Loonie back from the brinkw
FX Consultant / IFXA Ltd
• Scotland opts to remain a blend and not a single malt
• Range trading ahead on light data
• Loonie reverts to tried and true range
By Michael O’Neill
North American traders arrived at their desks this morning to discover that Scotland is still part of the United Kingdom. Scottish voters are now wondering if the UK prime minister David Cameron will deliver on the pre-ballot promises of more devolution offered by the Better Together campaign. USDJPY made a new 2014 high and then retreated sharply, which could mean that a short-term consolidation phase is occurring. Meanwhile, USDCAD plunged on higher-than- expected Core CPI, which triggered stops and turned the technicals bearish.
Coca-Cola has taken recent steps to expand its standing in the soft drinks market. Photo: Getty
The Pause that Refreshes
The "Pause that Refreshes" was a Coca-Cola slogan in 1929 and will be as applicable next week as it was back then. The past couple of weeks have seen FX volatility spike and trading volumes rise, which is a welcome relief from the cautious, low volume markets seen over the last few months. Sure, individual currencies all enjoyed intermittent bouts of activity but it was rare to see sustained action simultaneously across the G7 spectrum.
The week just ending will be a tough act to follow. The new week lacks central bank policy action and very little in the way of top-tier data which, unfortunately, doesn’t bode well for a continuation of the FX churning and burning that we have come to enjoy. Instead, it is likely to be another week of consolidation and position adjustment or squaring due to a lack of top-tier data. In addition, the end of September marks the Japanese half-year end, which usually puts a damper on JPY and JPY cross trading. Furthermore, the USDJPY rally from mid-August has been rapid, steep and approaching levels not seen since 2008, which is arguing for a pause.
The week that was
It was a highly entertaining week full of big FX moves, Central Bank activity and political intrigue. Monday started with disappointing data from China and news of a new government in Sweden. Pre-FOMC meeting jitters led to US dollar selling against most of the majors as traders revisited the previous week’s "hawkish FOMC" conclusion.
Tuesday saw a continuation of US dollar selling exacerbated by a Wall Street Journal column that gave considerable time to the phrase "considerable time" and its place in the pending FOMC statement. The Loonie rallied on a speech by the Bank of Canada governor announcing that "manipulating or trying to guide (markets) is not in our game plan" proving that many traders are gullible. The 800 pound gorilla in the room was Sterling as Scottish independence referendum poll concerns and speculation on break-up fallout governed trading.
The Wednesday session was the "eye of the hurricane", eerily calm and quiet until the US afternoon FOMC statement and the Janet Yellen press conference. Traders noted the shift in the dot plot, with the dots reflecting much higher rates in 2016 and 2017 then futures were pricing. The US dollar soared vs. the majors.
Thursday was volatile. Traders appeared to have second thoughts about their "hawkish" conclusions for the FOMC and the US dollar became offered, except against JPY. The ECB’s targeted LTRO was big news and a surprise to many who expected a much larger number (Actual 82. 6 billion vs. estimates of 100-150 billion). The UK was haunted by the Scottish referendum voting and anticipation of a "No" side victory helped GBPUSD rally.
The week that will be
There will be political drama to start the week with a very close New Zealand election on Saturday. The incumbent’s National Party is ahead in the polls but not with enough seats to secure a majority. The highlight in the Eurozone is ECB President Mario Draghi’s speech on Monday.
Japan is closed for Autumnal Equinox day on Tuesday. China leads a parade of PMI releases followed by the Eurozone and the US with Canadian Retail Sales also on tap.
Wednesday will likely be dull but Thursday, AUDUSD traders will be focused on the RBA governor’s speech ahead of the RBA annual report. US Durable Goods data could provide a brief flurry of activity but is unlikely to surpass last month’s blow-out number.
Friday’s US GDP and Reuters Michigan Confidence data will close out what is likely to be a dull week
The Loonie is back from the brink
The Canadian dollar has shown a degree of resilience that has made a mockery of the earlier, long-term forecasts projecting USDCAD to test the 1.1500-1.1700 levels in 2014. Every time USDCAD looks as if it will launch into orbit, the rocket ship crashes and burns. A week ago, the break above resistance at 1.1030 turned the technicals bullish, suggesting that not only was a short-term bottom in place at 1.0930 but that it was only a matter of time before the 2014 peak of 1.1270 was revisited. Today’s higher-than-expected Canadian Core CPI (Actual 2.1% vs. forecast 1.8%) may not be the final nail in the coffin of USDCAD bulls but it certainly one of many.
The Bank of Canada told the world that it does not have any interest in manipulating the currency, which may have convinced the market that it is not deliberately undermining the currency. Earlier in the year, below target inflation was noted as a major concern by the BoC, leading to speculation of a rate cut. The governor dismissed previous CPI gains that were "above-expectations", as temporary blips. Today’s CPI data may be hard to dismiss. Judging by the USDCAD sell-off, the market may be anticipating that Poloz may toss in the towel on that view.
USDCAD technical view
The intraday USDCAD technicals are bearish and targeting a retest of 1.0830. This week’s failure at 1.1100 and subsequently at 1.1035 suggests that a short-term top is in place at 1.1100, which was confirmed by the move below 1.0930. The downtrend will meet resistance from the short-term uptrend line at 1.0880. However, the longer term uptrend from the September 2013 low in the 1.0190-1.0210 area remains intact above 1.0750.
Forecast Range for next week 1.0830-1.0980.
Source: Saxo Bank