X-Men? Bankers in the future past
FX Consultant / IFXA Ltd
· 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
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.
Source: Saxo Bank