Loonieviews July 21, 2014

USDCAD still range-bound despite global tensions

Michael O’Neill

FX Consultant / IFXA Ltd


• Traders’ aversion to risk aversion
• Geopolitical tensions may mean more distractions
• USDCAD bid but will remain in 1.0710-1.0810 range

By Michael O’Neill

The week has started with geopolitical tensions still simmering. The Asian session was extra quiet today as Japanese markets were closed for a holiday, and a lack of data releases everywhere else left traders to ponder about the downed Malaysian airliner and expanding Middle East tensions. So far, the pondering hasn’t really translated into a move into risk aversion trades. In fact, the Swiss franc has actually dropped over the past week.

Who benefits?
Vladimir Putin and Russia are being blamed for the downing of the MH17 jet because the Ukraine rebels use Russian-made weapons. The fact that no one can prove Russia fired the missile that downed the aircraft, the fact that the Eurozone depends on Russian energy exports and the fact that Malaysia is neither an economic nor a military powerhouse all suggest that, for FX markets, this crisis is just a distraction.

Key US data releases
Tuesday: June CPI (Forecast 0.3 percent, Core 0.2 percent, month-over-month). If the US inflation data continues to creep higher it may start to impact on rate increase discussions.

Tuesday: June Existing Home Sales (Forecast 4.98 million). Unless there is a large deviation from the forecast, the data should provide support to the view that the US economy is recovering.

Friday: June Durable Goods (Forecast 0.5 percent, ex-transportation 0.5 percent, Core 0.5 percent) This data series is fairly choppy so a big miss either side of the forecast should lead to some US dollar volatility.

Chart: US Durable Goods

Source: TradingEconomics.com

Key Canadian data releases
Wednesday: May Retail Sales (Forecast 0.5 percent, ex-autos 0.3 percent, month-over-month). A better-than-expected result would reduce the negative sentiment towards the Canadian dollar as improving domestic data contradicts the pessimistic Bank of Canada (BoC) outlook for the economy.

USDCAD outlook
The Canadian dollar gets one piece of data this week, which may take some of the sting out of last week’s rather downbeat (BoC) Monetary Policy Report, and that is retail sales. It follows in the footsteps of Friday’s higher-than-forecast inflation data, another in a string of recent strong data prints that included manufacturing sales and housing starts. The big question is if this data is enough to offset the negative influences of weak employment and an uneven US economic recovery. The Bank of Montreal’s senior economist Sal Guatieri, citing a chronic trade deficit, believes that the Canadian dollar is at least 6 percent overvalued to the US dollar. At the same time, many economists and strategists expect the US economy to continue to expand during the second half of the year, which will provide support to Canadian exports. West Texas Intermediate (WTI) oil prices have recovered from last week’s dip below USD 100/bbl and are currently sitting comfortably at USD 103.40 /bbl, which should provide some support to the loonie. Despite this, the correlation between WTI and the Canadian dollar has been poor of late. There is a lot of important economic data due from the US and Canada next week, highlighted by the nonfarm payrolls report on August 1, which suggests that USDCAD is likely to remain in the 1.0710-1.0810 range at least until then.

USDCAD technical outlook
The intraday USDCAD technicals are modestly bullish. The rally from the July 11 low of 1.0630 remains intact above 1.0730 but needs to break short-term resistance in the 1.0770-80 area to extend gains. The short-term technicals are also bullish due to the break of the downtrend line from the June peak of 1.0960, which occurred on the move above 1.0710. The short-term resistance (in the 1.0770-80 area) coincides with the 23.6 percent Fibonacci retracement level of the 1.0630-1.1270. The 38.2 percent target resides at 1.0875. A move below 1.0690 would negate the upside pressure.

Chart: USDCAD 4-hour with support and resistance highlighted

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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