LOONIEVIEWS

USDCAD Open 1.0913-17 Overnight Range 1.0902-1.0917

USDCAD is bid and flirting with levels not seen since early June. The loonie is caught up in the "Dollar Vortex", a phenomenon occurring with the convergence of the perception of a "hawkish" FOMC, rising geopolitical risks (Russia, Middle East), recent strong U.S. data and month end demand. Overnight, Eurozone CPI dipped ever so slightly while regional data improved by the same amount. Month end fixing flows and today’s Canadian GDP data could give the loonie a boost, but that would be a USDCAD buying opportunity.

The intraday USDCAD technicals are bullish while trading above 1.0870 however, intraday, a dip below 1.0905, should see the 1.0870 level tested. A move above 1.0920 targets 1.0950 and then 1.1020 while below 1.0870 puts 1.0835 into play.

Today’s Range 1.0870-1.0950

The US dollar is on a tear so what could go wrong?

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• Strong US data fuels dollar rally
• FOMC could be the wet blanket
• USDCAD rally in high gear

The US dollar is on a tear and is validating the prophecies of the US dollar bulls. This morning’s ADP employment report came in with a healthy gain of 218,000 jobs but below the consensus forecast of 230,000. The US GDP report was stellar. The 4.0 percent annualised gain for Q2 handily beat the 3.0 percent forecast. Many of the FX majors have seen technical breakouts including USDJPY, AUDUSD and USDCAD. The USD rally has traction and it only needs the High Priestess of the Federal Open Market Committee (FOMC), Janet Yellen, to bless the move.

Chart: US GDP growth

Source: Marketwatch.com

FOMC-rally enabler or wet blanket?

Traders are eagerly awaiting today’s FOMC statement and seem to be expecting enough tweaks in the policy statement to validate the recent US dollar rally. They may be disappointed. It is the middle of the summer with three more months before the end of the asset purchase programme. There haven’t been enough significantly strong data releases since the last meeting to warrant changing the wording of the interest rate guidance: "The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run". The old adage that "those who ignore history are doomed to repeat it" may be applicable today. Last summer at this time, the FX markets were in a lather about the pending announcement of the start of the tapering programme. In fact, September tapering was believed to be written in stone and the discussion was only about the size and splits for tapering. We all know what happened then. Even a mildly disappointing FOMC statement could spark a nasty, profit-taking US dollar sell-off.

It’s going according to plan so what could go wrong?

The current US dollar rally has taken on an aura of being pre-ordained in the sense that, because it has been widely predicted, the pending policy meeting and nonfarm payrolls reports will validate the optimism. What could go wrong? Friday’s nonfarm payrolls report is forecast to show a gain of 235,000 jobs. Today’s ADP report missed, yet the miss was dismissed. Today’s GDP report is promising but as the Bureau of Economic analysis (BEA) noted in its statement "the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency". As stated earlier, a benign FOMC statement would put a damper on the rally, as well. The US dollar index has rallied sharply over the past few weeks but appears to have stalled in the 81.50-60 area, one that has contained rallies since November 2013. The upcoming events suggest to me that the risks are skewed to the downside in the short term.

Chart: US dollar index-Daily

Source: Saxo Bank

USDCAD technical outlook

The short-term USDCAD technicals are bullish while trading above 1.0770 with the breach of the 200-day moving average at 1.0835 pointing to further gains toward 1.0950, the June peak. Above 1.0950 puts the cross-hairs on 1.1025, the 61.8 percent Fibonacci retracement level of the March-June range. In addition, the termination of the March downtrend from 1.1270 suggests that a short- term bottom is in place at 1.0730. Intraday, support is at 1.0835, 1.0810 and 1.0790. Resistance is at 1.0910, 1.0925 and 1.0950.

Chart: USDCAD 4-hour with target

Source: Saxo Bank

LOONIEVIEWS

USDCAD Open 1.0808-13 Overnight Range 1.0800-1.0812

If slow and steady wins the race, today’s FX market will be first to the tape. Boring, would be another apt description although long kiwi traders would beg to differ. News of a cut in milk prices caused NZDUSD to drop 40 points and it hasn’t recovered. Very narrow ranges were the norm for the rest of the majors. The EU and USA are reportedly announcing another round of sanctions against Russia today. Russia is being punished for supporting the rebels in Ukraine but the US gets a pass for supporting rebels in Syria. Go figure.

I think that those expecting the FOMC to provide any new information or guidance tomorrow will be disappointed which should undermine the US dollar and allow USDCAD back toward 1.0760.

