LOONIEVIEWS SEPTEMBER 30, 2014


LOONIEVIEWS

USDCAD Open 1.1167-72 Overnight Range 1.1139-75

USDCAD made another feeble attempt at breaking intraday support in the 1.1130-40 area which was rebuffed and is now probing resistance in the 1.1175-80 area on the back of general US dollar strength. The US dollar turned bid in Europe, aided by another weak Eurozone inflation report and ongoing Eurozone and US economic and interest rate divergence. Today’s Canadian GDP data may provide some support to the Loonie although month end rebalancing flows may eliminate that benefit.

The intraday USDCAD technicals are bullish while trading above 1.1140 with a break of the 1.1180-90 resistance area leading to a return to the 2014 peak of 1.1274. A dip below 1.1140 may lead to a retest of 1.1080. For today, USD Support is at 1.1140, 1.1110 and 1.1090. Resistance is at 1.1180-90, 1.1210 and 1.1270

Today’s Range 1.1150-1.1250

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29 September, 2014 10:26


Goldilocks and the USD bears

Michael O’Neill Michael O'Neill FX Consultant / IFXA Ltd
Canada

  • Kiwi chasing Goldilocks
  • US bulls crowding on bandwagon
  • Geopolitical tensions shift to Asia

By Michael O’Neill

FX markets have got off to a lively start as September fades into October. The old adage that "actions speak louder than words" was proved yet again, during the New Zealand session. New Zealand’s prime minister John Key started talking about currency intervention and the "Goldilocks" level for the New Zealand dollar and before you could say "who’s been eating my porridge?", the Kiwi collapsed. Confirmation that the Reserve Bank of New Zealand intervened to sell NZDUSD in August didn’t hurt. Meanwhile, EURUSD is consolidating ahead of Tuesday’s Eurozone CPI data in a market that is very scarce of US dollar bears.

It’s standing room only on the USD bandwagon

The bandwagon is packed. US dollar bulls are crammed cheek by jowl on every available surface and more bulls are trying to board. And why not? The best performing G7 currency against the US dollar this month was Sterling and it lost 2%. The worst performer was the Kiwi, which shed 7.5%, much to the joy of the central bank.

The main drivers of the dollar rally are the diverging US and Eurozone economies and interest rate projections. Other factors include concern that the Chinese economy is slowing, which is driving down commodity prices as well as central bank verbal and actual currency intervention used to weaken individual currencies against the US dollar.

What could go wrong?

How much is a quarter point bump (from 0-0.25% to 0.25%-0.50%) really worth in terms of US dollar strength vs. G7? The fact that US interest rates are going up some time in 2015 is no secret. The secret is, by how much, how often and to what level? Arguably, the 7.8% drop in EURUSD this year is more than adequate compensation for the risk of a quarter-point bump in US rates, possibly six months in the future.

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While Ukraine has suffered from enormous levels of unrest this year, global focus has currently turned to tumult in Hong Kong. Photo: AndreyKrav

This week’s US data is widely expected to continue to provide evidence of a rapidly improving economy, with Friday’s nonfarm payrolls report the icing on the cake. Conversely, this week’s Eurozone data is anticipated to be soft, underlining the necessity for additional stimulus by the European Central Bank (ECB). The stimulus question may be answered on Thursday when the ECB releases its monetary policy statement. The FX market is long dollars and has been well rewarded and therefore is likely to be quick to protect its gains. It won’t take much of a deviation from expectations to spook the bulls into a stampede for the exits.

Exit Russia/Ukraine, enter China/Hong Kong

Geopolitical tensions remain elevated despite Russia and Ukraine dialling back the rhetoric and bloodshed. That is probably because China has stepped up to fill the void. China is dealing with major unrest in Hong Kong as students are demanding China keep its 1997 promise to allow Hong Kong to democratically elect its leader rather than have Beijing appoint one. The Chinese leadership responded with riot police and tear gas.The Arab Spring started with a protest in Tunisia, which the Chinese President Xi (not Eleven as an Indian reporter called him) Jinping is fully aware of. He won’t tolerate a China Autumn. Asian emerging market currencies may see some risk aversion volatility but the G7 currencies will ignore the story until troops move in.

