Loonieviews June 30 2014

Data-filled week could spark FX market volatility

Michael O’Neill

FX Consultant / IFXA Ltd


  • Canadian GDP disappoints
  • Heavy data week will keep FX markets interested
  • Six months into the year, Groundhog day

The month is ending on a sour note for the Canadian dollar with news that GDP missed forecasts, rising a mere 0.1 percent in April vs. forecasts for a 0.2 percent gain (month over month). However, USDCAD only advanced marginally which could be due to month-end maneuverings and Canadian dollar cross activity.

Tomorrow’s Canada Day holiday has likely already reduced domestic trading interest while Thursday’s European Central Bank meeting and US nonfarm payrolls report shift market focus back to World Cup pools.

FX markets have a lot to chew on this week, even without North America. The Reserve Bank of Australia is on tap Tuesday. AUDUSD may have already dipped in anticipation of the governor complaining about the "high level" of the currency, leaving short AUDUSD traders vulnerable to disappointment.

USDJPY has dipped further in part due to month-end rebalancing but the pending Tankan report could also be a factor. The reality is that there is enough important data from various sources to ensure wide swings within the confines of recent trading ranges for all the G7 currency pairs.

Tuesday is a public holiday in Canada, but it’s work as usual elsewhere
Photo: iStock

Groundhog day semi-annually

Six months ago the new year dawned with optimism as fresh as the Polar Vortex gripping most of the Northern Hemisphere. The European Central Bank’s (ECB) deflation fears and the post-Bernanke US Federal Reserve were the two major concerns overhanging FX markets.

Traders widely expected that the ECB would combat deflation with interest rate cuts and other stimulus measures. That action would drive the EURUSD from 1.3650 (where it was sitting on January 5) to at least 1.3000. Six months later, after the ECB introduced negative interest rates and a stimulus package at the beginning of June, EURUSD is still sitting at 1.3650 and traders are still looking for 1.3000

Across the Atlantic, the changing of the guard at the Federal Reserve had markets fretting about a more "dovish" Federal Open Market Committee (FOMC). The onset of tapering in December refocused markets on interest rate hikes and when they will occur.

The new Fed chairman, Janet Yellen, has talked at length about the Fed’s dual mandate of managing inflation and jobs growth. As the year progressed the quantification of the employment portion of the mandate became hazier and hazier. Despite four consecutive months of strong US employment gains, the "full employment" picture is still blurry. The interest rate question in January remains unanswered at the end of June.

Key US data releases

Tuesday: June ISM Manufacturing PMI (Forecast 55.8) There is an upside risk to this data based on other surveys which should support the US dollar.

Wednesday: June ADP Employment (Forecast 205,000) and Challenger Job Cuts-These reports usually garner attention when they greatly deviate from projections and will be monitored as a harbinger for nonfarm payrolls.

Wednesday: Federal Reserve chair Yellen’s speech on Financial Stability at 16:00 GMT.

Thursday: Nonfarm payrolls (Forecast 213,000). It doesn’t appear (yet, anyway) that the market is expecting any great surprises for this month’s roll of the dice although Wednesday’s employment reports could change that. Perhaps after four months of 200,000-plus job gains a disappointing number is due.

Thursday: May trade balance (Forecast deficit USD 45.20 billion) A consensus print would be US dollar supportive especially if combined with a strong payrolls report.

Key Canadian data releases

It is another light week for Canadian data

Wednesday May international trade (Forecast deficit CAD 600 million).l The Canadian balance is flirting between deficit and surplus lately but the data will have minimal impact due to the US employment report.


