Loonieviews Mid week October 1, 2014


Bullish dollar sentiment hauls Loonie along for the ride

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • ECB unlikely to bolster EUR
  • Dollar index still pointing higher
  • USDCAD struggling to extend gains

By Michael O’Neill

2014 has made the clubhouse turn and is now galloping along the homestretch to the finish line. Back in January, "USD Rally" was the favourite horse to win the race while "Mr. Euro" was destined for the glue factory. Those predictions are looking very good as EURUSD is the worst performing currency in the G7, down 8.45%, year-to-date. Despite this, the US dollar rally in September has been widespread and resilient. Pullbacks have been shallow and long-term resistance levels have crumbled. Currently, the US dollar is approaching major support areas in the G7 currencies. EURUSD appears destined to fall further to the back of the pack after Thursday’s European Central Bank (ECB) interest rate decision, policy statement and press conference. This morning’s Euro area PMIs were mixed but the combined weakness in the German PMI (Actual 49.9 vs. 50.3 expected) and the Eurozone PMI (Actual 50.3 vs. 50.5 expected), added to Tuesday’s soft inflation data, elevate the risk of additional stimulus action.

Captain America-The Winter Dollar

The US dollar is something of a superhero like Captain America, but rather like the comic character, it appears to have ideas above its station. Photo: iStock

Captain America is a fictional superhero but lacks super powers. In other words, he is a bit of a fraud. The same could be said about the US dollar. It is performing like a super currency yet its economic performance powers, according to the most recent Federal Open Market Committee (FOMC) statement, are only "expanding at a moderate pace" with "significant underutilisation of labour resources" while "fiscal policy is restraining economic growth".

The fast and the furious

The latest US dollar rally has been fast and furious with some suggesting that it is overdue for a correction. The arguments may be sound but picking tops and bottoms in this market is like catching falling knives. Fresh ECB stimulus action and a higher-than-expected nonfarm payrolls report will make a mockery out of the major support levels; the ECB, because it may be moving to a Quantitative Easing programme and NFP because it would elevate the probability of higher US rates sooner than currently forecast. However, this morning’s ADP employment report showed a small gain above the forecasts, which could mean that a reduced risk for a large gain in NFP.

Dollar index supports further gains

The US dollar index, (USDX) broke major resistance last week in the 85.00 area and its subsequent rally above 85.60 points to further gains towards the 86.70-87.25 area, levels not seen since 2010. However, the uptrend is line is very steep, which suggests corrections could drop back to 85.00, which should now act as support.

Chart: USDX 5-year daily with long term resistance

Source Saxo Bank

Canadian dollar outlook

USDCAD is making a strong push back to the 2014 peak on the back of general US dollar strength, doveish comments from the Bank of Canada (BoC), the selling of Aussie and Kiwi dollars, weak commodity prices and recent soft economic data (July GDP). That may explain the rally from mid-September but arguably pricing above 1.1200 reflects all those negatives. The outlook for EURUSD is much lower on possible new ECB stimulus actions and divergent ECB/US interest rate paths, which will drive EURCAD lower in the process. Yesterday’s, Canadian GDP data release was rather stale information, with August and September economic data suggesting a much stronger Canadian economy thus proving that expanding US economic activity can spill north of the border.

USDCAD technicals

The break of key resistance in the 1.1190-1.1210 area targets 1.1274. However, the intraday technicals are bearish with the move below 1.1190, supported by the loss of 1.1175, which opens up a drop to 1.1130 and then 1.1080. However, the dominant trend is still higher. The USDCAD short-term technicals are bullish while trading above the trendline from mid-July, which comes into play at 1.0940.

Chart: USDCAD Intraday chart exposing downside risks

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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