Loonieviews June 18, 2014


Loonie range will continue – FOMC no saviour

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• Will FOMC reveal Janet Yellen as "Hawk-lady"?

• Northern Gateway – rise of the First Nations

• USDCAD mired in cross traffic

The enigma of the hawkish dove

Who will show up at today’s Federal Open Market Committee (FOMC) press conference? We will know the answer to that question in a few hours but in the meantime the FX markets appear to have convinced themselves that it will be the US Federal Reserve chairman Janet Yellen aka Ms. Yellen – "Hawk-lady". The Bank of England’s (BoE) Mark Carney surprised traders last week when he noted that rate hikes could occur sooner than anticipated, a sentiment repeated today with the release of the BoE Monetary Policy Committee (MPC) minutes. FX traders have apparently extrapolated the BoE rate sentiments and applied them to today’s FOMC statement to conclude that the statement will be at worst, less doveish than previously. Yesterday’s unexpected jump in the CPI and the improving labour picture are the rationale cited to support the shift in sentiment by the FOMC. The previous FOMC statement noted that inflation "persistently below its 2 percent target could pose risks to economic performance".

However, a hawkish Fed is unlikely. Yesterday’s CPI result of 2.1 percent is only a one-month change and too soon to call a trend. The jury is still out on the amount of slack in the labour market and that debate should limit any shift to a more hawkish tone. There are three new voting members on the FOMC for this meeting, Fisher, Brainard and Powell, none of whom are described as hawks, implying an unchanged FOMC stance. Nevertheless, expectations are rising for the FOMC to signal a more hawkish shift in policy. If there is no signal today, it merely increases the risk for a signal at the next meeting suggesting that any US dollar weakness, post-FOMC will be temporary.

Northern Gateway pipeline project approved

The Canadian government approved Enbridge Inc.’s Northern Gateway pipeline project to move oil from the Alberta Oilsands to the British Columbia coast and shipment to Asia. The approval of this project takes some of the sting out of the US administration’s dithering and delaying of the Keystone XL pipeline from the oilsands to Nebraska. Unfortunately, the Canadian government has taken a page, or more like 209 pages from the US pipeline project handbook, insisting that 209 conditions must be met before any pipe is welded together. One of those conditions is hammering out an agreement with the First Nations community in British Columbia – a community of less than one half of 1 percent of the population of Canada. It is also a community that claims most of the province as its territory and for good reason – it never signed treaties with the UK or Canada. Russia has a better claim on Ukraine than Canada has on British Columbia. This pipeline will benefit the Canadian dollar but not until there is oil flowing through the pipes.

Chart: Northern Gateway route

Source: Enbridge and Canadian Press

USDCAD outlook

Friday’s release of Retail Sales (Forecast 0.5 percent, ex autos 0.3 percent, month-over-month) and CPI (Forecast 2.1 percent, Core 1.5 percent, year-over-year) represent the last top-tier data releases until GDP at the end of the month. Unless the results sharply deviate from expectations, the impact on USDCAD trading will be minimal at best. Bullish USDCAD was the prevailing sentiment in FX markets earlier in the year and it still remains a popular view even as many of the major bank forecasters are reducing their topside targets. Lately, it has been a frustrating sentiment at best. On the other hand, bearish USDCAD traders are also flummoxed by the resilience of the 1.0815-40 support area and in part by Stephen Poloz’s stealth bombing of bullish Canadian dollar sentiment.

Some of the inertia in the Canadian dollar is due to off-setting flows. Since the latter part of May, EURCAD and AUDCAD selling have been offset, to a degree, by GBPCAD buying. Elevated oil prices due to expanding hostilities in Iraq, Libya supply disruptions and Russia/Ukraine disputes should provide a modicum of support to the Canadian dollar and act as a drag on any USDCAD rallies. USDCAD support may be further enhanced as the end of the month approaches due to month-end, quarter-end and half-year end demand for dollars, as well as the usual portfolio rebalancing flows.

Chart: EURCAD, GBPCAD and AUDCAD daily

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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