Loonieviews July 2, 2014

Payrolls may stem US dollar slide

Michael O’Neill

FX Consultant / IFXA Ltd


• ADP report bullish for NFP
• Is USDCAD slipping on oil?
• USDX holding support

Canadian traders are returning to their desks after an extended long weekend (for many) to celebrate Canada Day. While they were gone, Belgium put the boots to the USA’s World Cup dreams and FX traders put the boots to the US dollar. The persistent weakness of the greenback may be due to sentiment that the Federal Reserve Open Market Committee (FOMC) has lost its way and can’t see the wood for the trees. The crux of the matter is that the illustrious committee members have been unable to articulate how they will transition from flooding the world with liquidity to draining the swamp that they have created. Simultaneously, they don’t appear to have any grasp of the effect of the transition on the economy. It begs the question: Who is more "Clueless", Alicia Silverstone or Janet Yellen?

ADP jobs report warns of upside risk to nonfarm payrolls

The monthly Automatic Data Processing (ADP) jobs report handily beat expectations, with a gain of 281,000 jobs in June. (Forecast 210,000). The size of the gap between the actual and forecast result suggests an upside risk to tomorrow’s nonfarm payrolls report (Consensus 213,000). However, the same scenario has occurred more than a few times this year and traders got burned, which helps to explain the tepid US dollar rally following the ADP release.

Chart: Change in employment

Source: ADP

US Dollar index testing support

The short-term US dollar index (DX) is bearish, suggesting further US dollar losses on a break of support at 79.75. The DX has been on a decline throughout June and remains in a downtrend below 80.15. A break of support at 79.75 could extend losses down to 79.10 although 79.50 could contain the dip. At the moment, unless the current rally can take out intraday resistance at 80.04, the bounce is merely corrective and a retest of 79.75 is likely.

Chart: US DX 4-hour

Source: Saxo Bank

USDCAD may be slipping on oil prices

There is always a faction that attributes Canadian dollar gains to rising oil prices. Earlier in the year this was dubious at best. However, it appears to have some validity judging by the price action in June. The increase in hostilities in Iraq combined with Libyan supply issues led to a bounce in West Texas Intermediate (WTI) from USD 101.60/bbl to USD 107.60 which coincided with a drop in USDCAD from 1.0960 to 1.0630. The correlation appears to have been revived. If so, WTI has retreated from its peak, which suggests that the drop in USDCAD may have run its course as well.

Chart: USDCAD and WTI daily

Source: Saxo Bank

Canadian Dollar outlook

The RBC/Markit PMI registered 53.5 in June, suggesting a rebound in the manufacturing sector. The survey points to rising output and new orders and strengthening job creation. Although the tone of this data is positive, the RBC/Markit PMI has not garnered a wide following so the results are largely ignored by traders. Canada’s economic performance for the past month can, at best, be characterised as "underwhelming". GDP growth is flat and while retail sales gained, manufacturing shipments and building permits declined. The Bank of Canada (BoC) monetary policy statement at the beginning of June expressed concern that the "weak first quarter would give slightly greater weight to downside risks" and it may have got that prediction right. The BoC governor has no interest in a rising Canadian dollar due to the fragile manufacturing sector (despite the RBC PMI index) and even though the rise in CPI should have removed the deflation risk from his rhetoric, he is unlikely to adopt anything close to a hawkish view in the July 16 statement. The effects of the surprisingly strong Canadian CPI data are likely to be fully reflected in the current USDCAD rate. USDCAD support in the 1.0590-1.0630 area should hold unless tomorrow’s US payrolls report is well below consensus.

Chart RBC/Markit PMI

Source: RBC

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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