Loonieviews End of Week June 27, 2014

High-flying loonie may hit a window

Michael O’Neill

FX Consultant / IFXA Ltd


• Holidays and World Cup action continue to disrupt trading
• ECB and Non-farm payrolls are marquee events next week
• USDCAD sell-off nears major support

The Canadian dollar is the second-best performing G7 currency this week behind the NZDUSD, which is also the best-performing G7 currency, year-to-date. Weaker-than-expected Canadian data today failed to take the shine off the loonie, as bearish USDCAD technicals and likely Canadian dollar demand from month-end portfolio rebalancing weighed on the currency pair. The European Union is turning the screws on Russia by signing a trade agreement with Ukraine that won’t make Vladimir Putin happy. The Iraq revolt is gaining traction and Saudi Arabia has reportedly put its military on "high alert". More importantly, the World Cup matches for the Round of 16 have been decided, which will provide a nice distraction next week while traders await the European Central Bank statement and the US nonfarm payrolls report

The US holiday on July 4 could disrupt trading but may boost US retail sales figures as couples head for the stores. Photo: Monkey Business Images / iSlick

The week that was

Monday rolled around with better-than-expected Chinese data lighting a fire under Kiwi and Aussie dollars. Weak European data in the form of soft manufacturing and service PMIs failed to have much influence on FX trading while the US FX market suffered the same fate, ignoring positive US data including a large rebound in existing home sales. Who knew the "beautiful game" would so captivate Americans?

Tuesday saw both the AUD and the Kiwi give back the previous day’s gains. It was also sterling’s turn to shine, but it didn’t. The Bank of England governor Mark Carney appeared to backtrack on last week’s warning of rising rates "sooner than you think" when speaking before the Treasury Select Committee, which caused the GBPUSD to shed about 90 points.

Wednesday saw the AUD and the Kiwi recoup all of Tuesday’s losses and those pairs haven’t looked back since. The European session was quiet ahead of key US data, which included Durable Goods, Q1 GDP and PCE. GDP shocked traders with a negative 2.9 percent growth rate in Q1 but this was quickly dismissed by many analysts as "old news". The disappointing Durable Goods number (negative 1.0 percent) was chalked up to "volatility" by dollar bulls who took solace from the rising PCE data.

Thursday was a choppy day, with the US dollar on the defensive against the majors. The kiwi was flirting with a 5-year high against the US dollar and the loonie was near a four-year high. Headlines from an ECB "official" warning that the ECB may not have reached lower boundary on key rates" sent EURUSD and EURJPY lower.

In among all the data noise were headlines warning of increasing hostilities in Iraq, which may have masked, to a degree, the pre-dealing activities for month end/quarter-end/half-year end portfolio rebalancing.

The week that will be

It is a holiday-shortened week in Canada and the USA. Markets will be closed on Tuesday in Canada for "Canada Day" which means everyone who can book Monday off as well will do so. The US is closed on Friday for the July 4 Independence Day holiday. Thursday could be a volatile day with the US nonfarm payrolls report competing for attention alongside the European Central Bank (ECB) monetary policy statement and press conference. And those are just the marquee releases. Thursday is also stuffed with data, beginning with Australian Retail Sales, China Services PMI and a slew of Markit PMIs for the Eurozone. This week should be entertaining, with intermittent volatility due to key data interrupting summer doldrums.

Canadian dollar perspective
RECAP: The Canadian dollar is the second-best performing G7 currency this week behind NZDUSD which is also the best-performing G7 currency, year-to-date. The Canadian dollar benefited from last Friday’s surprisingly large jump in the consumer price index (CPI), both headline and core, which spurred economists and strategists to reassess their views on the Bank of Canada’s (neutral with a doveish bias) policy stance. At the same time, the Federal Open Market Committee (FOMC) was viewed as more doveish than previously thought, undermining the US dollar in the process. This week’s improved economic data from China, bearish USDCAD technicals on the break of strong support at 1.0740 and reportedly pre-month end/quarter end and half year-end portfolio adjustment flows all weighed on USDCAD.

