Loonieviews August 11, 2014

Cowabunga! Risk aversion ebbs, USDCAD flows (barely)

Michael O’Neill

FX Consultant / IFXA Ltd


  • TMNT beat back risk aversion
  • BoE may give GBP traders direction
  • USDCAD struggling to rally

By Michael O’Neill

Cowabunga! The return of the Teenage Mutant Ninja Turtles have not only bolstered box office coffers but may have also beaten back the rising tide of global risk aversion seen on Friday. It may be only a coincidence but when Michelangelo, Donatello, Raphael and Leonardo climbed out of the sewers, Russian troops pulled back from the Ukraine border; President Obama found the courage to order airstrikes in Iran; Israel and Hamas accepted a ceasefire and investors backed away from risk-off strategies. As the latest bout of risk aversion fades, cable traders have turned their sights to Wednesday’s UK employment report and Thursday’s Bank of England (BoE) inflation report. BoE governor Mark Carney’s press conference will dictate near-term GBPUSD and EURGBP direction. At the same time, there aren’t a whole lot of market moving economic releases scheduled from the US. This factor, combined with summer vacations, points to another week of quiet G10 currency trading interspersed with intermittent bouts of frenzy, all within the confines of the current ranges.

The Teenage Mutant Ninja Turtles have not only bolstered box office takings but may have also beaten back the rising tide of global risk aversion. Photo: LoooZaaa / iStock Editorial

Key US economic data releases

Job Openings and Labour Turnover Survey (JOLTS): This report doesn’t really show up on FX traders’ radar screens but it is reportedly on Janet Yellen’s, which means it should be observed.

Wednesday July Retail Sales: (Forecast 0.2 percent, ex-auto’s 0.4 percent, month-over-month). The risk is for a modest beat of the forecast, which give the US dollar a bit of support.

Friday July Producer Price Index (PPI)-Forecast 0.1 percent, ex-food and energy 0.2 percent. Another US dollar supportive release if forecasts are met, as it is further evidence of a sustained improvement in the economy.

Key Canada economic data releases

Thursday June New Housing Price Index – New House prices are expected to have risen slightly but the news is unlikely to impact the loonie.

Friday June Manufacturing Shipments (Forecast 0.4 percent, month-over-month). This data will provide further evidence that the Canadian economy is improving modestly but unless there is a large deviation from the forecast, it will be ignored by FX traders.

USDCAD outlook

Friday’s ugly Canadian employment report tarnished a string of steadily improving economic reports that suggested the Canadian economic recovery was taking hold. Canada created a mere 200 jobs in July, a number far lower than the 20,000 gain forecast. USDCAD jumped from 1.0915 to 1.0980 immediately following the release and hovered in that vicinity for the rest of the day. That said, the inability of the forecasting community to accurately predict the jobs numbers questions the validity of the data, and the USDCAD price action agrees with this assessment.

The currency pair has since drifted towards hourly chart support in the 1.0940-50 area aided by today’s jump in housing starts for July. (Actual 200,100 vs. forecast 193,000). The latest round of domestic economic reports (except for the employment release) has provided evidence that Canadian economic activity is picking up, yet the prevailing Canadian dollar sentiment is negative. The big knock against the loonie is that the Bank of Canada is doveish and its stated concerns about low inflation will lead to a widening of US-CAD yield spreads. The latest above consensus CPI reports have introduced an element of uncertainty to this view that has and will limit USDCAD gains. However, the technical picture tells a different story.

USDCAD technical outlook

The short-term USDCAD technicals are bullish while trading above 1.0840, supported by the move above prior resistance at 1.0940, which seeks to extend gains to the 1.1050-60 area. However, the intraday technicals are modestly bearish. The failure to rally above 1.0985 coupled with the retracement below 1.0960 points to a retest of 1.0940. If this level breaks, USDCAD should test 1.0905 and perhaps, 1.0880. For the week, USD support is at 1.0940, 1.0905 and 1.0880. Resistance is at 1.0990, 1.1020 and 1.1050.

Chart USDCAD 4-hour

Source Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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