Loonieviews August 29, 2014


USDCAD fading as fast as August

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • ECB meeting and US NFP report major risks next week
  • Geopolitical risks increasing, but risk aversion is not
  • Strong Canadian data keeps USDCAD under pressure

By Michael O’Neill

The dog days of August are behind us, and the Canadian dollar was the best performing G7 currency for the month with a tiny gain of 0.10%. GBPUSD was the worst performer, undermined by the Bank of England’s governor, Mark Carney, flip-flopping on the timing of interest rate hikes, which triggered a large-scale unwind of bullish GBPUSD trades.

Today’s Eurozone consumer price index data showed another dip (0.3% vs. forecast 0.4%) raising expectations of some European Central Bank policy action next Thursday.

The US data was similarly disappointing, with personal income and spending missing forecasts.

Canada was a ray of sunshine. Q2 GDP rose 3.1% (forecast 2.7% quarter-on-quarter), while June GDP ticked up 0.3% (forecast 0.2% month-on-month). USDCAD dropped 0.0020 points.

The focus now shifts to 16:00 GMT and the monthly portfolio rebalancing flows, and then the stampede toward the exits to start the long weekend (at least for Canada and the US).

Geopolitical fatigue

There is no shortage of geopolitical tensions. The BBC reported today that the UK has raised its threat level to "severe" due to events in Syria and Iraq.

Russia/Ukraine, the Middle East and the South China Sea have all been in the news in the past week, yet it is hard to find any evidence of these increasing risks filtering down into the FX markets. Headlines screaming "Russia invades Ukraine" barely caused a ripple. News that Islamic State militants captured a Syrian airbase and massacred 250 prisoners nearly caused President Obama to stop a golf game. Chinese fighter jets intercepted a US spy plane near China’s Hainan Island. The Chinese pilot – obviously a fan of Tom Cruise in Top Gun – was accused of pulling a barrel roll over the top of the canopy of the US plane.

None of these events had much of an impact on FX markets. Risk aversion trades were considered but never executed. Obviously FX markets believe that shifting monetary policies in the US and EU are a bigger threat to currencies than the seemingly never ending and regionally contained geopolitical spats.

Hourly VIX and USDJPY

Source: Saxo Bank

The week that was

The Canadian dollar was big mover this week among the G7 currencies, gaining almost 1% vs. the US dollar, while the euro was the worst, giving up 0.38%.

The week started with the UK closed for a summer bank holiday, while the rest of the world digested Mario Draghi’s comments from the Jackson Hole Symposium. Draghi’s concerns over disparities in Eurozone employment led to increased speculation of some sort of policy action next Thursday.

Strong US data releases on Tuesday, including durable goods posting a whopping 22.6% gain, added another layer of support to the US dollar, but not much in the way of price movement.

On Wednesday, Asia and Europe jumped all over news of Burger King’s (NYSE:BKW) US$12 billion takeover of Canada’s Tim Horton’s (TSE:THI), which caught a short-term FX market long USDCAD. The Loonie soared. Elsewhere, EURUSD made an attempt at a correction climbing from 1.3160 to 1.3215 after the Germany’s finance minister, Wolfgang Schaeuble, seemed to rebut Draghi’s Jackson Hole remarks.

The EURUSD correction ended on Thursday, fuelled in part by headlines claiming that Russia had invaded Ukraine. EURUSD drifted lower throughout the day ahead of Friday’s Eurozone CPI data.

Canada’s dollar was a rare bright spot among the G7 currencies this week,

gaining almost 1% vs. the US dollar. Photo: Thinkstock

The week that will be

National holidays in the US and Canada, along with uncertainty ahead of Thursday’s BoE and European Central Bank (ECB) interest rate decisions and statements will likely curtail FX trading activity in the first part of the week. Today’s news that the Eurozone inflation rate for July dipped again, gives the nod to the ECB meeting as the most important event due to the risk of additional policy action.