USDCAD Technical outlook

The intraday USDCAD technicals are bullish while trading above 1.1140, looking for a break of the overnight high at 1.1176 to extend gains through 1.1190 resistance towards 1.1274. However, a move below 1.1140 opens up the risk of a quick drop to 1.1080.

Chart: USDCAD 30-minute
usdcad
Source: Saxo Bank

Key US data releases

Tuesday: September Consumer Confidence (Forecast, 92.5). A modest increase is expected, which would be the fifth consecutive monthly increase. However, the effect on US dollar trading will be minimal at best.

Wednesday: September ISM Manufacturing PMI (Forecast 58 vs. August 59). The expected drop from August is mainly because August represented 3-year highs. The risk is that a bigger-than- expected drop supported by a miss in the Markit PMI data could lead to US dollar selling exacerbated in a long US dollar environment.

Friday: September Nonfarm Payrolls (Forecast 203,000, Unemployment rate 6.1%). The FOMC has decreed that labour slack is a key hindrance to higher rates, giving Friday’s volatile data even more weight.

Chart: Change in US nonfarm payrolls
nfp
Source: TradingEconomics.com /US Bureau of Labour Statistics

Key Canadian data releases

Tuesday: July Real GDP (Forecast 0.2%, month over month). The USDCAD rate will have a bigger reaction to a worse-than-expected number than a better-than-expected number, mainly because FX traders are looking for additional confirmation to their bullish USDCAD view.

Friday: August Merchandise Trade (Forecast $1.55 billion vs. July $2.6 billion). Canada posting trade surpluses is nothing new and another positive result would be the sixth in seven months although the data will be lost in the NFP furore.

Loonieviews End of week September 26, 2014


Loonie may surprise in event-filled week

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • Next week filled with flow, data and event risk
  • USDX gains defy gravity
  • Loonie outlook better than prevailing sentiment

By Michael O’Neill

The commodity currency bloc was the ISIS of the FX market this week, with everyone lining up to take pot shots at it. To be fair, the Kiwi suffered self-inflicted wounds when Graeme Wheeler, the governor of the Reserve Bank of New Zealand, used the opportunity of a rising US dollar to complain about the high value of the NZDUSD.

The week that was

Monday started with the AUD and the NZD under pressure while Sterling traders fretted over the Bank of England governor Mark Carney’s impending speech, due Thursday. US equity indices were starting to bend under pressure.

Tuesday’s Japanese Autumnal Equinox holiday made for a quiet Asian session while European PMI releases only attracted mild interest from traders. News that the US and friends had launched airstrikes against ISIS targets in Iraq and Syria provided a distraction and perhaps a slight shift towards risk aversion. US equity indices continued to drift lower.

Wednesday should have been quiet due to a lack of meaningful US data. It wasn’t. USDCAD shot north and EURUSD headed south despite no clear catalysts for the moves. US equity indices recovered slightly.

Canada’s retail sales figures have dipped but are still 5% up on last year. Photo: FogStock

Thursday started with a blurb, specifically an official RBNZ website statement, written by the governor and entitled "Why the NZ exchange rate is unjustified and unsustainable". Not surprisingly, the Kiwi led the commodity currencies lower. The Bank of England’s Mark Carney talked of higher rates. The ensuing bounce in GBPUSD was small and unsustained. The US Durable Goods data was not a factor, delivering an as-expected result. US equity indices were beaten up. The Dow Jones Industrial Average was down 1.54% and the S&P down 1.44%.

The week that will be

There will be plenty of opportunities for traders in this action-packed week. Month end/quarter end portfolio rebalancing and repatriation flows combined with a smattering of Eurozone CPI data, German employment reports, UK GDP and US home sales will dominate trading on Monday and Tuesday.

The midweek trading fodder includes Euro-area PMIs, Eurozone GDP and US ISM manufacturing PMI, with the ADP employment report providing a hint of the nonfarm payrolls result.

Thursday is all European Central Bank (ECB). The interest rate statement and Mario Draghi’s press conference will provide the usual entertainment and perhaps more so this month with traders looking for more details on the ECB’s likely quantitative easing (QE) programme.

The monthly US nonfarm payrolls release wraps up the week and the consensus forecast is for a gain of 203,000 jobs. With the Federal Open Market Committee’s (FOMC) tapering programme winding down and US Federal Reserve chairman Janet Yellen’s fixation on "employment slack", the employment data carries an elevated, even if unwarranted, weight on the interest rate hike timing discussion.