OUTLOOK: This week’s holidays in Canada and the US could increase trading volatility due to reduced liquidity in the face of numerous important European data releases. Conversely, caution ahead of the European Central Bank meeting may put a damper on activity, especially in light of yesterday’s reported comments by an ECB official. The official suggested that the "ECB may not have reached the lower boundary on key rate", implying a risk of further ECB rate cuts. Also yesterday, the Federal Bank of St Louis president James Bullard warned that markets may think that the US Federal Reserve is more doveish than it actually is. Both officials’ comments point to a firmer US dollar. Today’s disappointing Canadian Industrial Product Price and Raw Material Price Index for March, while minor data points, served to reinforce the notion that the Canadian economic recovery is mixed and likely to lag behind that of its southern neighbour. Another piece of negative macroeconomic information is the news that Mexico will surpass Canada as the largest supplier of automobiles to the US. The Canadian auto industry has been the engine of Ontario’s growth since the 1950s and its huge decline goes a long way to explain Ontario’s drift into "have-not" status in Canada. The mixed-to-poor Canadian economic data, the risk that month- end portfolio rebalancing may have exaggerated the Canadian dollar rally and the nearly 5.8 percent rally in the Canadian dollar since March all combine to suggest that further loonie gains may be limited.

Canadian dollar technical outlook
Last Friday’s break of key support in the 1.0810-20 area confirmed that a short-term peak is in place at 1.0890. The medium-term downtrend from the March peak of 1.1270 remains intact while trading below 1.0860 and the move through support at 1.0740 suggests further USDCAD losses to 1.0600, the base of the long-term uptrend from the 2012 low in the 0.9640 area. Additional USDCAD support will be seen from EURCAD as that cross is nearing its long-term uptrend line base, currently 1.4500. For next week, USDCAD support is seen at 1.0660, 1.0630 and 1.0600. Resistance is at 1.0720, 1.0740 and 1.0780.

Chart: USDCAD daily with long-term support congestion

Source: Saxo Bank

Chart EURCAD daily with long-term support

Source: Saxo Bank

Loonieviews June 26, 2014


USDCAD Open 1.0705-09 Overnight Range 1.0708-22

USDCAD continued its glacial drift lower overnight with the US dollar offered against the majors (except EUR and CHF) on anticipation of month end/quarter end/half year end portfolio rebalancing flows. Cable rallied back above 1.7000 ahead of the FSR and on the back of EURGBP selling. Today’s US data includes Jobless Claims, PCE bookended by two Fed speakers (Lacker and Bullard)

The intraday USDCAD technicals are bullish while trading below 1.0730 supported by the break below previous support at 1.0750. The medium term outlook is bearish USDCAD as well. 1.0728 was the 50.0% retracement of the September 2013, 1.0180 low and the March 2014 peak of 1.1270 which suggests a drop to 1.0600, the 61.8% Fibonacci level. For today, USD support is at 1.0700, and 1.0675. Resistance is at 1.0730 and 1.0750

Today’s Range 1.0790-1.0830

Loonieviews June 25, 2014

Best of times, worst of times as FX markets go quiet

Michael O’Neill

FX Consultant / IFXA Ltd


• US data determines dollar
• Iraq uprising blamed for retreat in equities
• Summer solstice brings FX inertia

There is a lot going on, there is nothing going on; it is the age of information, it is the age of information-overload, and it is time to apologise to Charles Dickens for badly paraphrasing his opening line in A Tale of Two Cities. The summer of 2014 appears to have many similarities with 1859, and FX traders are wondering what the Dickens is going on. Stale data corrupted by inclement weather manages to undermine the US dollar four or five months after the fact while the announcement three weeks ago of negative interest rates and a threat of additional stimulus by the European Central Bank (ECB) is readily forgotten. The risks from the Russia/Ukraine hostilities, which pose a credible threat to the European Union, are displaced by news of unrest in Iraq, a country that has been in a state of civil disorder for more than 10 years. The Bank of England warns of rate hikes "sooner rather than later" and then says but "maybe not". The Federal Reserve Open Market Committee (FOMC) is showing a dot plot suggesting a rate increase in Q1 2015 and then says "dot plot not so hot". The reality is that Russia poses a risk to the European Union and interest rates will be rising yet FX markets can’t tell the noise from the music.

