Loonieviews-end of week May 30, 2014


X-Men? Bankers in the future past

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· AUDUSD best performing G-7 currency this week, Kiwi the worst

· ECB the star of the show next but great supporting cast from Australia, Canada and UK

· USDCAD headed for new lows

FX trading was very quiet as the month draws to a close. Many European traders took advantage of Thursday’s Ascension Day holiday as an excuse to book a Friday vacation day and enjoy an extended long weekend. The 15:00 GMT fixing reportedly will only yield minor portfolio readjustment flows. There are a number of Fed speakers scheduled throughout the day providing some headline risk although more than likely the day will close like it started-quietly.

The week that was

The week is ending with the Australian dollar as the best performing currency in the G-7(against the US dollar) while Kiwi is the worst performer. It was a bit of a strange week globally, with seemingly more national/semi-national holidays than trading days.

It was also a week with two key US data releases; durable goods orders on Tuesday and Q1 GDP on Thursday. The former greatly outperformed, the latter greatly underperformed and both were quickly discounted. In addition, we were treated to more Mario Draghi musings and dramatics. In a speech last weekend he reiterated previous "hints" suggesting that the European Central Bank (ECB) would act at its next meeting.

The response of euro traders to his remarks was just as vague as EURUSD is content to hover around the 1.3600 area indicating that the single currency may be oversold or that there is a degree of scepticism or likely a bit of both. GBPUSD couldn’t catch a break. The mid-week retreat from 1.6875 took out support at 1.6780 and continued lower despite comments from a Bank of England (BoE) monetary policy committee member stating that rates would go up "sooner rather than later".

Soft New Zealand economic data added to a slightly dovish sounding central bank which led to NZDUSD being offered all week. The bearish technical picture got an added boost with the breech of support in the 0.8500-20 level. The week is ending with more than a few currency pairs well off the levels where they were last Monday. It is worth noting that some of the moves may have been exaggerated due to a) poor liquidity from holidays on Monday in the U.K and US and Thursday in various parts of Europe; b) poor liquidity because traders stay sidelined ahead of the ECB meeting next Thursday and c) month-end demand and pre-fixing positioning.

The week that will be

X-Men: Days of Future Past will fill cinemas for the next few weeks while a lesser known movie, X-Men: Bankers in the future past entertain FX traders next week. The headlining act for next week is Mario Draghi and the ECB interest rate decision, monetary policy statement and press conference on Thursday.

Mr Draghi has taken every opportunity in the past few weeks to warn markets that "pre-emptive action may be warranted to ward off deflation" which has led to a drop in EURUSD. The issue is whether the potential ECB action is already priced in or if any action signals the start of a massive euro correction.

The Reserve Bank of Australia (RBA) takes centre stage on Tuesday. It is widely expected to leave interest rates unchanged. The capital expenditure data released on Thursday reflected a sharp rise in non-mining spending which helps to take the sting out of reduced commodity sector spending. This could add a hawkish sounding element to the RBA statement.

Wednesday puts the Bank of Canada (BoC) front and center. Interest rates will remain unchanged but the tone of the statement is ripe for a redo. The BoC governor has harped about the risks of low inflation and hinted at rate cuts to combat the problem, undermining the loonie in the process. The recent CPI readings have inflation levels at the bottom of the BoC range suggesting that the statement could be on the hawkish side. Thursday’s Bank of England (BoE) meeting will be overshadowed by the ECB meeting and press conference. In between Central Bank meetings there will be a slew of PMI data from China, Europe and the US and Eurozone CPI, finishing with the ever volatile US nonfarm payrolls data on Friday.

The central bank dudes might lack the X-Men’s charisma but they’ll pull in the crowds next week

Image: ©Marvel.com

Canadian dollar outlook

The BoC meeting may be the focus but if the string of strong Canadian economic data releases continues while US bond yields remain under pressure, USDCAD will likely continue to drift lower targeting the 200-day moving average at 1.0746.