US dollar index defying gravity

The US dollar index has climbed to levels unseen since July 2010 after breaking major resistance in the 84.95-85.05 area, and has its sights set firmly on 86.70. However, the steepness of the rise warns of a consolidation pullback towards the 84.50-75 level.

Chart: USDX 4 Hour

Source: Saxo Bank

USDCAD Outlook

The Canadian dollar’s label as a commodity currency is exposing it to further losses as the perceived economic slowdown in China undermines the commodity bloc. At the same time, increasing interest rate divergences between Japan and the Eurozone have led to a widespread US dollar rally.

The Canadian dollar has suffered on the interest rate front due to the perception that Canadian rate hikes will lag behind those of the US. That perception is based on reality since both the governor and a deputy governor of the Bank of Canada have stated that it is so, provided that economic conditions warrant it.

That proviso should give the USDCAD bulls some pause. The domestic economy is performing better than expected. Inflation is rising. Manufacturing is up and, as JP Morgan noted in a recent report, 16 of the 21 major groups accounting for 56% of total manufacturin reported increases in July.

This week’s dip in Retail Sales follows a string of gains and they are still up 5% from last year. The source of the improving Canadian economic performance is easily to trace-directly south to the Land of Lincoln. The ever-improving prospects of sustainable US economic growth, which is further supported by today’s 3Q US GDP print of 4.6%, bodes well for growth north of the border as well.

The BoC will not remain on the sidelines as the US rate increases and as the Bank of Canada’s governor Stephen Poloz noted in a speech earlier, Canadian overnight rates are already above those of the US. If all this plays out and commodity prices don’t collapse, those calling for USDCAD to test 1.1500 in Q1 2015 will be sorely disappointed.

USDCAD technical outlook

The short-term USDCAD technicals are bullish and in a steep uptrend channel bordered by 1.1095 on the bottom and 1.1160 on the top. Resistance between 1.1130-60 is slowly being chipped away with a break targeting 1.1190 and then the 2014 high of 1.1274. However, the intraday technicals warn that this week’s uptrend line from 1.0945 was broken on the move below 1.1115 overnight which will lead to the 1.1050-60 area on a break of 1.1095. For next week, USDCAD support is at 1.1095, 1.1050 and 1.1010. Resistance is at 1.1135-1.1160 and 1.1190.

Forecast Range for next week: 1.1050-1.1190.

Chart: USDCAD hourly

Source: Saxo Bank

Loonieviews September 25, 2014


LOONIEVIEWS

USDCAD Open 1.1110-13 Overnight Range 1.1060-1.1113

The Canadian dollar was the best performing G-7 currency and Kiwi was the worst in a lively overnight session that saw the US dollar rally against everything. The RBNZ governor torpedoed NZDUSD with a statement headlined "Why the NZ exchange rate is unjustified and unsustainable". EURUSD crashed through minor support at 1.2750 and dropped another 0.0050 points while USDJPY climbed back above 1.1100. The improving US economic outlook and the risk of higher rates, sooner rather than later has breathed new life into the US dollar. Today’s US Durable Goods data and Markit PMI’s may reinforce that view.

Canadian dollar demand against EUR and GBP has acted as a drag on Canadian dollar weakness from US dollar and JPY demand.

The intraday USDCAD technicals are bullish while trading above 1.1090 looking for a break of 1.1130 resistance to extend gains to the 1.1150-60 area and then 1.1190. Above 1.1190 is a straight shot to 1.1270. A move below 1.1080 will lead to 1.1050-60.

Today’s Range 1.1090-1.1150

Loonieviews: September 24, 2014


Is this a midweek muddle up, down or sideways?

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Recommend

  • USDCAD technicals bullish on break of key resistance
  • Pending data may cause positions to be re-evaluated
  • Risk aversion not a reality

By Michael O’Neill

It’s the middle of the week and FX markets are as skittish as a squirrel at a Hillbilly picnic.

The violation of Syria’s sovereignty in a quasi-invasion by a US-led coalition in pursuit of Islamic State militants has all the makings of a "risk-off" scenario.