The intraday USDCAD technicals are slightly bullish while trading above 1.0800 but needs to break through 1.0820-40 to extend gains for another 0.0050 points. A move below 1.0790 will retarget support at 1.0860.

Today’s Range 1.0790-20

The calm before no storm

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• FOMC meeting likely to be a "non event"
• Post-nonfarm payrolls action will be slight
• Canadian GDP key for loonie outlook

By Michael O’Neill

It is a hot and muggy summer Monday morning with grey skies and rain – the type of day that one wants to ignore, which helps to explain the indifferent start to the FX trading week. The weather isn’t the only factor behind the lack of FX trading activity. Uncertainty ahead of Wednesday’s Federal Open Market Committee meeting (FOMC) has many traders on the sidelines, and the debate is on as to how the FOMC will "tweak" its statement. As "FX" risk events go, this FOMC meeting is most likely to be a non-event. It’s the middle of the summer, the tapering programme is proceeding on schedule and not much has changed, US economy-wise, since the last meeting. A recycled June FOMC statement is a likely outcome.

US GDP may fuel additional US dollar gains
The Q2 GDP report does pose some risks. The US dollar is starting to exert its dominance again. Last week’s move through 1.3510 support in EURUSD, the drop through support at 0.8650 in NZDUSD and the rallies above 101.60 in USDJPY and 1.0790 in USDCAD reflect a more positive view towards the greenback. These moves take on more significance as they occurred after regionally specific events rather than "general" US dollar strength. The kiwi plunged on verbal intervention from the central bank. USDJPY rose on technicals, and EURUSD fell in a delayed reaction to the risk of further monetary stimulus measures from the European Central Bank. Wednesday’s GDP data could lead to a continuation of these moves if it is a better-than-expected result.

No sizzle just fizzle from NFP
The monthly NFP report has been fairly entertaining of late, with outsized gains leading to large US dollar moves. Unfortunately, the pattern is unlikely to repeat itself this Friday. Last month’s outsized gain is not expected to be repeated and the current forecasts are for a result closer to the six-month average. This report has a diminished importance as there will be another NFP report ahead of the September FOMC.

Chart: Change in NFP

Source: Bloomberg

Key US data releases
Wednesday: Q2 Real GDP (Forecast 3.0 percent, quarter-over-quarter). An upside surprise would give the US dollar a boost on anticipation of earlier-than-expected Fed tightening. Conversely, a downside surprise may undermine the US dollar as the US economic recovery story gets tarnished.

Wednesday: FOMC interest rate decision and statement.
Friday: July Nonfarm Payrolls (Forecast 235,000, Unemployment rate 6.1 percent) The impact of this release may be subdued as it follows on the heels of the FOMC interest rate announcement.
Friday: US ISM Manufacturing index (Forecast 56.0). Another gain in this index will support the US dollar on the view that the economic recovery has taken hold.

Key Canadian data releases
Thursday: May GDP (Forecast 0.3 percent, month-over-month). The risk is that the data surprises to the upside on the back of auto sales and construction.

Canadian dollar outlook
The loonie took it on the beak on Friday in what appeared to be a noon rate order, which drove USDCAD through resistance in the 1.0790-1.0810 area. The rally finally ran out of steam at 1.0820 but for USDCAD bears, the lack of any meaningful retracement is disconcerting. There are more than just "one-off" flows at play here. The most recent Commitment of Traders report COT shows long CAD positions rising that are at odds with the Friday USDCAD rally. A move above 1.0835 could trigger more sharp gains as these new "spec" positions are unwound. Wednesday’s Canadian GDP data release is the only domestic data available this week to provide some offset to any bullish US data releases. If the Canadian data disappoints, a move to 1.0950 cannot be ruled out.

USDCAD technical outlook
The intraday USDCAD technicals are bullish while trading above 1.0770 looking for a break above 1.0835 to extend gains to 1.0880. The short-term technicals are also bullish while trading above 1.0740. The 1.0825-35 area is significant because it represents the 200-day moving average (1.0828) and the 61.8 percent Fibonacci retracement of the June-July range. For this week, USDCAD support is at 1.0790 and 1.0770. Resistance is at 1.0820, 1.0840 and 1.0890.

Chart: USDCAD 4-hour

Source: Saxo Bank

USD rally getting legs with big week ahead

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• 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.