The Canadian dollar is also benefiting from the unwind of long EURCAD and GBPCAD positions, which look heavy following the break of support levels at 1.4880 and 1.8150, respectively. The US dollar index suggests that the Canadian dollar has been trading as "North American" currency, rising and falling in tandem with the US dollar. It has been rising steadily since May 10 and it is bumping up against resistance in the 80.60 area. A drop in the index could impede Canadian dollar gains.

Daily USDX with USDCAD overlay:

Source: Saxo Bank

USDCAD technical outlook

The short-term USDCAD technicals are bearish while trading below 1.0880 looking for a break of support in the 1.0805-20 area to extend losses to test the 200-day moving average at 1.0746. A move below 1.0746 points to a retest of the 1.0580 level. A break of 1.0880 would lead to a test of the 1.0920-40 zone and a break above this level would suggest that a short-term bottom is in place.

USDCAD daily

Source: Saxo Bank

Advertisements

Loonieviews May 29, 2014


LOONIEVIEWS

USDCAD Open 1.0858-63 Overnight Range 1.0859-1.0875

The USDCAD causally retreated from Wednesday’s close in a lively Asian session. AUDUSD rallied strongly in part due to a CAPEX report and in part because of general US dollar weakness. USDJPY sank as US 10 year yields dropped to 2.43 percent. Today’s US GDP report is getting a lot of the blame for the position adjustment ahead of the release, despite the fact that the data is stale and backward looking. A number of European markets were closed for Ascension Day holidays which may have exacerbated the moves. The Canadian Current Account data is also out today, expected to show further narrowing of the deficit which should provide a little support to the loonie.

The intraday USDCAD technicals are mixed within the current 1.0840-80 trading band needing a break either side to extend gains or losses by another 0.0040 points.

Today’s Range 1.0840-1.0880

: Loonieviews May 27, 2014


LOONIEVIEWS

USDCAD Open 1.0838-42 Overnight Range 1.0838-61

The USDCAD is slogging its way through thick, sticky support in the 1.0840-50 area aided in part by general US dollar weakness although FX activity across the board is mostly a notch above stagnant. ECB officials (Nowotny) continue to make noises that raise the odds for a rate cut next month but the lack for further EURUSD weakness indicates that a small cut is priced in or scepticism that the words will lead to action. Today’s US data ( Durable Goods, S&P Case Schiller, Markit PMI (flash) and Consumer Confidence )may provide some direction for traders.

The intraday USDCAD technicals are bearish with the break of 1.0850 support suggesting further losses to 1.0805. A break of 1.0805 will extend losses to 1.0750. 1.0840 will be sticky, however the downtrend remains intact below 1.0870.

Today’s Range 1.0805-1.0850

Loonieviews May 26, 2014


US data releases should support the greenback

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• Kiwi shrugs off soft data

• BoJ minutes undermine yen

• Canadian dollar risks appear balanced

Overnight, NZDUSD barely budged on news that the trade surplus narrowed to NZD 534 million in April, down from NZD 920 million in March. (The consensus forecast was NZD 667 million.) Falling shipments of dairy products and meat were blamed for the miss which is also a seasonal phenomenon. The news should keep the downward pressure on Kiwi intact.

BoJ minutes undermine yen

Investing.com reports that three of nine Bank of Japan (BoJ) board members wanted to revise growth and inflation outlooks including emphasising downside risks and setting a time frame for easing. In an interview with the Nikkei Asian Review, BoJ governor Kuroda repeated his forecast that the Japanese inflation rate will hit 2 percent in 2015 and reiterated that the BoJ is ready to take further policy action without hesitation if changing conditions cause prices to deviate. USDJPY drifted sideways most likely due to a lack of traders in holiday thinned markets.

Ukraine elections get it backwards

In most countries, winning an election is a ticket to the highest paying job that the candidate has ever had. Petro Poroshenko did it differently. He is a billionaire and is now the president of Ukraine. This is highly unusual. Politicians usually become billionaires during their term in office not prior to arrival. (See: former Ukraine President Yanukovych, Libya’s Khadafy, Mubarak, Egypt’s Saddam Hossein,) Former US President Bill Clinton is a political under-achiever. He was a civil servant his entire career and is now worth USD 80 million, a spectacular achievement on a USD 200,000 per year presidential pay check. In any event, the Ukraine elections may lead to an improved dialogue with Russia and a ratcheting down of tensions, at least for the short term.