Added to the mix was Israel shooting down a Syria fighter jet and the shooting dead of a terrorist suspect in Australia after he attacked two police officers.

Meanwhile, even as Russia troops are pulling back from the Ukraine border, the US continues to goad Russia by announcing the sale of mid-range missiles to Poland.

FX markets are watching these developments with indifference, preferring to focus on speeches by Federal Open Market Committee members or European Central Bank officials.

Regroup, rethink and reload

The G-7 currencies (with the exception of GBPUSD) have given up a lot of territory to the US dollar over the past week. The key driver has been US data and speculation over the timing of the first US interest rate hike.

Traders will be focused on US data for the balance of the week as they regroup, rethink and reload ahead of next week’s month- and quarter-end portfolio rebalancing flows, ECB meeting and nonfarm payrolls.

Thursday’s headline Durable Goods data will not be much of a factor, as a big decline from the previous month’s blow-out result is almost a given.

However, any disappointment in the remaining data, jobless claims or Markit PMI will reheat the "considerable time" debate. Friday’s GDP figures and Reuters Michigan Consumer Sentiment Index pose similar issues.

Recapping USDCAD pro’s and con’s

USDCAD pro’s:

  • Falling commodity prices, particularly WTI oil.
  • Economic slowdown in China.
  • Widening long-term US and Canada interest rate differentials.
  • General US dollar strength vs. majors.
  • FOMC deputy governor’s speech viewed as doveish.
  • International investors continue to view Canadian housing market with jaded eye, remaining concerned about correction.

USDCAD con’s

  • Rising Canadian CPI reduces Bank of Canada’s ability to remain doveish.
  • Canadian dollar demand against EUR and JPY offsets some general US dollar strength.
  • Rapidly improving Canadian economic data (except employment) including manufacturing shipments.
  • Last week’s BoC governor’s speech viewed as shifting from "neutral doveish" to "neutral hawkish".
  • Canada Mortgage and Housing Corporation reported yesterday that the current House Price Analysis and Assessment results show "that despite some overvaluation there are no immediate problematic housing market conditions at the national level".

Conclusion

The Canadian dollar remains vulnerable to falling commodity prices and rising US interest rates, which explains the widespread bullish USDCAD bias. The BoC governor’s admission in an interview at the Jackson Hole Symposium that "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,” was tantamount to giving a green light to sell Canadian dollars.

With the spotlight continuing to shine on US rate expectations and the risk of Canadian dollar selling into month- and quarter-end, USDCAD is likely to grind higher, albeit in a choppy, churning manner.

USDCAD Technical outlook

The short-term USDCAD technical’s are bullish while trading above 1.0940. The intraday uptrend remains intact while trading above 1.1060 and this morning’s breech of strong resistance in the 1.1090-1.1110 area puts the 1.1135-50 area in play.

A break of his area targets the 2014 peak of 1.1270. A move below 1.0990 and then 1.0960 risks a retest of 1.0880. USD support is at 1.0990, 1.0960 and 1.0920. Resistance is at 1.1120, 1.1135, 1.1150 and 1.1190.

USDCAD daily with target

Source: Saxo Bank

– Edited by Oliver Morrison

Loonieviews September 23, 2014


LOONIEVIEWS

USDCAD Open 1.0998-03 Overnight Range 1.0990-1.1046

Commodity Bloc currencies are bouncing on the China trampoline; down on weak data and higher on stronger data. Last night was no exception. Slightly better-than-expected HSBC PMI data (Actual 50.5 vs. forecast 50.0) kept the Loonie in demand throughout the European session. Mixed Eurozone data was largely ignored. There was plenty of action but mostly militarily. The USA and friends launched bombing and missile strikes at ISIS bases in Iraq and Syria while Israel shot down an interloping Syrian fighter jet.

Canada serves up July Retail Sales data today which is expected to surpass forecasts of 0.5% and 0.0% for Core. If so, look for a test of 1.0950.

The intraday USDCAD technicals are bearish while trading below 1.1015 with a move through 1.0990 putting 1.0950 in play. A break above 1.10230 argues for further topside gains to 1.1050.

