Loonieviews-April 4, 2014

USD and Canada – Mixed reviews as Yellen keeps us guessing

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Michael O’Neill

• Nonfarm payrolls fails to inspire
• Canadian employment rises to the occasion
• USCAD technicals have bearish bias

Nonfarm payrolls — Expected sizzle just a fizzle

The highly anticipated US nonfarm payrolls report failed to live up to the hype. Instead of delivering the trend-defining, sky- high increase that many pundits had been predicting, nonfarm payrolls merely increased by a respectable 192,000. After an initial flurry of activity the US dollar returned to its pre-payrolls levels against EUR, GBP and JPY while the commodity currencies eked out some gains. At the very least, the report has not provided proponents of an early 2015 US rate hike much ammunition to support their cause.

Canadian payrolls — Surprise with sizzle not fizzle

The Canadian employment data surprised to the upside with Statistics Canada reporting 42,000 new jobs (forecast 20,000) and a dip in the unemployment rate to 6.9 percent. USDCAD punched through support in the 1.0990-1.1000 area and plunged to 1.0945 before bouncing. The reality is that looks can be deceptive and in this case the headline number masks the fact that 33,000 of the jobs were in the youth category (15-24), which usually means part-time. Nevertheless, the data is positive but maybe not enough to take the sting out of the perception that the Bank of Canada (BoC) is dovish and is happy with a weak currency.

Chart-Canadian Employment

Source: StatisticsCanada

The week that was

Happy New Year, USDJPY!

The 2013-2014 Japanese fiscal year came to a close last Monday and USDJPY awoke from a week long slumber. The new year brought with it a weak Tankan survey that led to renewed speculation of further easing ahead. This sparked renewed demand for USDJPY, taking it from 101.80 on Monday to 104.10 yesterday.

"Let me reiterate," says Janet Yellen

"The US economy is still considerably short of the two goals assigned to the Federal Reserve by Congress". This referred to low and stable inflation and maximum sustainable employment. Yellen was making a valiant attempt with a speech on Monday to clarify her comments from her previous press conference. She is still a dove, and expectations of a US rate increase six months after the end of the tapering programme is premature.

US dollar optimism grows

The US dollar was looking rather perky by the end of the day on Wednesday after the ADP employment report came out close to expectations. (Actual 191,000 vs. previous 178,000 and consensus 195,000). That got the erasers out and the nonfarm payrolls estimates were raised. At the same time, the International Monetary Fund (IMF) was adding to the chorus of "experts" urging the European Central Bank (ECB) to ease monetary policy.

Draghi-ing my heels

The highly anticipated ECB meeting on Thursday failed to live up to expectations (again) leaving traders to latch onto words or phrases that could possibly suggest near-term policy action. This meeting’s phrase du jour was "unconventional measures", which precipitated EURUSD selling as traders jumped all over the possibility of negative interest rates in the Eurozone. However, consider the part of the statement in which he said: "Incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment. At the same time, recent information remains consistent with our expectation of a prolonged period of low inflation followed by a gradual upward movement in HICPinflation rates." This was ignored even though it sounds as if the ECB could be on the sidelines for a more prolonged period.

Canadian dollar outlook

Today’s Canadian employment report is the icing on the cake in a week filled with positive Canadian economic data releases, albeit not top-tier. GDP beat expectations as did the Industrial Product Price and Raw Material indices while the Merchandise Trade account reported a surplus. The large drop in short Canadian dollar positions as reported by the IMM in the Commitment of Traders report dated March 25 is another key factor in the recent Canadian dollar rally. Despite the string of positive reports the Canadian dollar is not out of the woods just yet. US and Canada contrasts are evident. The BoC governor and his counterpart at the Fed appear to be on opposite monetary policy paths. The governor’s comment about not ruling out rate cuts (even if taken out of context) should temper the enthusiasm of CAD bulls and put a floor under the currency. Yellen is seen by some as hinting at early Q2 2015 rate hikes.

USDCAD Technical outlook

The short-term USDCAD technicals are bearish while trading below 1.1010 and are looking for a break of 1.10940 to extend losses through support at 1.0900-10 to possibly 1.0740-50, which represent the breakout to start the 2014 USDCAD rally. A break back through 1.1040 would suggest that a short-term bottom is in place at 1.0940 leading to 1.0940-1.1080 consolidation.

Chart USDCAD 4 hour with downtrend line and support

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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