Manufacturing facts to fit the move
The uprising in Iraq led by the previously unheralded Islamic State in Iraq and Syria (ISIS) has been blamed for the recent retreat in equities due to a shift to risk aversion. Don’t bet on it. Iraq has been unstable since George W. Bush and his cronies embarked on a search for "Weapons of Mass Destruction" in "Operation Iraqi Freedom" back in 2003. None of the dire warnings and predictions of financial market chaos transpired then and the same result is likely this time as well. In fact, the S&P 500 was around 837 when the US invaded Iraq and it is currently flirting with 2,000.

Chart S & P 500 weekly

Source: Saxo Bank

Summer solstice and FX inertia
The summer solstice has come and gone. The celebration marks the point in the year when the Northern Hemisphere is closest to the sun providing the most hours of daylight. In ancient times, pagans celebrated the sun’s energy and lit bonfires to add to the energy. This year’s solstice also marks the less well-known FX inertia. It is a period of time coinciding with the quadrennial FIFA World Cup tournament when FX traders sacrifice huge quantities of time, alcohol and money in support of 23 men wearing their national colours. The World Cup is not entirely to blame for the lack of volatility in FX markets. Many believe that much of the blame can be laid on the doorsteps of the G7 central banks for keeping interest rates close to zero. The argument is that financial markets are in an environment in which low rates encouraged leverage and bullish sentiment which is offset by sluggish economic growth and bearish sentiment. FX trading volatility may die but it may be in Brazil cheering on (insert favourite team here).

US data below expectations
The US dollar came under pressure following the release of weaker-than-expected data.
The shaky Q1 GDP data (Actual negative 2.9 percent vs. Forecast 1.7 percent) is also undermining the US dollar even though, for many, the Q1 data has been written off due to weather issues.

Durable Goods dropped 1.0 percent (vs. forecast of 0.0 percent) giving rise to speculation that Q2 US growth may be a tad less than stellar. At the same time, the Durable Goods release is known for its volatility.

Chart: US Durable Goods

Source: Bloomberg

USDCAD – Short term support with risk for medium-term sell-off

The USDCAD sell-off has stalled at the 1.0720 support level despite today’s unsteady US data, indicating a lack of belief in the sustainability of the move. Although the recent rise in inflation puts the Bank of Canada’s (BoC) neutral with a negative bias policy in jeopardy, it is very unlikely that the BoC statement in the middle of July will shift to a hawkish outlook. Stephen Poloz has gone to great lengths to highlight the weaknesses in the domestic economy and he certainly won’t be championing a stronger loonie. In addition, US interest rates still provide a yield advantage over Canadian rates that should help to limit further USDCAD losses. However, the medium-term USDCAD technicals are bearish while trading below 1.0880 with a break below 1.0720 projecting a further drop of 0.0500 points to 1.0220 (Inverted Triangle).

Chart USDCAD daily

Source: Saxo Bank

Loonieviews June 24, 2014


USDCAD Open 1.0725-29 Overnight Range 1.0720-30

USDCAD traded sideways in Asia while EURCAD demand offset GBPCAD selling in Europe leaving USDCAD going nowhere. The BoE’s Mark Carney delivered a somewhat contradictory message to the Treasury Select Committee from his Mansion house speech last week on the course of interest rate hikes sparking a wave of GBPUSD selling. Stretched long cable positions contributed to the drop. The focus shifts to the US data releases which include Housing Price Index, Consumer Confidence, and New Home Sales Change. Collectively, positive data prints should provide the US with some support.

