Loonieviews end of week September 12, 2014


US dollar demand due to pause ahead of FOMC

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

• Hawkish hopes for FOMC drive US dollar higher
• Plenty of event risk on tap for next week
• USDCAD poised for further gains

By Michael O’Neill

USD retail sales met expectations and were enough to keep the downward pressure on the commodity currencies as traders train their sights on a nest of event risk next week. Meanwhile, the UK government is continuing to step up its efforts to stave off Scottish independence as a flurry of polls show support for No just a few points ahead of the Yes campaign. However, GBPUSD has yet to recoup all of this week’s losses.

Loonie slides on oil slick

It hasn’t been a great week for the Canadian dollar, being over 1.5% this week. However, compared to AUDUSD, (down 3%) the Canadian dollar has performed fairly well. At issue is the fall in commodity prices sparked in part by concerns that China’s economy is slowing. The Canadian dollar is under duress after widespread negative sentiment stemming from the Bank of Canada’s governor Stephen Poloz reminding markets that domestic rates won’t necessarily follow US rates higher. A key ingredient to the USDCAD rally has been the re-correlation of the Loonie to WTI, a relationship that has re-exerted itself since the beginning of August. If so, further declines in WTI don’t bode well for the Loonie.

Chart: WTI and USDCAD

Source: Saxo Bank

USDCAD outlook

USDCAD bulls have sunk their horns into the diverging interest rate outlook between Canada and the US, which resulted in a rally from 1.0815 less than two weeks ago to 1.1060, currently. The US economy is on a roll and growth is accelerating. The prospect of an ongoing slowdown in China will undermine the commodity bloc of which Canada is a member. The BoC is seen as doveish and a tacit supporter of a weaker currency. The elevated housing market prices and fears of a correction are still viewed by many as a key risk to the Canadian economy.

USDCAD technical outlook

The USDCAD technicals are bullish. A short-term low is in place at 1.0830, confirmed by the break of resistance in the 1.0930-60 area and supported by the breach of 1.1055, which now targets a retest of the July 1.1270 high. A move below 1.0970 would negate the upside pressure. A break of 1.1080 puts 1.1122, the 76.4% Fibonacci retracement of the 2014 March to July range in play.

For the week ahead, USD support is at 1.1030, 1.1005 and 1.0980. Resistance is at 1.1120, and 1.1160.

Chart USDCAD 4 hour with Fibonacci.

Source: Saxo Bank

The week that was

It was a lively week. It started with traders being hit upside the head with a poll result – a YouGov poll that showed support for the Yes side in the Scottish referendum at 51%. Cable tanked and UK parliamentarians were finally galvanised into action.

A San Francisco Fed report suggesting that the market may be behind the curve with respect to the Federal Open Market Committee’s (FOMC) interest rate intentions late on Monday fuelled US dollar gains on Tuesday and key levels were broken in USDJPY and AUDUSD.

The UK chancellor George Osborne started the week with a timetable for extra tax-raising powers for Scotland should its people opt to stay in the UK. Photo: Peter Macdiarmid / Getty

Wednesday was particularly lively. GBPUSD was poll-axed early on anticipation of another negative referendum poll but instead of another "Yes" side lead, the table was turned and the ‘No" side were ahead by 6%. Bank of England governor Mark Carney added to the excitement by mentioning that the time for a rate hike had moved closer. A Swiss National Bank (SNB) official sent CHF tumbling when he opined about the SNB being open to negative rates.

Thursday started with Australia posting phenomenal job gains (121,000) but even Statistics Australia didn’t believe the number. A 0.0060 point spike higher evaporated in seconds and AUDUSD has been falling ever since. The Reserve Bank of New Zealand’s (RBNZ) interest rate statement was doveish, which drove NZDUSD lower. The Canadian dollar took over the role of the Aussie dollar during the New York session, with USDCAD punching through strong resistance in the 1.1030-60 area to reaching 1.1070 before pausing.

The week that will be

The third week of September may bring a slightly less exciting FX market than this week’s version. This is mainly due to the assumption that repositioning ahead of Thursday’s anticipated hawkish FOMC statement has already occurred.

That said, there are plenty of regional influences that can disrupt specific currency pairs beginning on Tuesday. The release of the minutes from the Reserve Bank of Australia (RBA) may fuel additional AUDUSD selling if they imply any new doveish sentiment. Eurozone ZEW data may further undermine EURUSD although a slew of UK data is likely to be ignored ahead of the Scottish independence referendum on Thursday.

Wednesday’s focus will be the FOMC meeting although it comes too late for the European traders. Those traders will concentrate on Eurozone CPI, BoE minutes and US CPI. The Eurozone CPI data may have minimal impact because of the earlier stimulus measures announced by the European Central Bank. The Bank of England minutes are also due but their impact will be overshadowed by the looming Scottish referendum. A robust US CPI report will encourage sentiment for a hawkish FOMC statement

Thursday is a gigantic day for the future of Scotland and the UK. Exit polls before the Scottish vote could create some wild spikes in sterling and sterling crosses while Retail Sales data gets ignored. Meanwhile, fallout from the FOMC statement will dictate trading in Asia.

Friday will see the week close out with either a new independent country and GBPUSD free-falling or else it will see a wealthier, more powerful Scotland and GBPUSD still trading lower.

Recap

The prospect of a hawkish FOMC statement in the face of a booming US economy has given a green light to traders to buy US dollars, and they have, with a vengeance. Sterling has sunk on Scottish referendum risks and even Mark Carney talking about higher UK rates hasn’t stemmed the outflow. The question is "how much is enough?" There are a lot of data releases between now and Q1 2015 and the question of US employment slack" has not been answered. Geopolitical risks are rising again, with Obama leading the antagonism against Russia while declaring war (limited, of course) on ISIS. It is hard to see the US dollar making a lot more headway until at least Thursday. This suggests that the price action for the first half of the week will be mostly consolidation.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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