USDCAD Outlook
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

Source: TradingEconomics.com

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

LOONIEVIEWS

USDCAD Open 1.0720-24 Overnight Range 1.0720-40

A USDCAD move higher in Asia stalled at 1.0740 resulting in a slow drift lower, finally coming to rest on minor support at 1.0720. NZDUSD tanked on verbal intervention by the RBNZ and a doveish sounding policy statement despite a 0.25% OCR hike. Sentiment that the RBNZ is on hold is behind the kiwi’s malaise. EURUSD bounced off of its recent lows in part due to higher German PMI’s and EURGBP demand following weak UK retail sales. US jobless claims, New Home Sales and Markit PMI’s should provide some US dollar support today.

The intraday USDCAD technicals are neutral within the context of the 1.0710-1.0760 trading band seen for the past 10 days. A break either side should extend another 0.0050 points. For today, USDCAD support is at 1.0720, 1.0710 and 1.0690. Resistance is at 1.0740, 1.0760 and 1.0790

Today’s Range 1.0710-50

Spotlight shifts to Kiwi as geopolitical tensions abate

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• Mark Carney muddies waters further
• Geopolitical tensions ratchet lower
• Kiwi in the limelight

The headline Canadian Retail Sales number exceeded expectations but only by a tad (0.7 percent vs. forecast 0.6) while the ex-autos number missed (Actual 0.1 percent vs. forecast 0.3 percent). Not surprisingly, the USDCAD reaction was confused; USDCAD dipped ever so slightly and then bounced for a net change between pre and post-data pricing of a mere 0.0010 points. This puts an end to the top-tier Canadian data releases for this week and there isn’t any more until GDP on July 31. Arguably, that means that USDCAD direction will be governed by EURCAD, GBPCAD and CADJPY trading.

EURUSD stalls
The week started with FX traders concerned about Tuesday’s US inflation data. However, so far the only inflation has been heightened European Union/United States threats of further sanctions on Russia. US CPI was mostly as expected but disappointed the camp that was expecting a more robust result. EURUSD jumped slightly on the news but quickly retreated in part due to a building bearish bias. A series of lower highs and the break of support in the 1.3510-15 area have given rise to the view that the long-awaited, often forecast EURUSD down move may be starting.

Cable confused by Carney
The Bank of England (BoE) minutes and Mark Carney’s speech were expected to be the highlights of Wednesday’s European trading session. They were, but the message was muddled. Carney, the champion of forward guidance, has flip-flopped on rate hike timing in the past and today added another level of muddiness to the rate discussion. Apparently, any rate hike decision has to include pay growth in addition to the vaguely quantifiable "slack". GBPUSD’s initial pop, post-minutes, quickly unwound and Cable made a new low for the month.

Vladimir Putin may be facing further EU sanctions after the MH17 tragedy, despite
a recent report by US intelligence officials. Photo: Sean Gallup / Getty

Geopolitical tensions ease
Despicable Me 2 is not a movie about Vladimir Putin, and the Russian ruler is unlikely to be singing the Pharrell Williams song Happy. However, he may be cracking a smile after three US intelligence officials said that the "US finds no direct link to Russia in downing of MH17. These officials are claiming that the most likely explanation was that the plane was hit by mistake. At the same time, even though the EU is planning to expand sanctions on Russia, economic concerns will mute their effects. France will still go ahead with the sale of two Mistral helicopter warships, and Germany does not want to disrupt its Russian exports or jeopardise its energy imports.

Kiwi in the limelight
It is a big day for Kiwi traders with the release of the Reserve Bank of New Zealand (RBNZ) interest rate decision. Even though the RBNZ is almost unanimously expected to raise the OCR by another 0.25 points, the NZDUSD has declined over the past week. A spate of poor economic data has given rise to speculation that today’s rate move may be the last for about six months. If so, NZDUSD will drop quickly and target 0.8470. On the other hand, if there is no indication of a pause in the rate hikes, NZDUSD will retest 0.8800.

Chart: NZDUSD 4-hour

Source: Saxo Bank

USDCAD technical outlook
The longer term USDCAD technicals are bullish with the uptrend from the September and October lows firmly intact above 1.0630. However, the short term downtrend from the March high of 1.1270 remains intact while USDCAD is trading below the 1.0760-70 area. A break of support in the 1.0690-1.0710 zone will re-target the long-term uptrend line at 1.0630. A break of resistance at 1.0770 would extend gains to 1.0820.

In the short term, with the exception of the post Monetary Policy Report spike to 1.0790, USDCAD has been contained in a 1.0630-1.0770 range since June 20 and there isn’t anything on the horizon to suggest that this range will be broken. Next Friday’s US employment data could make a mockery of this forecast but USDCAD gains should be offset by Canadian dollar buying against EUR, GBP and JPY.

Chart: USDCAD hourly with current trading band

Source Saxo Bank

Chart: USDCAD 4-hour with converging trend lines

Source: Saxo Bank