When the UK and NYC are away, the Canadians will play

It’s Memorial Day in the USA. and the Spring Bank holiday in the UK (imagine that—a holiday for bankers. Is it a reward for nearly blowing up the world with the 2008 financial crisis?) Nevertheless it also a readymade excuse for FX desks everywhere else to host client golf tournaments or book long lunches. Most of the trading today will consist of dealers trading stories about big trades or big wins while leaning against a bar.

Those lucky British bankers got a day off work today. Photo: Stacy Newman

Key US Data Releases

Tuesday: April Durable Goods (forecast 0.4 percent, ex transportation 0.6 percent) the ever volatile durable goods data is expected to reflect a bit of payback following the stellar March results (Actual 2.5 percent, month over month).

Thursday: Q1 GDP (Forecast minus 0.2 percent) The hangover from the severe winter will be the cause so the impact of the data will be muted.

Friday: April personal consumer expenditures (PCE). Modest gain (0.3 percent) expected on the back of improving labour markets.

Chart US GDP

Source: Federal Reserve Bank of St Louis

Key Canadian data releases

Thursday: Q1 Current Account (Forecast deficit CAD 12.8 billion, deficit CAD 16.0). Forecast to narrow on improving trade balance and could be a minor positive to the Canadian dollar.

Friday: Q1 Real GDP (Forecast 1.7 percent quarter over quarter, 0.1 percent month over month) This data continues to reflect the nasty winter weather effects and not likely a market mover.

Canadian dollar outlook for the week

The Bank of Canada governor, Stephen Poloz has gone to great lengths to outline his concerns surrounding low and falling inflation in Canada. In response, the Canadian dollar had been knocked for a loop due to fears of an interest rate cut. Friday’s CPI data (Actual 2.0 percent, year over year) means that governor will have to find another reason to explain why Canadian rate could move lower. Or else he could admit that real risk is for a rate hike. The risks to the Canadian dollar appear balanced.

The USDCAD bullish view is supported by:

a) US economic growth is picking up steam while the Canadian economy lags.

b) The Federal Reserve Open Market Committee (FOMC) is likely to raise interest rates sooner than the Bank of Canada (BoC).

c) Concerns that China’s economic growth continues to sputter undermining commodity prices.

d) Nagging fears that Canada is susceptible to a housing market correction.

The bearish USDCAD view sees:

a) Bearish technicals following the break of support in the 1.1040-60 area and the 100-day moving average targeting the 200-day moving average at 1.0737.

b) Sentiment that the bullish USDCAD story is stale and has run its course.

c) Canadian dollar demand stemming from selling of Euro’s on a European Central Bank (ECB) rate cut.

This week, USDCAD is likely to trade with a negative bias within a 1.0810-1.0920 range

Chart USDCAD 4 hour

Source Saxo Bank

Loonieviews May 22, 2014


LOONIEVIEWS

USDCAD Open 1.0911-15 Overnight Range 1.0907-17

The USDCAD and the rest of the majors traded sideways in the overnight session. The exception was AUDUSD which rallied on the back of better than expected China PMI data which hinted that the Chinese economic slowdown had paused. Elsewhere, PMI data in Europe was met with a collective yawn although the yawn was not nearly as loud as what followed the release of the FOMC minutes, yesterday. Even news of a coup in Thailand barely caused a ripple. Canadian Retail Sales are on deck this morning and an upside surprise should drive USDCAD below 1.0900.

