the Toronto open, NZDUSD had retraced all of its post announcement gains. The keenly awaited speech by the ECB’s Mario Draghi, ended up being a rehash of previous comments and EURUSD just sat. The Bank of Canada governor, Stephen Poloz is giving a speech in Saskatchewan today entitled Canada’s Hot-and Not. He may take this opportunity to dump on the Canadian dollar, again. US durable goods and Initial Jobless claims are the main data events.

Today’s Range 1.1005-1.1050

Offsetting economic impact of Keystone Pipeline delay

The Canadian dollar is not only struggling to hang on to its recent gains, it is trying to avoid another wholesale sell-off. The positive effect from the recent series of strong domestic data releases including CPI and retail sales is being off-set by Stephen Poloz, the governor of the Bank of Canada. His constant references to deflation and admissions of rate cuts not being off the table are deliberate and not very subtle attempts to devalue the currency. He may have a very good reason for his actions. In his former role as President of Export Development Corporation (EDC) he became well aware of the benefits of a weaker currency on exports. The on-going discount applied to prices paid for Canadian oil (Western Canada Select-WCS) and West Texas Intermediate (WTI) is currently around $21.00 per barrel and mainly due to pipeline congestion in Cushing, Oklahoma. The US administration announced another delay in the approval of the Keystone XL pipeline which would have alleviated the congestion and the discount. Perhaps Mr. Poloz views a weaker currency as an effective measure to counteract the US politics.

USDCAD technical outlook

The USDCAD rally from October 2013 ended at the beginning of April with the move through the up-trend line at 1.0990. The ensuing sell-off was contained by the 38.2 percent Fibonacci retracement level in the 1.0850-80 area and USDCAD has steadily risen. The intraday up-trend from the 1.0855 low remains intact above 1.0990 but faces good resistance in the 1.1040-60 zone. A break above 1.1080 would argue that a short-term bottom is in place at 1.0855 and re-target 1.1270.

Chart USDCAD 4-hour

Source: Saxo Bank

What is the US index telling us?

The US dollar index suggests that the dominate US dollar downtrend from last June remains intact although there is good support in the 79.20 area. Intraday, the USDX rally is intact above 79.75 looking for another test of the 80.10-20 area. If the up trend continues it would support a retreat in EURUSD and add to the upside pressure on USDCAD.

Chart US dollar index

Source: Saxo Bank

Loonieviews April 22, 2014

Loonie in the land of the cross hairs

Michael O’Neill

FX Consultant / IFXA Ltd


• Light week for data from Canada and US
• CAD Cross trading to define direction

• Bank of Canada’s focus on inflation

A post-Easter sugar crash may be responsible for lethargic FX markets today with a very light Canada and US economic calendar this week not helping matters. FX traders ignored a report in the Australian Financial Review that Finance Minister Joe Hockley was unhappy with the Reserve Bank of Australia’s (RBA) move to a neutral bias and rightly so. Central bankers are notoriously protective of their autonomy and the RBA is no different. USDJPY is mildly bid as traders warm to the idea that Japan’s revamped Government Pension Investment Fund (GPIF) and its new mandate to invest in riskier assets rather than just government bonds will lead to further stimulus from the Bank of Japan and thus a weaker JPY. GBPUSD was the star of the overnight session touching the 2014 highs in part due to the anticipation of hawkish minutes from the Bank of England, due tomorrow.

US Data Releases

FX traders are unlikely to find inspiration from this week’s US data releases.

Wednesday: April Markit Manufacturing PMI (Forecast, 56.0); March New Home Sales (Forecast, 450,000).

Thursday: March Durable Goods: (Forecast, 2 percent, ex-transportation 0.6 percent). The risk is that the data will exceed expectations as weather issues dissipate.

Friday: April Reuters/Michigan Consumer Confidence Index (Forecast, 83).

Canadian Data Releases

Wednesday: February Retail Sales (Forecast, 0.4 percent, ex-autos 0.5 percent month-over-month). The headline number is unlikely to beat the 1.3 percent gain in January but a better-than-forecast print would still give the loonie some support.

Loonie in the cross hairs.

The lack of Canadian economic data this week leaves the loonie in the cross hairs and exposed to the ebbs and flows of regional developments dictating direction in CAD crosses. It starts tonight with the Australian CPI data and the HSBC China Manufacturing PMI. A strong PMI reading coupled with a high Australian CPI would give the AUDUSD a boost and is likely to lead to AUDCAD demand. However, the Reserve Bank of New Zealand (RBNZ) announcement of its interest-rate decision on Wednesday could offset AUDCAD demand with NZDCAD selling. An increase of 0.25 percent is fully priced, which leaves the statement to be the source of volatility. If it is perceived to be dovish then NZDUSD will come under heavy selling pressure, potentially benefitting the loonie on the selling of NZDCAD.

