Loonieviews September 22,2014


Autumn arrives with a big dollar bang

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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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.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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