AUDUSD traders will be focused on Monday’s China PMI data and Tuesday’s Reserve Bank of Australia (RBA) interest rate decision and statement. The AUDUSD is supported by interest rate differentials, but the RBA governor is unhappy with the level of the currency.

AUDUSD will still be in play on Wednesday with the release of Australia Q2 GDP. The Eurozone will see a host of services PMI data releases and retail sales. The Bank of Canada will announce that interest rates are unchanged although improved economic data throughout August could lead to a change in tone in the statement.

The week will end with a bang with the release of the US non-farm payrolls report (forecast 210,000) and the Canadian employment guess (forecast 11,000). Statistics Canada reported yesterday that last month’s employment report embarrassment was due to "human error" and has taken steps to avoid a repeat of the fiasco. I am sure that all the traders who lost money on the misprint feel so much better now. In addition, the Canadian Ivey Purchasing Managers report could spark additional USDCAD volatility if the data compliments the employment numbers.

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Loonieviews August 28, 2014


LOONIEVIEWS

USDCAD Open 1.0861-66 Overnight Range 1.0845-1.0867

USDCAD stayed on the sidelines throughout a fairly active overnight session. Ukraine has declared that Russia has invaded it, which Russia has denied. The JPY acted like the accusation was true, rising about 0.20 points on a shift to risk aversion. Or it could be due to more month end portfolio rebalancing flows. There is a lot of US data for traders to digest including Q2 GDP. A drop in Canada’s current account deficit would be another excuse to buy the loonie.

The intraday USDCAD technicals are bearish below 1.0875 but bouncing off the 1.0840 lows. A move above 1.0880 points to a retest of 1.0920 while a move below 1.0840 will meet support at 1.0820 and then 1.0790

Today’s Range 1.0820-80

Loonieviews August 27, 2014


USDCAD plunges faster than dunkin’ donuts

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • USDCAD bulls squeezed on merger news
  • Dovish Bank of Canada governor and soft WTI oil may limit Canadian dollar gains
  • USDCAD technicals argue for test of recent lows

By Michael O’Neill
News of the tax-driven takeover of the iconic Canadian doughnut chain Tim Hortons (TSE:THI) by Burger King (NYSE:BKW) put USDCAD in a very active overnight session. Canadian dollar buyers crawled out of the woodwork on anticipation of CAD12 billion being purchased to fund the takeover, even though there are still a few hurdles to jump.

Canadian regulatory approval should be a done deal considering that this isplunge the second time that Tim Hortons has been purchased by a US company (after its merger with Wendy’s in 1995). The US government will likely give its blessing, though begrudgingly so, owing to the tax-inversion nature of the transaction. The 39% share price premium should ensure shareholder approval as well.

Devil’s in the details

The sheer size of the possible Canadian dollar demand will overhang USDCAD trading until the deal closes, which hasn’t been announced yet. The other issue is that shareholders have the option of taking all stock. If 50% of shareholders elect this option, the volume of Canadian dollars needed to close the transaction drops to about CAD4.35 bn, still chunky, but far less disruptive. The reality is that even though the headline touts a US$12 bn deal, the actual Canadian dollar demand will be substantially less.

Putting lipstick on a Loon

The potential Canadian dollar demand from the deal has altered the short-term outlook for the Loonie and renewed the focus on the 1.0800-10 area, which for many is akin to putting lipstick on a pig.

USDCAD bulls are taking solace from Bank of Canada Governor Stephen Poloz’s comments at the weekend. In an interview with the Globe and Mail, Poloz said: “The main thing people should understand is that our policy is quite capable of being fully independent, as it has been these past few years.” The remarks imply a lag between any US rate hike and a similar move in Canada. This dovish view is expected to be reiterated and reinforced next week (September 3) in the interest rate statement following the rate announcement.

There hasn’t been much in the way of USDCAD/WTI correlation this year, but if WTI continues to decline the Canadian dollar will follow suit.