Chart: NZDCAD daily

Source: Saxo Bank

Tomorrow’s release of the Bank of England minutes also poses some risk for the Canadian dollar. GBPUSD and by default GBPCAD has been on a tear throughout April and is once again flirting with levels not seen since 2009. The currency is already trading as if the minutes are revealing a more hawkish stance than was previously thought. If so, GBPCAD risks a return to 1.8670. Conversely, disappointment should see selling of GBPUSD and GBPCAD.

Chart: GBPCAD 4-hour

Source: Saxo Bank

Canadian dollar outlook

There is a strong possibility that the buying and selling of Canadian dollars against the majors will keep USDCAD in its recent 1.0940-1.1040 range for the balance of the week. As was evidenced last week in the Bank of Canada’s (BoC) interest rate statement and Monetary Policy Report, the BoC is pretty obvious with its desire to have a weaker currency. Its governor, Stephen Poloz, is continuing to highlight the risks of deflation even in the face of recent rising inflation data, which is diminishing the effects of the improving domestic data on the loonie.

USDCAD technical outlook:

The USDCAD is directionless, hovering just above the middle of the intraday trading band of 1.0940-1.1040. There is a small bullish USDCAD bias while trading above 1.0980 which, if it holds, should lead to another test of 1.1040. A break of 1.1040 would extend gains to 1.1080 while a move below 1.0980 targets 1.0940, which is also the 100-day moving average.


Source: Saxo Bank

Loonieviews End of week April 17, 2014

FX markets find Big Three mean business on rate hike talk

Michael O’Neill

FX Consultant / IFXA Ltd


• Central banks’ messages fall on deaf ears
• Canada MPR release upbeat
• USDCAD consolidation ahead

The Easter weekend holiday should see a quick evaporation of liquidity heading into Friday. Monday is a holiday in many countries that will guarantee a slow start to the new trading week, providing Russia and Ukraine go Easter egg hunting rather than head hunting. Today’s Canadian CPI data will prove to be a non-event coming so soon after the interest rate decision and the Monetary Policy Report.

We listen but do not hear

Source: IFXA/ Universal Studios

These three images have one thing in common. Yes, a fondness for chocolate eggs may be one shared characteristic although big ears are probably the better answer. It is fair to say that if this trio listened to the recent speeches from the European Central Bank president Mario Draghi, the US Federal Reserve chairman Janet Yellen and the Bank of Canada (BoC) governor Stephen Poloz, their aural capacities would have allowed them to clearly hear the messages being delivered which is: "interest rates aren’t going anywhere any time soon".

The FX markets are only just starting to get the message and that is because yesterday the Fed chairman reiterated the view that an unemployment rate of 6.5 percent was a threshold and not a trigger. She said: "Specifically, in determining how long to maintain the current target range of 0 to 25 basis points for the federal funds rate, the Committee will assess progress, both realised and expected, toward its objectives of maximum employment and 2 percent."

Mr Poloz has to accept some blame for the confusion surrounding the direction of Canadian interest rates and the currency. Yesterday, he appeared to be deliberately trying to "talk down" the currency by repeating that interest rates would be cut to fight deflation, and said in such a fashion as to garner headlines. He said: "We are neutral. That means a rate cut cannot be taken off the table." By definition, neutral would also mean that a rate hike cannot be taken off the table. Furthermore, both the interest rate statement and the MPR have a reasonably optimistic outlook for the Canadian economy that the media downplayed. To be fair, the BoC did say that 2016 GDP would be closer to 2 percent, down from the average of 2.5 percent in 2014 and 2015. However, the BoC did not note its poor track record for forecasting GDP.

Verbal intervention in currency markets is in vogue yet the short-term results tend to fade rapidly. Draghi managed to take the EURUSD down a notch or two last Saturday when he warned that further gains in the EUR would trigger additional monetary easing to keep inflation from falling too low. It is fair to say that a 0.0040 point drop in EURUSD was unlikely to be the desired result. Draghi is also to blame for the markets’ confusion on Eurozone interest rates. He is constantly warning about the perils of deflation but the ECB statement is maintaining that "incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment".

