Loonieviews End of week Oct. 24, 2014


Loonie traders cast a wary eye south

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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  • CAD prospects dependent on USD
  • FOMC meeting to set course for the dollar
  • Stress tests could sway euro crosses

By Michael O’Neill

The week is drawing to a bit of a choppy close in FX markets, a situation that is likely due to the usual weekend positioning adjustments (with next week’s Federal Open Market Committee meeting adding a bit of extra concern).

Skittish traders may also have lingering concerns about the possible New York Ebola patient. Realistically, the concern should be less about Ebola and more about why a physician fresh from treating Ebola patients in West Africa was allowed to use public transportation.

USDCAD outlook

The Canadian fundamentals appear to be at odds with the technical picture. The fundamentals are mixed to soft while the intraday USDCAD technicals are bearish.

The Canadian dollar got a boost on Wednesday when the Bank of Canada dropped the word “neutral” from its interest rate statement. That move was not a signal that Canadian rates weren’t moving lower or higher, but merely an admission that the term may be misleading to markets.

In fact, many economists agreed that the monetary policy report did not feature any material changes to the BoC’s view. The bank remains concerned about inflation and is still not convinced that the recent increases are due to anything more than temporary factors.

Fundamentals

The lack of Canadian data next week leaves the CAD’s direction at the mercy of the US dollar and FOMC meeting sentiments. The BoC is still neutral despite dropping the term, and domestic fundamentals are mixed and a little shy of inspiring. Manufacturing sales were soft and real gross domestic product data for August could be slightly negative. Commodity prices have bounced a tad, but remain in a downtrend.

Last week’s sharp plunge in the WTI oil price (which sank to $79.10/ barrel from $84.08/bbl) broke major support at $84.00/bbl. That level will revert to resistance and as long as prices remain below this level the outlook is bearish for WTI.

Tumbling oil prices are bad news for Canada’s energy sector. Photo: Doran J. Clark iStock

This is also a longer term bearish development for the Canadian dollar, as persistent lower prices will hurt the economy. At the same time, the US dollar overcame a case of the jitters and has started to move higher on expectations for a mid-2015 interest rate increase while both Japan and Europe threaten to cut rates further.

The loonie is also vulnerable to selling from month-end and portfolio rebalancing flows.

Technicals

USDCAD is slowly grinding lower following last week’s rally that registered a new 2014 high. The jury is still out as to whether the spike through resistance in the 1.1270-90 area signalled a new bull run with 1.1550 as a target, or if it was merely a “one-off” spike in a panicking and illiquid market.

On the weekly chart, the move could easily be interpreted as a “one-off” spike suggesting that the key resistance area has held although the underlying trend is bullish above 1.1110. This view gains further credence due to the retracement back below 1.1290 and the three failures (on the daily chart) to get back above 1.1300.

On the other hand, the daily USDCAD outlook is bullish while trading above 1.1180-1.1200 with the retreat from 1.1380 viewed as merely corrective.

The intraday USDCAD technicals are bearish while trading below 1.1240 and we are looking for a decisive break of 1.1180 to extend losses to 1.0980, a level projected by the break of the existing triangle. Until we get a decisive break either side of 1.1180 or 1.1300, however, USDCAD will be confined to that range.

USDCAD four-hour with broken triangle projection

Source: Saxo Bank

The week that was

This week had a tough act to follow. The explosive FX volatility and near-panic selling in some equity indices for the week ending October 17 fizzled like a wet wick in a Jack-o’-lantern.

This was likely a relief for frazzled investors. Photo: iStock

Monday started tentatively as Federal Reserve vice-chairman Richard W. Fisher helped to ease some of the previous week’s panic by stating that his economic outlook was unchanged despite the recent volatility. USDJPY rallied on a rising Nikkei, although the stronger dollar theme didn’t continue into Europe or North America. EURUSD made a foray above 1.2800 while GBPUSD probed resistance at 1.6170.

Tuesday was all about a Reuters story stating the European Central Bank may discuss the purchase of corporate bonds at its December meeting. Despite the flimsy premise, this was all EURUSD bears needed to crank up the “additional stimulus” tune.

Wednesday saw a continuation of EURUSD selling on the ECB bond buying story. FX activity gained some momentum on fairly dovish Bank of England minutes and a rally kicked in on a higher-than-expected US inflation report. USDCAD churned within a 1.1185-1.1290 range on weak retail sales and the removal of the word “neutral” from the Bank of Canada interest rate statement.

Thursday had plenty of action starting in New Zealand, where inflation was well below forecasts. The action continued in Europe with French Purchasing Managers Index data undermining EURUSD prior to German PMI figures lifting it from its lows. UK data was soft followed by strong US data and a strong US dollar during the New York session.

The week that will be

Next week will be a two-parter, thematically speaking. Part one is “what do we expect the FOMC statement to say?” and part two is “what did the FOMC statement mean?”. A dash of month-end portfolio rebalancing flows will cap off the week

Monday kicks off with the euro-area bank stress test results (released on the weekend) which could create a stir in EURUSD and euro crosses.

The results of Tuesday’s US durable goods and consumer confidence reports will certainly influence the FOMC statement debate, but will ultimately be overshadowed by the statement itself.

In a divergence from the pattern established over the past two weeks, Wednesday has all the makings of a dull trading session, at least until the end of the New York session when the FOMC releases its interest rate decision and statement.

Thursday should be lively with the fallout (if any) from the FOMC statement front and centre, followed by a slew of German and US data including 3Q GDP.

Friday will see Eurozone Consumer Price Index figures, Canadian GDP and US personal consumption and expenditures data. In all likelihood, the week will end on a note of disruptive month-end portfolio rebalancing flows.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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