OilUS continuous

Source: Saxo Bank

Month-end portfolio rebalancing a plus for USDCAD bears

Strong US equity market gains in August are suggesting a need to sell USDCAD to rebalance portfolio’s at month-end. USDCAD bears are feeling pretty good. The failure to extend gains above 1.1000 this week combined with the drop below 1.0920 removes the short-term upside pressure. The steady diet of improving Canadian economic data diminishes the concerns that domestic economic growth will lag that of the US. The negative outlook for EURUSD on interest rate divergence has led to renewed selling of EURCAD. The break in key support levels in this currency pair points to further losses ahead and is CAD supportive. GBPCAD selling and CADJPY buying are also contributing to the bearish USDCAD bias.

USDCAD technical outlook

The short-term USDCAD technicals are bearish following the break of the July uptrend line at 1.0925 that was intact since July 7 and is aiming for support in the 1.0860-80 area. The support is derived from the 100-day moving average (1.0861) and the 200-day moving average (1.0881). In addition, the rejection of additional gains above 1.1000 reinforces the strength of that resistance area that should attract sellers on any future USDCAD rallies. The 38.2% Fibonacci retracement of the July 1.0630 to August 1.0994 range comes into play at 1.0855 with the 61.8% retracement at 1.0770. The strong resistance in the 1.0980-1.1000 area should cap any top-side forays, while the 100- and 200-day moving averages should limit the downside. The range for the next week is likely 1.0860-1.0980 with a risk toward 1.0810.

USDCAD four-hour with Fibonacci levels

Source: Saxo Bank

Loonieviews August 26, 2014


LOONIEVIEWS

USDCAD Open 1.0961-66 Overnight Range 1.0964-1.0995

USDCAD was unable to overcome resistance in the 1.0995 area ahead of a rumoured option barrier at 1.1000 which was apparently being defended. A round of profit taking on long US dollar positions led to a weaker US dollar vs. the majors. Chatter of US dollar selling for month end portfolio rebalancing likely helped to encourage the move. The US data, including Durable Goods is will likely reinforce the US recovery theme but unlikely to rally the dollar as it is expected.

The intraday USDCAD technicals are bearish below 1.0975 but struggling to overcome support from the uptrend line from the 1.0830 low which is now at 1.0960. A move below 1.0960 opens up a dip to 1.0940 and then 1.0920. A rally through 1.0975 targets 1.1010.

Today’s Range 1.0940-80

Loonieviews August 25, 2014


US dollar consolidation likely

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • US employment measurement drives rate-hike speculation
  • US Dollar Index suggests period of consolidation
  • Geopolitical risks increase, but are ignored

By Michael O’Neill

The bank holiday in the UK today has put a dampener on FX trading activity in the European session, even though European Central Bank president Mario Draghi’s Jackson Hole comments have increased speculation of additional ECB stimulus.

USDJPY rallied on dovish comments from the Bank of Japan’s governor, Haruhiko Kuroda, but have since retraced all its gains. Tomorrow’s US durable goods data and the UK holiday are likely to ensure a fairly quiet North American session.

A riddle, wrapped in a mystery, inside an enigma

Winston Churchill famously said Russia was "a riddle, wrapped in a mystery, inside an enigma". This also succinctly describes the US employment measurement dilemma. Fed chair Janet Yellen’s Jackson Hole speech and the Federal Open Market Committee failed to provide any new information or direction to support the hawks or doves with respect to the timing of a US interest rate hike.

If there is one clear message, it is that the committee members have been unable to quantify their assessments of the degree of slack in labour markets. And until they do, US rates are not moving anywhere. The FX market is chomping at the bit for a "hard target" measurement of the labour market, while all the FOMC can deliver is vague references to variables shrouded in a fog of "degrees of slack".

Reality check

Global markets believe US interest rates will rise, with the first move sometime in 2015. Therefore, a rate hike in 0.0025 point increments should not surprise anyone. The current federal funds rate target is 0-0.25%. The rationale for not raising rates is that a rate hike would undermine a fragile economic recovery, yet no one is explaining how a quarter point hike in an interest rate from a level never seen before will stymie economic growth.

