Loonieviews End of Week Oct.7, 2014


Back in black

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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By Michael O’Neill

As this week fades to black and the curtain falls on the most volatile FX trading week of 2014, the evidence is mounting that the fears may have been unfounded. The Reuters/University of Michigan Consumer Sentiment index chalked up a score of 86.5, well above expectations and the highest level since October 2007.

Today’s US housing starts beat the forecast as well. At the moment, US equity indices are posting healthy gains (Dow Jones up 1.6%; S&P 500, 1.19%; NASDQ, 1.28%) and WTI is $83.04 per barrel. The rebound in oil prices has given the loonie a new lease on life, but that could be short-lived if OPEC continues to target market share.

Some support in oil prices is needed if CAD investors

are to keep their heads above water. Photo: iStock

That said, it won’t take much to spook the markets again. Russia is threatening to cut off Ukraine’s gas supplies, ISIS has not been beaten (or even tamed) and the equity market bounce could end up being of the dead cat variety.

In addition, although the US dollar index uptrend since July remains intact, the steepness of the rally implies that the current correction could have further to run. A drop through support at 84.80-85 could extend losses to 83.85-90.

USDX Daily

Source: Saxo Bank

No surprises from Canada

Canada’s Consumer Price Index data came in as expected with core CPI remaining unchanged from August at 2.1%. USDCAD dropped on the news but rebounded just as quickly when traders realized that the Bank of Canada is sceptical. The bank believes the rise is temporary and remains concerned about deflationary risks, which is why many traders brand them as “dovish” (although the BoC sees itself as neutral).

12-month change in CPI

Source: Statistics Canada

The week that was

FX markets started the week unsettled, concerned that the previous week’s erratic trading and volatility would continue this week. As it turned out, they were right.

Monday saw a deputy governor of the Reserve Bank of Australia drop a few verbal bombs on the currency, wreaking havoc on AUDUSD trading. Canada and the US were mostly closed for holidays but even so, US equity indices were dropping and the US dollar was slipping.

Asia opened with a bang on Tuesday. Renewed concerns over the strength of the Chinese economy and poor economic data from the Eurozone — particularly a weak German ZEW report and falling oil prices — pushed FX traders into risk aversion mode.

Wednesday defined the term "FX volatility". The drop in Brent crude and WTI fueled demand for US dollars with USDCAD posting a new 2014 high. But just as everyone who wanted US dollars finally had them, US retail sales posted a weaker-than-expected number and suddenly no one wanted dollars. The drop was fast and furious.

What America giveth, America taketh away. Photo: Pawel Gaul iStock

The loonie recouped all of its earlier losses, and faster than it lost them. The reasons for the move were many and varied, and some of them may even have been true. However, one cannot ignore the fact that since “long USD” has been the favourite trade for the past four months, stretched positions may have exaggerated the price swings.

Thursday was calmer, but only marginally so. US Initial jobless claims beat expectations and helped take the sting out of Wednesday’s retail sales data. USDCAD rejected both the top and the bottom of this week’s range while AUDUSD was just as choppy. Thursday ended with oil prices coming off their lows, some soothing comments from the Federal Reserve Bank of St. Louis’s James Bullard and a modest recovery in equities.

The week that will be

The volatility genie is out of the bottle and there is no Aladdin to order him back in. It is too early to call an end to the oil price drop, Ebola headlines will continue to multiply (especially after US officials allowed infected heath workers to fly around the country) and top tier US data releases are still lacking.

Monday is light on economic reports but Tuesday’s start could be entertaining. The release of the RBA minutes shouldn’t create much of a stir, but a rash of Chinese data might. Chinese retail sales, gross domestic product and industrial production figures are all due. Better-than-expected reports will go a long way towards alleviating global slowdown concerns.

Wednesday has a lot to offer as Australian CPI data kicks off the Asian session. In the UK, the Bank of England minutes will be studied for hints of a hawkish bias. Following that, the Bank of Canada releases its interest rate statement and monetary policy report followed by a press conference which will govern USDCAD trading. The day will end with a speech by RBA governor Glenn Stevens.

Thursday is Purchasing Managers Index day, beginning with HSBC China Manufacturing PMI followed by PMI’s from Europe and the European Union. The UK retail sales report will be vying for attention just after.

The only major release slated for Friday is UK GDP.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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