Loonieviews August 18, 2014

Jackson Hole not deep enough to bury Loonie

Michael O’Neill

FX Consultant / IFXA Ltd


  • Traders tentative as bank minutes anticipated
  • BoE minutes likely to overshadow those of FOMC
  • USDCAD could sink by the end of the week

By Michael O’Neill

It has not been an august start to trading in the third week of August. In fact, it is more akin to a holiday session although all markets are open. Traders are tentative ahead of the release of the minutes from the recent meetings of the Reserve Bank of Australia, the Bank of England (BoE) and the Federal Reserve Open Market Committee. The BoE minutes are likely to get the most scrutiny as economists and strategists peruse the document to try and find an explanation for the governor Mark Carney’s flip-flopping on the interest rate hike message. In June, he was warning that rates would be going up "sooner than you may think". Last week, Carney warned that falling wages may delay any rise in interest rates. In an interview in the Sunday Times yesterday, he said that he wouldn’t wait for real wages to turn positive before raising the bank rate. The only certainty on UK rates is that rate hikes are uncertain.

Led Zeppelin sang of a "Whole Lotta Love" but whether FX traders find a similar sentiment within Janet Yellen’s speech remains to be seen. Photo: Ben A Pruchnie / Getty

Hoping for a Jackson ‘Hole Lotta Love’

Led Zeppelin aren’t alone in wanting a

. FX markets are hoping for a similar result from US Federal Reserve chairman Janet Yellen’s speech in Jackson Hole, Wyoming, which is a ski resort. The theme of the conference is the labour market.With Yellen’s stated concerns over the lack of improvement in labour market slack, there is a faction that hopes she will provide a clearer set of guidelines that may lead to rate hikes. The St. Louis Fed President, James Bullard, a non-voting member of the FOMC and a noted hawk, is calling for a rate hike in March 2015. The reality is that the markets will be disappointed. There has been a recent trend for markets to work themselves into a lather over the anticipation of a market moving event only to be disappointed. I think this conference will end up being just another meeting at a resort with lousy skiing weather.

Key US economic data releases

It is another uninspiring week for US data and the data that is released will be overshadowed by the FOMC minutes and the Jackson Hole Symposium.

Tuesday: July CPI (Forecast 2.0%, year-over-year [yoy], ex-food and energy 1.9% yoy). This data should have little to no impact ahead of the Jackson Hole Symposium.

Tuesday: July Housing Starts (Forecast 970,000). This data is expected to show an improvement over the June figures and be modestly US dollar positive.

Thursday: July Existing Home Sales (Forecast down 0.4%). A small dip from the June numbers will still be seen as a positive for the US dollar as the housing market recovers.

Key Canadian economic data releases

Friday: July CPI (Forecast 2.3% y/y, Core 1.9% y/y). An upside surprise in this month’s release would lead to speculation that the Bank of Canada would have to remove the word "Temporary" when it describes inflation gains. A better-than-expected print would boost the Canadian dollar.

Friday July Retail Sales (Forecast 0.3% m/m, ex-autos 0.3% m/m). If Retail Sales manages to beat expectations along with CPI, USDCAD will be testing support in the 1.0830-60 area. However, there is a risk that Retail Sales will disappoint and offset any rise in CPI.

USDCAD Outlook

The lack of Canadian data releases for most of the week leaves the Loonie exposed to the ebbs and flows of the US dollar vs. the majors. Last Friday’s employment report has been digested, and USDCAD is sitting right where it was before the release. One of the key reasons to justify a weaker Canadian dollar this year is the perception that US economic gains will greatly outpace those in Canada. That conclusion may be unjustified.

The recent US economic data releases have been uneven while the Canadian data has been relatively strong. Anecdotally, on a trip to Michigan and Ohio this weekend, one was hard- pressed to find evidence of a robust US economy. The parking lots of large shopping malls were never more than half-full even during peak shopping times. A Costco in Toledo had fewer than half the shoppers that a Canadian Costco had at a comparable time. The windows were boarded up at a large national chain restaurant and "For Sale" signs populated the area. Granted, the observations were certainly not scientific and the sampling base was beyond microscopic but the point is that the Detroit, Michigan area certainly doesn’t reflect any evidence of a US economic recovery.

The lack of Canadian data and the pending FOMC minutes and Jackson Hole Symposium point to a continuation of the 1.0860-1.0940 trading range. However, Friday’s Canadian data could change that. If the data surprises to the upside, USDCAD should probe support in the 1.0830 area.

USDCAD technical outlook

The short-term USDCAD technicals are bearish while trading below 1.0905, looking for a break of support in the 1.0870 to extend losses to 1.0830. A break of this level would expose 1.0730. A move above 1.0905 could extend to 1.0940, which, if it holds, confirms further 1.0860-1.0940 consolidation.

Chart: USDCAD 4-hour

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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