USD rally getting legs with big week ahead
FX Consultant / IFXA Ltd
- US dollar rally taking hold
- Next week’s focus on FOMC and NFP
- Canadian GDP may provide loonie with support
And it’s almost a wrap! EURUSD was already trading heavy after mildly disappointing German IFO data, a condition that was exacerbated by US Durables coming in around expectations. EURUSD is now plumbing lows not seen in nearly nine months. A slate of key economic releases in store for next week along with the Federal Open Market Committee (FOMC) meeting and month-end flows should see an early end to FX activity today.
The week that was
Slow starts to the week seem to be the norm and this week was no different, with the Japanese Marine Day holiday and not much in the way of data from the Eurozone or the US curtailed trading activity on Monday.
On Tuesday, AUDUSD traders eagerly awaited a speech by Glenn Stevens, the governor of the Reserve Bank of Australia, a man known to be rather vocal about the high level of the Aussie dollar. They were disappointed. Meanwhile, the US dollar enjoyed a "stealth" rally against the EUR when EURUSD dropped from 1.3520 to 1.3480 leading up to the US CPI release. The data met expectations and EURUSD traded sideways for the rest of the day.
GBPUSD climbed ahead of the release of the Bank of England (BoE) minutes on Wednesday as traders anticipated a "hawkish" report. That wasn’t the case. Traders drove GBPUSD lower and EURGBP higher. Mark Carney, the Bank of Canada transplant, seems to have adapted very well to the famous London Fog, as his forward guidance is becoming murkier than pea soup which didn’t help the sterling bulls.
The Reserve Bank of New Zealand (RBNZ) stole the show at the end of Wednesday’s North American session and the start of Asian trading. The 0.25 percent rise in the Overnight Cash Rate (OCR) was widely expected but the blunt complaint about the "high" New Zealand dollar wasn’t. The Kiwi was already under pressure on weak economic data, and there were expectations of a pause in the rate hiking cycle so the verbal intervention was the "last straw". NZDUSD plunged from 0.8820 to 0.8550 currently and hasn’t looked back.
Thursday saw slightly better European PMIs and soft UK retail sales data. Photo: peplow
Thursday also brought slightly better European PMIs and soft UK Retail Sales data but the big surprise was the large drop in US Initial Claims (Actual 284,000 vs. forecast 308,000). The claims data underpinned the US dollar vs. the majors and shifted the focus to next Friday’s nonfarm payrolls report.
The week that will be
The upcoming week is also a month-end and US nonfarm payrolls (NFP) week with a FOMC rate decision and a policy statement thrown in for good measure. It looks as if it could be lively and maybe even lead to a break of many of the stubborn ranges that have contained FX moves for the past month or so.
Monday and Tuesday’s FX sessions are likely to be slow, barring any geopolitical flare-ups, even after the release of US data, which includes Markit PMIs, Pending Home Sales and Consumer Confidence.
The heat should turn up on Wednesday. There is a lot of data from the Eurozone that could serve to dampen the effects of strong US data releases including GDP. However, any initial reactions to any of the data are likely to be short-lived ahead of the FOMC meeting.
Month-end rebalancing flows will disrupt FX trading on Thursday, with the payrolls report waiting in the wings to entertain traders on Friday.
It is apparent that the prevailing Canadian dollar sentiment is bearish. The market is taking its cue from the Bank of Canada (BoC). The BoC’s tendency to accentuate the Canadian economy negatives rather than the positives helps to limit Canadian dollar gains. Wednesday’s Canadian Retail Sales release offered more evidence of this. The headline number beat expectations while the Core data missed. The analysts were more focused on the negative aspects of the report and the Canadian dollar responded in kind. The initial gains were quickly erased. Next week will bring more of the same. Canadian GDP data will be released on Thursday and any effects from the data are likely to be short-lived due to month-end portfolio rebalancing and the next day’s US payrolls report. FX traders are gravitating towards a "bullish US economy, bullish US dollar" view and see the current weakness in EURUSD as the start of the long-awaited US dollar rally.
Chart: Canada GDP growth rate
USDCAD technical outlook
The short-term USDCAD technicals are bullish. The downtrend from the March peak of 1.1270 appears to be in the process of being broken, with the price action above 1.0750. However, resistance in the 1.0760-90 area and again at 1.0810-25 should slow and even limit US dollar gains. Incidentally, the 38.2 percent Fibonacci retracement of the 1.1270-1.0620 range is at 1.0867, which makes for a nice stretch target for US dollar bulls. The intraday technicals are bullish while trading above 1.0730 and are looking to extend gains to 1.0830 on a break of 1.0780. For next week, USD support is at 1.0730, 1.0710 and 1.0690. Resistance is at 1.0780, 1.0810 and 1.0830.
Chart: USDCAD 4-hour
Source: Saxo Bank