Loonieviews End of Week May 9, 2014

The Loonie may be down but it’s not out

Michael O’Neill

FX Consultant / IFXA Ltd


• Loonie crushed by weight of job losses
• Risk of ECB action will undermine EURCAD
• USDCAD technicals still bearish

The nascent Canadian dollar rally ended shortly after it began with the release of a very weak Canadian employment report that caused USDCAD to jump 0.0075 points within minutes. The loss of 28,900 jobs, mostly full-time, is a wet blanket on top of the earlier string of upbeat Canadian economic data releases, with Statistics Canada noting that "There has been little overall employment growth in Canada since August 2013". However, the damage may be short-lived.

Chart: Canadian Employment Change

Source: TradingEconomics/Statistics Canada

The week that was:

It was a short week for traders in Japan and the UK and holidays in those countries on Monday led to quiet trading. A variety of regional influences on Tuesday put the US dollar under pressure across the board. The Reserve Bank of Australia (RBA) left rates unchanged and AUDUSD rallied as did the Kiwi. A string of Markit PMI releases for Europe led EURUSD higher, and sterling went along for the ride. The highly anticipated Janet Yellen testimony to the Joint Economic Committee of Congress caused a stir over the degree of doveishness implied in her remarks. She provided what was described as a "mostly upbeat economic testimony" and then tempered her enthusiasm with concerns surrounding the labour market recovery. The Bank of England (BoE) and the European Central Bank (ECB) left rates unchanged on Thursday, as was expected. What wasn’t expected was ECB president Mario Draghi dropping a verbal "bomb" on the Euro during his press conference. His statement that "council is comfortable acting next time" unleashed a wave of EUR selling vs. everything.

The week that will be:

European data releases will be under the microscope next week in light of Draghi’s press conference statement so next Thursday’s EU CPI data should be a flash point. A soft reading would imply that a rate cut and/or other stimulus measures are a given, which should knock EURUSD for another loop. There are important regional events occurring earlier in the week led by Chinese Retail and Industrial production data and the Australian Budget Release on Tuesday. Although many of the key initiatives have already been leaked, the possible effect on the perception of Australian economic growth remains to be seen. The Bank of Canada quarterly review on Wednesday will be an important guide as to the sustainability of the recent Canadian dollar rally below 1.1060. UK employment data on Wednesday will help determine if GPUSD can break strong resistance at 1.7000 and whether it could sustain the gains. The US data will have diminished importance while the many US Federal Reserve speakers, including the chairman Janet Yellen, always have the potential to rile markets.

Canadian dollar outlook

The loonie may be down but it is not out. The Canadian jobs report is a volatile series and a rather poor barometer of the health of the economy. In fact, the Auditor General Michael Ferguson noted in his spring report that "job Vacancy" data is too vague. He also said "governments and the private sector are regularly unable to access important economic and demographic information on small geographical and certain sections of the population". Even the federal government was relying on data from non StatsCanada sources, which irked the opposition parties. It is unlikely that the effects of today’s data will be long-lasting. The Canadian dollar still has a couple of things going for it. The USDCAD downtrend from the March peak of 1.1270 is still intact as long as the currency pair is below 1.0970. Canada has both a budget and trade surplus, unlike the rest of the G7. The April Monetary Policy Report noted that "the fundamental determinants of growth and inflation continue to strengthen gradually as anticipated" which is likely to be repeated in next week’s Bank of Canada review. In addition to the domestic data, Mario Draghi’s overt hint of ECB policy action in June has put downward pressure on the EUR, stimulating EURCAD selling by default. All in all, steadily improving domestic economic fundamentals mixed with a US Federal Reserve evidently in no hurry to raise interest rates may allow the USDCAD to consolidate within the 1.0810-1.0970 range.

USDCAD technicals.

The intraday USDCAD technicals are bullish with the break back above 1.0860, reverting to support, but needing a break through 1.0915-20 to extend gains to 1.0940. A move below 1.0880 should result in another look at 1.0860. In the short term, the USDCAD downtrend from the March peak of 1.1270 remains intact while below the 1.0970-90 area. Incidentally the 38.2 percent Fibonacci retracement level of the 1.1270-1.0810 range is also at 1.0990. Arguably, today’s move is merely a correction within the downtrend. USDCAD support is at 1.0860, 1.0830 and 1.0810. Resistance is at 1.0915, 1.0940 and 1.0970.

Forecast range for next week is1.0840-1.0940.

Chart: USDCAD 4 hour with forecast trading range

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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