Loonieviews May 5, 2014

Follow the Yellen brick road to a world of smoke and mirrors

Michael O’Neill

FX Consultant / IFXA Ltd


· Yellen testimony could be US dollar bearish

· ECB likely to disappoint those looking for stimulus

· Canadian dollar may have a "good" week"


If the Federal Reserve is Oz, then Janet Yellen must be the wizard, using smoke and mirrors to conjure up an aura of capability and competence through the use of a vague forward guidance. The FX market will happily prance down the Yellen Brick road this week seeking guidance from her testimony to the Joint Economic Committee of Congress on Wednesday, with a repeat performance to the Senate Budget Committee on Thursday. Traders are as befuddled over the US dollar’s Non-farm payrolls reaction as the Kinks’ Ray Davies was when he met

They are hoping that Yellen will provide some clarity on how the Fed views the latest payrolls report in the context of their economic outlook. Dallas Fed President Richard Fisher may have provided a bit of a hint to Yellen’s views in a speech on Sunday when he answered a question about the timing of a rate hike stating that it was " too soon to start that debate". Bond traders appear to agree with him as 10-year yields are well off their January peak.

Chart: US government 10 year yield

Source: Bloomberg

EURUSD may stay bid into ECB decision

The EU CPI bounced from the March low of 0.5 percent to 0.8 percent in April but missed the forecast and remains well below the ECB’s inflation target of 2 percent. Today, the European Commission lowered its Eurozone inflation forecasts for 2014 and 2015, expecting 0.8 percent and 1.2 percent, respectively. There are many economists that are looking for a rate cut but European Central Bank president Mario Draghi has repeatedly stated that inflation is proceeding as expected and ignored their advice. Thursday’s result shouldn’t be any different although EURUSD may drift lower ahead of the announcement, just in case.

When you listen to fools, the mob rules

The 1981 Black Sabbath title song from the

album aptly describes the events in Ukraine as pro-Russian rebels clash with supporters for the unelected interim pro-west, quasi-legitimate government. The violence is increasing as is the body count yet there isn’t a whole lot of evidence suggesting that investors are concerned. The US led sanctions against Russia seem ineffective and there are reports that Germany’s Angela Merkel and Barack Obama don’t see eye to eye on further action with Merkel still miffed over the US hacking her phone. Meanwhile, Syria has reportedly reverted back to poison gas attacks on its citizens, which last September, was deemed "crossing a global red line" by US Secretary of State, John Kerry. Apparently that line has not just moved, but it has disappeared. Despite these events, demand for CHF and US dollars, traditional safe-haven currencies has been muted.

US data releases

Tuesday: March Trade Balance (forecast deficit USD 40.5 billion) A lower-than-expected result should give the US dollar a boost on an improving outlook for US economic growth.

Wednesday: Yellen testifies to Joint Economic Committee of Congress on the outlook for the U.S. economy.

Thursday:Yellen testifies to Senate Budget Committee

Canadian data releases

Tuesday: March International Trade (forecast surplus USD 600 million) The February trade surplus wasn’t a fluke and this data will confirm it adding to the recent string of positive Canadian data releases.

Ivey Purchasing Managers Index (forecast 57.3) This number does not get much respect, yet big misses either way impact USDCAD.

Wednesday: Building Permits (forecast 3.5 percent) February’s horrible numbers were blamed on the weather so the March permits are expected to rebound.

Thursday: Housing starts (forecast 170,000, New housing prices 0.4 percent)) Housing starts could surprise to the upside on payback from the previous month’s weather-related plunge.

Friday: Employment Report: (forecast 11,000, Unemployment rate 6.9 percent) A healthy gain is expected which should underpin the Canadian dollar.

Chart: Canadian Employment change

Source: TradingEconomics.com/Statistics Canada

USDCAD appears biased lower

The first full week of May could prove beneficial to the Canadian dollar due to some key Canadian releases including Friday’s employment report. Many times, the Canadian employment report gets overshadowed by the simultaneous release of the US employment data which won’t be the case this week. None of the forecasts expect a repeat of last month’s 42,000 gain, however, a print in excess of 20,000 could be the icing on the cake in a week of strong data. The mix of a dovish Fed and strong Canadian data should lead to further USDCAD losses.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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