There is no rule or law that mandates consecutive meeting rate hikes. The current federal funds rate has been around since December 2008. A 1% hike would still leave interest rates at historical lows. If a mere 1% rate increase means the difference between solvency or insolvency for US corporations, they probably should not be in business in the first place. In fact, an argument could be made that a rate hike would stimulate the economy as corporations realise that the era of cheap money is coming to an end and activate dormant borrowing or expansion plans.

Effective federal funds rate

Source: Federal Reserve Bank of St. Louis

USDX suggests US dollar consolidation

The USDX broke through strong resistance in the 81.70-76 area last week, which is a level that contained rallies since November 2013. It is now running into a similar obstacle in the 82.70-76 zone, which suggests a period of consolidation may be in order. The July uptrend line from 79.78 comes into play at 89.12, which should contain any retracement. A move above 82.70 targets 83.60.

USDX daily

Source: Saxo Bank

Geopolitical tensions – who cares?

FX traders seem hardened to the unrelenting headlines of missile strikes, artillery barrages and fire fights in the Middle East and elsewhere around the world.

Israel has adopted a nastier tactic in Gaza, leveling entire apartment blocks where suspected Hamas military bosses are hiding among civilians. Iran claims to have shot down an Israeli drone.

Islamic State militants have reportedly captured a Syrian airbase. Will President Obama ally the US with President Bashar al-Assad to combat the group? Libya’s capital Tripoli also finds itself under Islamist control.

Meanwhile, Russia is sending another aid convoy to Ukraine, much to the dismay of officials in the country.

Japan is increasing its defence budget by 3% in the face of a worsening security environment in the region, much to the dismay of China.

China and the US are also exchanging pleasantries over military aircraft intercepts. US spy planes have had close calls with Chinese fighter planes, which has inexplicably irritated the former. One has to wonder how the US would react if Chinese were sight-seeing around San Diego.

The geopolitical risks are real, but as long as they remain localised then risk aversion trades are on the back burner.

China angered the US last week after one its fighter jets barrel rolled "very, very close" to an American Navy plane, but geopolitical risks are not crucial to investor calls. Photo: rypson Thinkstock.com

Key US data releases

Tuesday: July’s durable goods orders (forecast: 7.0%, ex-transportation 0.5%). This data is expected to surprise to the upside on the back of aircraft orders, which will add to the positive US dollar sentiment. A big miss would hurt the US dollar as the market is long dollars across the board.

Tuesday: Consumer confidence (forecast: 89.1 vs. previous 90.9).

Thursday: GDP (forecast: 2.0% quarter-on-quarter). The surprise would be if GDP is below consensus, which would also squeeze the existing long US dollar positions.

Friday: July’s personal income and spending (forecast: income 0.3%, spending 0.1% month-on-month).

Key Canadian data releases

Thursday: Q2 current account (forecast deficit: CAD11.4 billion). A big drop in the deficit would be a boon to the Canadian dollar, which is an unlikely outcome. The current account deficit is a key macroeconomic data supporting predictions of a weaker Canadian dollar.

Friday: GDP (Q2 forecast: 2.6% year-on-year, June 0.2% month-on-month). The proof is in the pudding, and the slew of better-than-expected Canadian data releases risk an upward surprise to the data and provide support to the Canadian dollar.

Loonieviews Endo fo Week Augg.22, 2014


Wish for hawkish Jackson Hole speech not granted

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Janet Yellen coo’s dovishly at Jackson Hole
  • Canadian data surprises to the upside
  • US dollar rally on hold

Fed chair Janet Yellen’s speech at the Jackson Hole symposium represented the last hope for the US dollar bullish camp, which has been buying dollars all week in the hope of discovering a clear, quantifiable road map to the Fed’s rate hiking strategy.

