Loonieviews July 28, 2014

The calm before no storm

Michael O’Neill

FX Consultant / IFXA Ltd


  • 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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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