The intraday USDCAD technicals are modestly bullish within a short term downtrend from last week at 1.0880. A break above 1.0730 targets 1.0750 and then 1.0780. A move below 1.0715 puts 1.0690 in play

Today’s Range 1.0820-60

Loonieviews June 23, 2014

It’s the loonie’s turn to fly

Michael O’Neill

FX Consultant / IFXA Ltd


• China PMI supports commodity currencies
• BoC needs a new tune

There is a great disturbance in the force and FIFA World Cup fans felt it. Team USA turned a win into a tie against Portugal. All they need is a tie against Germany to advance to the next round, a result that could be obtained over a bottle of schnapps as both opposing coaches are supposedly friends. There was another disturbance in the force and this one was felt by the commodity currency bloc traders. The HSBC China PMI data rose to 50.8 while the Eurozone PMI data was mixed. The Aussie, the Kiwi and the loonie all rallied against the US dollar as Chinese growth is seen as supportive to commodity exporters. This week could be a choppy week for FX markets with a slew of US data releases possibly poised to validate the US recovery view and raise questions as to whether the Federal Open Market Committee’s (FOMC) seemingly doveish bias is appropriate. At the same time, continued soft data from the Eurozone will underscore the divergent US and EU interest rate trajectories.

It’s the loonie’s turn to fly

It’s hard to soar like an eagle when you are considered a turkey but that is what is happening to the Canadian dollar. The negative bias that has undermined the Canadian dollar for most of this year has been slowly chipped away and the only turkeys appear to be USDCAD bulls. Friday’s surprise jump in Retail Sales and CPI accelerated the Canadian dollar rally, and USDCAD dropped through the 200-day moving average (1.0779) to come to rest at 1.0729, the 50 percent Fibonacci retracement level of the September 2013, 1.0180 low to the March 2014 peak of 1.1274.

The rise in inflation was the key catalyst behind Friday’s move. Bank of Canada (BoC) Governor Stephen Poloz dismissed the previous rise in inflation as "largely due to the temporary effects of higher energy prices". The jump in May Core CPI to 1.7 percent from 1.4 percent, which excludes natural gas and fuel oil, gasoline and other fuels suggests that Poloz and the BoC forecasters got inflation all wrong. The "miss" on the inflation forecasts also highlights that the Bank’s warning that "downside risks to the inflation outlook as important as before" were an exaggerated and flawed assessment of the economy. It also adds credence to the argument that Poloz was deliberately attempting to devalue the Canadian dollar by raising non-existent deflationary risks. However, the Bank of Canada will never admit to getting its forecasts wrong and, therefore, is unlikely to make a radical shift in the tone of its next interest rate statement.

USDCAD technical outlook

The short-term USDCAD technicals are bearish while trading below 1.0850 supported by the break and close below the 200-day moving average (Currently 1.0779). A move below the 1.0730 level (50 percent Fibonacci retracement of Sept.13.-Mar.14 range of 1.0180-1.1274) targets 1.0600, the 61.8 percent level. The intraday technical picture is also bearish USDCAD while trading below 1.0780 looking for a break of minor support in the 1.0720 area to extend losses to 1.0670. For the week, USDCAD gains should be capped at 1.0790 and1.0710 should act as a floor.

Chart: USDCAD 4-hour

Source: Saxo Bank


The EURCAD downtrend from the middle of March accelerated on Friday with the break of support in the 1.4670-90 area and is now aiming for 1.4400. At the same time, a short-term GBPCAD uptrend ended with the move below 1.8290-1.8310, which targets a retest of support at 1.8100. Selling pressure in these currency pairs will keep the downward pressure on USDCAD.

Chart: GBPCAD Hourly with broken uptrend noted

Source: Saxo Bank

Chart: EURCAD 4 hour with downtrend and target

Source: Saxo Bank

Key US data releases

Tuesday: May New Home Sales (Forecast 440,000). This should be another positive piece of US data supported by expectations of pent-up demand following the harsh winter.
Tuesday: Consumer Confidence (Forecast 83.5).
Wednesday: Durable Goods (Forecast 0.0 percent, ex-Transportation 0.4 percent). The risk is for a small upside surprise due to higher aircraft and auto sales.
Thursday: May Personal Income and Spending (Forecast: Income 0.4 percent, Spending 0.4 percent, month-over-month) another data series supporting US economic recovery view.