Today’s Range 1.0950-1.1020

Loonieviews September 22,2014


Autumn arrives with a big dollar bang

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

Recommend

  • USDX may herald short-term consolidation
  • ISIS creates strange allies but FX markets don’t care
  • Loonie doesn’t know if it’s coming or going

By Michael O’Neill

Today marks the first day of autumn, which for those of us of a certain age, is also a day late. There was a time when the solar system had nine planets, the seasons always started on the 21st day and the US dollar was strong. Two out of three isn’t bad. A series of weak economic data reports from China in August coupled with the Chinese Finance Minister Lou Jiwei’s acknowledgement that growth in China faces downward pressures, managed to further undermine commodities. It also gave the US dollar a fresh bid.

Former FX trader John Keys not only kept his job as Prime Minister of New Zealand but also enhanced his position by winning a majority of seats, something not seen since 1996. Alas, the Kiwi’s initial gains were unsustainable due to the sell-off in the commodity bloc.

Today’s 1.8% drop in US Existing Home Sales was a surprise to forecasters but FX traders ignored the data. It may just be a delayed reaction as the USDX has stalled at resistance.

US dollar index testing topside resistance.

The US dollar bulls are in command. So says the US dollar index (USDX), which is probing resistance in the 84.85 area, a level unseen since June 2013. In fact, you have to go all the way back to July 2010 to see the last time it surpassed this level. But that doesn’t mean it won’t. In 2010, the range for Fed Funds was right where it is now, 0-0.25%. The difference is now the door is open for a rate hike, which is expected to be the first of many. However, the Federal Open Market Committee (FOMC) statement does not appear to be as hawkish as last week’s US dollar rally would suggest. In fact, the absence of top-tier US data this week, coupled with last week’s USDX gains, suggests that we may get a period of consolidation this week.

Chart USDX with steep uptrend and resistance noted

Source: Saxo Bank

Loonie struggles for direction

Autumn has arrived and even though it heralds the start of the migratory birds’ annual southern trek, there is one bird that doesn’t know if it is coming or going. The Loonie has failed miserably when attempting to break out above 1.1100 or below 1.0800. The pattern is likely to continue for the rest of the month although there is a definite bullish bias to USDCAD.

The economic data, with the exception of the unreliable employment report, has been supportive to the Canadian dollar, which has helped to put a lid on USDCAD strength. Last week’s Bank of Canada governor’s speech has been interpreted by many as evidence that the BoC has shifted from a doveish bias. Tomorrow’s Retail Sales report may add another layer of support. However, the increase in long-term US bond yields has widened the interest rate differential between the US and Canada and that has provided additional support to the USDCAD.

Chart: USDCAD Daily

Source: Saxo Bank

ISIS invites strange bed-fellows

US State department flunkies can be forgiven for not knowing the enemy du jour ever since the Islamic State of Syria and Iraq (ISIS) first waved their black flag. Iran will jump aboard the "Stop ISIS" bandwagon if the UN gets off their "Stop Iran Nukes" soapbox. Turkey is being accused of colluding with ISIS for a hostage exchange even as the country is inundated with thousands of Syrian refugees. Russia, a permanent member of the UN Security council, is even contemplating co-operating with other nations to fight ISIS, perhaps with a reduction in sanctions as an incentive. All this news has met with massive indifference to FX traders. There isn’t a lot of evidence to support a shift into risk aversion as both CHF and JPY are weak.

Key US data releases

Tuesday: Markit Manufacturing PMI (Forecast 58.0 vs. previous 57.9).

Wednesday: August New Home Sales (Forecast 433,000 vs. July 412,000). Strong data will support the US dollar on the economic recovery story although gains may be limited as strong data is expected.

Thursday: August Durable Goods Orders (Forecast down 19% vs. previous 22.8% gain). Any number that doesn’t have a minus side in front of it will be a surprise and give the US dollar a bid.

Friday: Q2 GDP: (GDP Forecast 4.5%, annualized, Deflator 2.1%). Strong data is expected so a miss would undermine the US dollar.

Q2 Personal Consumer Expenditures: (Forecast PCE2.3%, Q2 Core 2.0% quarter over quarter).

Reuters Michigan Consumer Sentiment Index (Forecast 84.7 vs. prior 82.5).

Key Canadian data releases

Tuesday: July Retail Sales (Forecast 0.4% month over month). Auto sales are expected to drive this data higher and an upside surprise would give the Loonie a boost.