Loonieviews Endo fo Week Augg.22, 2014

Wish for hawkish Jackson Hole speech not granted

Michael O’Neill

FX Consultant / IFXA Ltd


  • 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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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