Loonieviews August 29, 2014

USDCAD fading as fast as August

Michael O’Neill

FX Consultant / IFXA Ltd


  • 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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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