You will have better luck hunting for Easter eggs this weekend then you will have trying to discern central bank interest rate tendencies from the recent press conferences and speeches.

USDCAD range with bias higher

The Bank of Canada went to great pains to "talk down" the Canadian dollar yesterday, repeating warnings of interest rate cuts to fight deflation. It goes to great lengths to detail its concern over inflation and then pats itself on the back by stating that "The Bank judges that the balance of these risks remains within the zone for which the current stance of monetary policy is appropriate." The focus on inflation and the references to the "lower Canadian dollar" providing additional support to economic growth implies a tacit endorsement of a weaker currency. At best, the weaker loonie encouragement may help to shore up the floor.

USDCAD Technicals for the week ahead

The short-term USDCAD technicals are bullish. The down trend from the March peak of 1.1270 ended on Tuesday with the move back above 1.0980. There is an intraday USDCAD up trend from the 1.0860 low that will accelerate on a break above 1.1040-60, which would confirm a short-term low in place at 1.0960 and project further gains to 1.1160. A move below uptrend support (currently 1.0990) would lead to another test of 1.0960. The 1.0960 area is garnering additional support from the 100-day moving average and 50 percent Fibonacci level at 1.0928. This implies a trading range of 1.0960-1.1040 for next week.

Chart: USDCAD 4-hour with projected range

Source: Saxo Bank

Loonieviews April 16, 2014

Loonie stays level as BoC leaves rates unchanged

Michael O’Neill

FX Consultant / IFXA Ltd


• Russia/Ukraine issues a risk to ranges
• Bank of Canada ambiguous
• Yellen speech a wild card

It’s the middle of a shortened holiday week and the currency markets are lacking a cohesive theme. This is making for choppy trading within existing ranges although traders are warily eyeing developments in the Ukraine. Pro-Russian militia and Ukrainian government forces are jockeying for position in eastern Ukraine before officials from the EU, US, Ukraine and Russia meet in Geneva on Thursday in an attempt to diffuse tensions in the area. The start of the week pressure on EURUSD was not sustained, having stemmed from remarks by European Central Bank president Mario Draghi over the weekend, better-than-expected US retail sales and the Russia/Ukraine dispute. Wednesday has brought a modest improvement in risk sentiment even though the rationale is tenuous. USDJPY rose on a rising Nikkei while Chinese data releases were mixed. GBPUSD jumped on a better-than-expected labour report. US housing starts were below forecast (Actual 946,000 vs. Forecast 973,000 month-over-month). Unfortunately, all of the above are like an unlabelled box of Lego bricks i.e. pretty to look but lacking directions. Maybe Janet Yellen’s speech today will provide a plan for the bricks.

BoC keeps status quo on interest rates

USDCAD jumped 0.0030 points when the Bank of Canada announced there would be no change in its interest rate policy, as traders focused on headlines culled from the statement. As has been the case lately, the headlines scrambled the tone of the statement that isn’t as dove-like as the headlines imply. In fact, the tone of the statement is fairly positive stating that "CPI inflation will remain close to target". You will recall that speculation of an interest rate cut due to persistently weak inflation caused a large part of the USDCAD rally from last October. This statement seems to put that notion to rest. The statement is rather positive on the outlook for global economic growth. Domestic GDP growth is projected to be 2.5 percent in 2014 and then declining to 2 percent in 2015, which was likely the major negative in the entire statement.

USDCAD technical outlook

USDCAD is in the process of consolidating recent losses stemming from the loss of support in the 1.1020-40 zone. The initial USDCAD floor of 1.0858 is just below the 38.2 percent Fibonacci retracement level of the entire October 2013-March 2014 range. If the 1.0850 level breaks, USDCAD could retrace back to 1.0650, which is the 61.8 percent retracement of the October-March range. A move above 1.1060 would suggest that a short-term bottom is in place, and retargeting the March peak.

Chart: USDCAD daily with Fibonacci and moving averages

Source: Saxo Bank

Highlight of the BoC Quarterly Monetary Policy Report (MPR)

The Bank of Canada interest rate statement wasn’t the only official report released by the central bank today. The MPR described an improving global economy that is expected to lift Canadian exports. One notable factor is that the BoC appears to have stolen a page from the Reserve Bank of Australia’s playbook by making more specific references to the Canadian dollar exchange rate. The MPR states: "TheCanadian dollar has averaged approximately US 0. 91 since the March fixed announcement date, in line with the assumption in January. By convention, the Canadian dollar is assumed to remain at its recent level of US 0.91 over the projection horizon"