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

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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