Loonieviews May 26, 2014

US data releases should support the greenback

Michael O’Neill

FX Consultant / IFXA Ltd


• 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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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