There are no Canadian data releases of note this week.

Loonieviews -End of week June 20, 2014

Loonie soars while Bank of Canada snores

Michael O’Neill

FX Consultant / IFXA Ltd


  • Canadian CPI data surprises market and BoC
  • USDCAD support crumbles
  • Strange bedfellows in the Middle East

The Bank of Canada (BoC) appears to have been caught napping with its inflation forecasts and fears. The Canadian dollar surged against its US counterpart following the release of surprisingly strong retail sales and CPI data. CPI jumped to 2.3 percent year-over-year in May vs. the consensus forecast of 2.1 percent, and put the Bank of Canada in a bit of a pickle at the same time. The central bank had downplayed last month’s CPI gain as "due to temporary effects of higher energy prices and exchange rate pass-through" which allowed it to issue a dovish-sounding statement saying that "weighing recent high inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before". Today’s CPI reading should force BoC to revisit that view.

Change in Canada CPI

Source: Statistics Canada

Canadian shoppers out in full force

Retail sales was no slouch either, rising 1.1 percent in April (year-over-year) vs. a forecast gain of only 0.6 percent. The March data was also revised higher (now 0.1 percent from negative 0.1 percent) The combination of the two data releases in the face of what appears to be a dovish Federal Reserve Open Market Committee (FOMC) argues for further USDCAD losses and a test of the long-term uptrend from 2012 (currently around 1.0660-80).

The week that was

The new week rolled in with UK traders licking their wounds after Italy declawed the "Three Lions" on Saturday. It is ending with the "Three Lions" defanged, disgraced and disappearing from the tournament. That is a similar fate suffered by traders after the highly anticipated FOMC meeting on Wednesday. Expectations were high for a decisive, hawkish and clear assessment of the US economy and interest rates. The resulting disappointment manifested itself into widespread US dollar selling, an Emerging Market FX rally and new highs for US equity indices. The only clarity that the FOMC provided was that the committee is clearly uncertain when there will be a change in interest rates.

The World Cup tournament and the FOMC weren’t the only distractions this week. President Obama and the US administration opened another act in the Theatre of the Absurd. It was only a few months ago that the Americans were considering bombing Iran for failing to comply with a United Nations decree to cease the development of nuclear weapons. Iran was considered a threat to not just Israel but to stability throughout the Middle East and to the "Great Satan".

This week, Iran is no longer a threat, but a pal and a possible a "BFF". The rise of the Islamic State in Iraq and Syria (ISIS) fermenting civil war in Iraq has the former enemies partnering up to combat the ISIS threat. The US once partnered with a fellow named Osama bin Laden to fight Soviets in Afghanistan and that didn’t end very well. Why will this partnership be any different?

Barack Obama’s new-found friends. Photo: Office of the President of Iran

The week that will be
The lingering effects of this week’s FOMC statement will continue to overhang markets due to three Federal Reserve governors (Plosser, Lacker and Bullard) speeches next week. US housing data, GDP and durable goods releases should continue to show that the US economy is rebounding and provide some US dollar support. A speech by the Bank of England (BoE) governor, Mark Carney on Thursday may underpin cable if he reiterates his rate rise opinion. Mario Draghi and the European Central Bank have to be a little unhappy with the rebound in EURUSD this week. The next ECB meeting is in less than two weeks, on July 3, which may temper the enthusiasm for pushing EURUSD above the 200-day moving average.

USDCAD technical outlook

The short-term USDCAD technicals are bearish while trading below 1.0890 with the break of strong support at 1.0805-10 accelerating the decline and reverting to strong resistance. There is only minor support at 1.0740 guarding long-term uptrend support (from September 2012) currently in the 1.0660-80 area. Short-term support is seen at 1.0740 and 1.0715. Resistance is at 1.0790 and 1.0820

Chart: USDCAD 4-hour with downtrend

Source: Saxo Bank