Loonieviews October 8, 2014

When the data are away, the fear-mongers play

Michael O’Neill

FX Consultant / IFXA Ltd


  • Hawks eyeing FOMC minutes
  • Data "distortion field" skews FX markets
  • USDCAD choppy in uptrend

By Michael O’Neill

One could be forgiven for thinking that the world is on a Highway to Hell. After all, a quick scan of the business news reveals a financial world in turmoil. The Wall Street Journal’s headlines include items such as: "US stocks are sunk by Europe fears"; "OECD sees Eurozone slowdown"; and "Bundesbank knocks ECB plan", while Bloomberg chimes in with "Merkel eyes measures to ward off looming German recession". As for Reuters? How about "Euro at 1-month low vs. yen on growth worries, Fed minutes eyed"?

‘Tis the season for gloomy financial projections. Photo: bodinhenrik/iStock

October is famous for stock market crashes and the memory of the global crisis in 2007 and 2008 is still very fresh — especially since the world is still reeling from the fallout. When you add phenomena like the Islamic State and Ebola into the mix, stuffing your mattress with cash begins to seem like a viable investment strategy.

But of course, that would be wrong.

It’s always darkest before the data

There is an old adage that goes "it’s always darkest before dawn", which in the FX world morphs into "it’s always darkest before the data". Last Friday’s US nonfarm payrolls release represented the last piece of first-tier data from the US until next Wednesday’s retail sales report.

The lack of data shifted the FX focus from US economic growth and rate hike timing to regional macroeconomic and geopolitical developments. Although all of the regional events and geopolitical developments are important, the fact remains that the key driver of the FX markets is the timing of the first US rate hike. The rest of it is just what Steve Jobs’ employees used to call a "reality distortion field".

FOMC minutes may disappoint hawks

There is a lot of speculation surrounding the release of the Federal Open Market Committee minutes this afternoon, with many hoping to discern evidence regarding rate-hike plans. But that may prove more difficult to find then a birthday party for Mr. Putin in Kiev.

The FOMC statement expressed concern that "…a range of labour market indicators suggests that there remains significant under-utilisation of labour resources", while yesterday’s Job Openings and Labour Turnover Survey, or JOLTS, was mixed.

As it happened, job openings increased while both the quits and the layoffs-and-discharges rates were little changed. There isn’t anything new that suggests Federal Reserve chair Janet Yellen and company will change their view on labour market slack.

Fed member musings still dovish

The messages from the three Fed speakers this week (Esther George, Narayana Kocherlakota and William C. Dudley) mirrored the FOMC’s statement. Ms. George was afraid of getting behind the curve and wished to avoid the necessity of faster/steeper interest rate hikes which could destabilize the economy. The other two, meanwhile, were content to await further economic data (although Dudley did acknowledge that he agreed with the consensus for a rate hike in the middle of 2015).

The Fed could prove more dovish than investors might prefer. Photo: yamatao/iStock

This implies that today’s minutes will be disappointing for the hawks. However, the US dollar has already retreated this week, so even the smallest hint could lead to a reversal in the dollar’s losses.

USDX says correction not trend change

The USDX has pulled back from resistance in the 86.70-90 area, which represented levels not seen since 2010. The pullback found support in the 85.57-65 area (which is also the current base of the steep August uptrend line). As long as this area holds, the risk is for a return to the 86.90 resistance zone. A break of the uptrend line targets further losses to 85.06.

USDX daily

Source: Saxo Bank.

USDCAD outlook

The Canadian dollar has seen elevated volatility in the first part of the week due to the ebbs and flows of the US dollar versus the G7 currencies as well as CAD Cross activity.. The overall USDCAD bias is bullish, which is supported by recent mixed-to-soft Canadian economic data, a dovish Bank of Canada and weak commodity prices.

West Texas Intermediate crude (WTI) is currently down $87.75 from $107.65 in mid-June, which correlates nicely with the decline in the Canadian dollar. Friday’s Bank of Canada Business Outlook Survey as well as the employment report could provide a much-needed boost to the loonie, although the legitimacy of the employment data is questionable.

USDCAD daily and WTI oil

Source: Saxo Bank

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.1150, which guards additional support in the 1.1120-30 area but needs a break above the 1.1190-1.1210 resistance zone to spark a retest of 1.1270.

The short-term technicals are also bullish while trading above 1.0980 with additional support seen in the 1.1030-60 area. There is strong resistance in the 1.1270-90 area (representing March and September’s peaks).

US dollar support is at 1.1130 and 1.1080, while resistance is at 1.1210, 1.1250, and 1.1270-90.

USDCAD daily

Source: Saxo Bank

Edited by Michael McKenna

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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