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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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