The intraday USDCAD technicals are bearish following the below 1.0910 overnight, suggesting that US gains will be capped around 1.0915 with a probe of support at 1.0885 in the cards. For today, USD support is at 1.0885 and 1.0860. Resistance is at 1.0915 and 1.0940

Today’s Range 1.0870-1.0915

Loonieviews May21, 2014


Why the Forex Vortex is not all hot air

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• Trend change likely in AUDUSD
• No relief in FOMC minutes
• USDCAD consolidating within 1.0850-1.0940 range

It is the middle of another week characterised by sporadic bouts of activity. (AUDUSD, USDJPY and GBPUSD). In the case of AUDUSD, the volatility may be due to a trend change while USDJPY and GBPUSD merely probe extreme support and resistance levels. AUDUSD was beaten up by what were viewed as doveish Reserve Bank of Australia (RBA) minutes and then by a report by Standard and Poor’s opening the door a crack to the possibility that Australia’s AAA credit rating could be at risk. GBPUSD resumed its uptrend following better-than expected UK Retail Sales and the Bank of England (BoE) minutes revealing a more active interest rate discussion. Further sterling gains may be seen tomorrow if UK GDP data beats expectations. US home sales data on Thursday and Friday will only be important as additional support to the US economic recovery theme.

The "Forex Vortex"

The winter of 2014 gave us "Polar Vortex" a swirling mass of air unusually found around the North pole, which was pushed south by a large high pressure system, plunging a large part of North America into a deep freeze. This year also gave us the "Forex Vortex", a swirling fog of hot air usually found in the halls of central banks that blanketed FX markets and plunged volatility to multi-year lows. Indecision and contradictory messages from senior officials have confounded traders and made a shambles of the dominant trading themes espoused at the beginning of the year. Additional stimuli from the Bank of Japan (BoJ) was widely expected to drive USDJPY near 108.00. The stimulus package is still on the shelf and this morning’s BoJ statement has raised concerns that it will stay on the shelf for a lot longer. The European Central Bank’s (ECB) deflation concerns gave rise to rate cut speculation ahead of every meeting this year and disappointment after every meeting when they remained inactive. The Federal Open Market Committee (FOMC) have been spinning their wheels like bald tyres on ice. The changing of the guard at the top and forward guidance fading to forward gas have left markets befuddled. Today’s release of the FOMC minutes from April 30 will not provide any relief from the Forex Vortex.

The Canadian dollar outlook.

USDCAD trading can be best described as a restless sleep – a lot of tossing and turning but not really going anywhere. That is unlikely to change for at least the rest of this week. Thursday’s March Retail Sales data (forecast 0.3 percent, ex-auto’s 0.4 percent, month-over-month) will not be strong enough to raise expectations of an expanding domestic economy fuelled by the consumer. On the other hand, a strong April CPI print on Friday (Forecast 0.2 percent, core 0.3 percent) would go a long way into putting to rest any thoughts of domestic rate cuts to combat deflation. If it doesn’t lead to outright demand for Canadian dollars it should help to put a cap on any USDCAD strength.

USDCAD technical outlook

The intraday and short-term technicals are bullish while trading above 1.0895, which is also the break of the downtrend from the March peak of 1.1270. There is resistance between 1.0920-40 and then again at the 100-day moving average at 1.1003. A move below 1.0995 would lead to another test of 1.0850 and likely additional, 1.0850-1.0940 consolidation.

Chart: USDCAD 4-hour

Source: Saxo Bank

Loonieviews May 20, 2014


LOONIEVIEWS

USDCAD Open 1.0885-89 Overnight Range 1.0875-89

The USDCAD barely budged overnight joining the bulk of the majors on the sidelines seemingly content to watch the antipodean antics. The RBA minutes were considered "doveish", S&P warned of a possible risk to Australia’s AAA rating and a deputy governor noted that the currency could weaken on a decline in capital inflows. These rather innocuous comments appear to have taken on an exaggerated level of importance due to a lack of meaningful data or direction in FX markets. A couple of Fed speakers ( Plosser and Dudley) may be the highlight of a dull North American session

The short term USDCAD technicals are bearish with the downtrend from March 17 intact while trading below 1.0905. There is additional resistance between 1.0920-1.0940 that, if broken would suggest further gains to 1.1050. A move below USDCAD support at 1.0850 would extend to 1.0800-10 and then 1.0750. For today, USD support is at 1.0870 and 1.0850. Resistance is at 1.0895, 1.0910 and 1.0930

Today’s Range 1.0875-1.0920