They have to be disappointed, as the text appears to be a re-hash of previous speeches and provides no new insight. The US dollar bulls tried to convince themselves that they found a piece of the puzzle in the Federal Open Market Committee minutes, but they appear to have since changed their minds. This week’s US policy developments suggest that the US dollar rally is on hold and likely to consolidate all next week.

The week that was

Sterling hogged the European area spotlight from Monday to Wednesday. The week started with

Bank of England governor Mark Carney doing another about-face with his opinion on the timing of the next UK rate increase. The move left market watchers wondering when Basil Fawlty became the BoE governor. Cable got severely thrashed on Tuesday after a flurry of soft data drove GBPUSD through the 200-day moving average (1.6674). However, hawkish BoE minutes on Wednesday allowed GBPUSD to rally, which proved to be short lived.

Elsewhere, the Reserve Bank of Australia minutes on Tuesday didn’t offer up any surprises, while the Reserve Bank of New Zealand’s did. The RBNZ reduced its economic growth and budget forecasts for 2014/15 and 2015/16, which undermined NZDUSD – already under pressure from soft producer price index data.

The FOMC minutes knocked the BoE minutes off the stage on Wednesday afternoon. The FX market determined that the minutes were hawkish and the US dollar rallied across the board.

Thursday was a whole different bag. The Asian market continued to buy US dollars following the FOMC and in part due to weaker-than-expected Chinese PMI data, but the Eurozone didn’t follow through. EURUSD recouped its post FOMC losses and USDCHF gave back its gains. Perhaps it was because the German PMI’s beat the forecasts, or maybe they were more concerned about the risks surrounding the Yellen speech at Jackson Hole.

The week that will be

A UK bank holiday on Monday, the last until Christmas, will mean a very quiet start to a rather uninspiring trading week. The marquee events are likely to be Tuesday’s US Durable Goods report, Thursday’s US GDP release and Friday’s Eurozone consumer price index data. Friday could be the most volatile trading day due to the usual month-end portfolio rebalancing flows ahead of a long weekend (Labor Day) in the US and Canada.

There aren’t any central bank meetings, conferences or symposiums to distract traders during the week. German IFO data, US Markit PMI services data and US new home sales are the main focus on Monday.

Canadian data provides support for Loonie

USDCAD bulls are getting nervous following a much stronger-than-expected retail sales report and a CPI report that barely missed consensus. Retail sales rose 1.1% (forecast 0.3%), the best result in over three years. Even though the CPI result was slightly lower than forecast (2.1% vs. forecast 2.3% year-on-year) the headline number is still above the Bank of Canada’s inflation target of 2.0%. The latest release should put to rest the concerns of a deflationary risk in Canada.

Retail sales monthly change

Source: tradingEconomics.com/Statistics Canada

Change in CPI

Source: Statistics Canada

USDCAD Outlook

The risks to USDCAD trading are not quite equally balanced, yet there is enough offsetting influences to limit substantial gains or losses in the coming week. Today’s Canadian CPI and retail sales data are further confirmation that the Canadian economic recovery has shifted into a higher gear.

The string of strong data releases will act as a drag against general US dollar demand stemming from the perception that the FOMC is close to announcing clear timelines and guidelines for a US interest rate hike. At the same time, lingering concerns surrounding the Bank of Canada governor’s propensity to "talk down" the currency and a BoC interest rate statement in less than two weeks limit gains.

USDCAD technical outlook

The short-term USDCAD technicals are bullish while trading above 1.0920 the base of the uptrend line from the July 1.0630 low. For now, resistance in the 1.0990-1.1010 area has capped the topside. A break of this level would extend gains to 1.1050, the last line of defence ahead of 1.1270. A move below 1.0920 argues for a test of 1.0870 and likely more 1.0870-1.0970 consolidation.

USDCAD four-hour

Source: Saxo Bank

Loonieviews Aug 21, 2014


FOMC Minutes: Cherry picking for hawks and doves

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• FOMC minutes have something for both camps
• Is it a case of buy the rumour sell the fact?
• Will USD bulls land in a Jackson Hole?

