Loonieviews End of Week October 3, 2014


Loonie under pressure and sees 1.1700 on the charts

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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  • US dollar surges on better-than-expected nonfarm payrolls
  • USDX is at significant resistance
  • 1.1700 is not an unreasonable USDCAD target

By Michael O’Neill

The US dollar has surged following the better-than-expected US nonfarm payrolls report ignoring the fact that the two-month total is merely 195,000. Is it really worth a big figure decline in EURUSD? The fact is that the Fed is on track for raising rates in the first half of 2015 and this data doesn’t change that. Does it really matter if it’s March or April? Apparently, yes since the US dollar has kept its gains. The recent US data has mostly met expectations although Home Sales and inflation are on the soft side, suggesting that there isn’t any more urgency to hike rates today then there was last week.

Chart: Change in US employment

Source: TradingEconomics.com

US dollar Twilight

FX traders smell blood: the blood of a US dollar bear, and like any self-respecting vampire, they have gone for the jugular. The question is "How long before they drink the bear dry?" The US dollar index suggests that the bear may be dry now. A number of G7 currency pairs have tested and been rejected from major support/resistance levels including the Yen, the Euro and the Kiwi.

The US dollar index (USDX) is flirting with strong resistance in the 86.70-90 area, last seen in June of 2010. The steep rise today and this week argue that a period of consolidation is due. The lack of major US data releases until the Federal Open Market Committee (FOMC) minutes supports this view.

USDX Daily with long term resistance shown

Source: Saxo Bank

USDCAD outlook

USDCAD has been fairly volatile within the broad 1.1080-1.1270 range this week and, as usual, as it approaches the top end, it is looking very bid. The Canadian dollar is not getting any support from the recent data. Oil prices are low and, reportedly, oversupply points to further losses.

This week’s GDP report was weak and today the Trade Balance returned to a deficit and July’s data was revised down. Expected Canadian economic gains from the steadily improving US economic recovery are hard to find. The only bright spot has been a steady increase in inflation which has knocked a Bank of Canada rate cut off the agenda (if it was ever on an agenda). Canada will not get any support from data until next Friday’s employment report and it is debatable whether that information is even valid. That leaves the currency exposed to the whims of US dollar direction across the G7 and exposed to a collapse,

USDCAD technicals

The short-term and intraday technicals are bullish while trading above 1.1110 with today’s move above 1.1190-1.1220 pointing to a retest of the 1.1274 peak. A break above the 1.1275-1.1300 level may result in a sharp spike to 1.1700 due to the lack of any meaningful resistance. (As an aside, USDCAD dropped nearly 0.0500 points in one week in June 2010, so a similar rally is not out of the question). A move below 1.1160 would alleviate the topside pressure and suggest a 1.1120-1.1270 range.

Chart: USDCAD 5 year with stretch target of 1.1700 shown

Source: Saxo Bank

The week that was

The week started with a verbal bomb blowing up the Kiwi, and unrest in Hong Kong setting the tone for an entertaining and volatile FX week.

On Monday, newly re-elected New Zealand Prime Minister John Key said that the NZDUSD’s fair value was about 0.6500 and that it was logical for the Reserve Bank of New Zealand (RBNZ) to intervene. Later in the day, the RBNZ confirmed that it had intervened to the tune of $521 billion in August. Meanwhile, USDJPY was heading higher and Euro traders were fretting about the next day’s CPI release.

On Tuesday, Eurozone CPI disappointed markets and EURUSD got smacked, dropping to 1.2570 in a flash. Canadian GP was also a let-down and USDCAD spiked to 1.1222. Tuesday was also month-end and quarter-end and in Japan, half-year end. The usual volatility around the 16:00 GMT fixing was noticeably absent but that didn’t prevent a choppy, churning FX day.

FX turbulence continued on Wednesday with positioning adjustments ahead of the European Central Bank (ECB) meeting and Friday’s US nonfarm payrolls data being the straw that stirred the drink. Yen traders appeared to have simultaneously decided that USDJPY had peaked and started hitting bids resulting in a 1.50 point drop. EURUSD was choppy on weak PMI data and NFP concerns.

The latest BoE statement could be hawkish after recent encouraging data, such as a 1.1% rise in output from the services industry. Photo: Moodboard

On Thursday, Mario Draghi didn’t disappoint those expecting to be disappointed. The ECB statement gave some details on the bond purchase programme but was a tad less doveish than anticipated. Short covering sent EURUSD from 1.2615 to 1.2695 in a choppy session. At the same time, US dollar losses on Wednesday were reversed as quickly as they had accumulated ahead of the US payrolls release.

The week that will be

At first glance, the week is shaping up to be rather dull compared to the previous two weeks but that may not be the case. There is a definite lack of Tier 1 data from the US to provide intraday direction which may be offset by important regional data and Central Bank policy comments.

Monday will start off slowly, in part due to a holiday in China leaving traders to rehash the implications of the previous US nonfarm payrolls release.

Tuesday’s Reserve Bank of Australia (RBA) interest rate decision and policy statement will be closely watched. The governor Glenn Stevens has been a vocal proponent for a weaker AUDUSD in the past, so in light of the New Zealand prime minister’s successful verbal intervention last week, it may have provided a timely excuse to revisit the weaker Aussie theme. UK data including GDP will put GBPUSD in the spotlight during the European session.

Wednesday is likely to be dull with traders awaiting the release of the FOMC minutes. The minutes will be dissected (as usual) in the hope of discerning more insight into the timing of the first rate hike.

Thursday’s FX action should more than compensate for a subdued Wednesday session with Australian employment data and the Bank of England (BoE) interest rate decision on tap. It wasn’t that long ago that GBPUSD was extremely bid on the prospect of beating the Fed to the rate increase window. Recent UK data and comments from thegovernor Mark Carney suggest that the BoE statement may be hawkish.

The Canadian dollar will be centre stage to close the week, with the September employment report (Forecast 18,000) and the quarterly Bank of Canada Business Outlook survey due.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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