FX volatility will follow political tension and data risk rise
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
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