By Michael O’Neill

"Cherry Picking is defined by the Oxford dictionary as "Selectively choosing (the most beneficial or profitable items, opportunities etc.) from what is available".

The minutes are out and the cherries have been picked. The Federal Open Market Committee minutes are hawkish! Or are they? The US equity markets don’t think so and neither does Canada’s S&P/TSX index. They are all modestly higher on the day. However, the FX markets appear to have bought into the hawkish view point as the USD has popped higher against the majors.

Doves and hawks alike have taken what they can from the FOMC minutes. Photo: Thinkstock

Hawks like labour discussion

The hawks have keyed in on the more detailed discussion of the Labour market and the following sentence from the FOMC minutes: "Participants generally agreed that both the recent improvement in labor market conditions and the cumulative progress over the past year had been greater than anticipated and that labor market conditions had moved noticeably closer to those viewed as normal in the longer run. is cited as evidence that the Committee has adopted a more hawkish stance."

Doves also like labour discussion

The small minority that see the minutes as slightly doveish to neutral at best argue that the following paragraph greatly dilutes the tone of the above statement. "However, many participants continued to see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization than indicated by the difference between the unemployment rate and estimates of its longer-run normal level. These participants cited, for example, the still-elevated levels of long-term unemployment and workers employed part time for economic reasons as well as low labor force participation."

The labour market may be improving but the committee remains just as concerned about the labour gap as they did previously.

When the stars and the planets are aligned

Another paragraph that has garnered a lot of attention from the hawkish camp is
"With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee’s longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated. Indeed, some participants viewed the actual and expected progress toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting the Committee’s unemployment and inflation objectives over the medium term".

The hawks seem to think that this statement is hawkish when in reality it has been said before – rates will rise when the the incoming data supports an increase.

No rate hike before its time

The doves took note of the following paragraph which essentially nullified the concerns raised above. "However, most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor market, and inflation. In particular, although participants generally saw the drop in real GDP in the first quarter as transitory, some noted that it increased uncertainty about the outlook, and they were looking to additional data on production, spending, and labor market developments to shed light on the underlying pace of economic growth."

Buy the rumour, sell the fact

It is readily apparent that today’s FOMC minutes have been deemed hawkish by FX traders as the USD is quite bid against the majors. The question that arises is: "Does the degree of hawkishness implied by the minutes warrant further gains in the green back?" In the past week, USDJPY has risen over 1.4%, while EURUSD has shed nearly 0.8%. Arguably, the bulk of those gains were on anticipation of hawkish minutes.

But what has really changed? Nothing! US interest rates are probably increasing in the second quarter of 2015. Today’s minutes provided no more evidence of a rate hike moving forward than what was reported last month. Some believe that the fact that the Committee members are actually discussing the timing of a rate hike is in itself hawkish. Why? It is part of the job description.

Will Yellen put the dollar bulls in a Jackson Hole?

Janet Yellen is well known for preferring the more detailed Job Openings and Labour Turnover Survey (JOLTS) to the US nonfarm payrolls report as a barometer for the health of the US employment market. Her keynote address at the Jackson Hole symposium is entitled "Labour Markets". She has been vocal in her concern that part time workers can’t find full time jobs.

Today’s FOMC minutes made reference to many participants "continuing to see a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization than indicated by the difference between the unemployment rate and estimates of its longer-run normal level".

Was Ms Yellen one of the participants? If her speech in anyway indicates that managing the hard-to-quantify, "employment slack" is a key factor in determining the timing of a rate hike, the USD is likely to give back a lot of this week’s gains.

Recap

Today’s FOMC minutes have empowered US dollar bulls who believe that US rate hikes are coming sooner rather than later. They are conveniently ignoring the FOMC’s stated concerns about labour market slack and the Committee’s stated goal of seeing more evidence that the recovery is sustainable. No one is denying that US rates are going up but the dollar bulls may have gotten ahead of themselves and are exposed to a correction. A doveish perception of Ms Yellen’s Jackson Hole speech may be the catalyst.