The Canadian loonie is a flightless bird
FX Consultant / IFXA Ltd
- USD gains against G10 currencies (except the kiwi) in November
- Eurozone CPI a non-event for EURUSD
- Canadian GDP soars, but loonie stays put
By Michael O’Neill
With November coming to an end, most Americans are probably grateful for the persistent strength in the US dollar as they finish their Black Friday shopping.
Elsewhere, EURUSD traders shrugged off today’s Consumer Price Index report as the figures were just as expected. Canadian GDP data blew away forecasts with a 2.8% quarter-over-quarter result for October (analysts were expecting 2.1%). Unfortunately, loonie traders weren’t blown away with the result; USDCAD declined to 1.1370 from 1.1390 and then quickly reversed itself. Essentially, GDP is in the past. Oil price declines are the future here, and USDCAD is bid.
Try as it might, the Canadian loon could not take flight today. Photo: iStock
Black Friday, black gold
Opec has eagerly bought into the American tradition of Black Friday sales, even starting them on Thanksgiving Day (just like a few aggressive US retailers). The cartel’s decision to maintain its 30 million barrels per day production target despite a “black gold” glut drove WTI down nearly 7% on Thursday, gutting the loonie in the process.
The break of support in the $73.20/bbl area clears the road for a straight line drop to the next support level at $62.80, a level not seen since the end of July 2010.
Source: Saxo Bank
If you can’t beat ’em, bankrupt ’em
A large reason for the current glut of oil can be traced directly to the USA and the rise of shale production. Last year, UBS issued a report suggesting that the American shale boom is for real and that the USA would be the world’s largest oil producer by 2020.
Did you think the Saudi’s missed this one? Every barrel of oil produced by America means one less barrel for the Saudis to sell. That means fewer palaces and private 747s for the royal family and friends.
Saudi oil costs next to nothing to produce (one guess, all-in and including transportation, gives $7.00/bbl) while American shale production costs about $85/bbl, including transportation (source: SNBCHF.com). Saudi Arabia can live with low oil prices for a lot longer than can American (or Canadian) producers.
Saudi Arabia: making it look easy since 1938. Photo: iStock
A Bloomberg story on Tuesday reminded the markets that, when it comes to protecting their market share, Saudi Arabia can be ruthless. In 1986, the Saudis orchestrated a 67% drop in the price of crude which decimated the domestic US oil industry. Déjà vu?
Loonie smeared by oil
The Loonie has been knocked out of its two-week comfort zone of 1.1220-1.1390 on the rising risk of much lower oil prices… and the damage is just beginning. Recent Canadian economic releases have provided support to the Canadian dollar on evidence of a broad Canadian economic recovery. Today’s GDP data continued that theme. Yesterday, the Current Account deficit narrowed to CAD $8.4 billion vs. expectations of a CAD $11.10 billion deficit, another bullish surprise following in the footsteps of strong CPI, retail sales and employment reports.
Unfortunately, the WTI/CAD correlation, absent for most of November, appears to have re-established itself. Justified or not, falling oil prices are an uppercut to the beak and the loonie has been stunned.
USDCAD technical outlook
The intraday and short term USDCAD technicals are bullish. The short term rising uptrend from the July 2014 low remains intact while trading above 1.1120 on a daily chart, with the break above 1.1340 pointing to a revisit of 1.1460.
The break of the 50% Fibonacci retracement level at 1.1230 (representing the March 2009 peak of 1.3025 and the July 2011 low of 0.9430) targets further gains to 1.1650, the 61.8% level. However, the Fibonacci levels are very long term targets and merely a guide.
Yesterday’s break of 1.1340 negated the USDCAD downtrend from its November peak while the move above 1.1390 resistance warns of the risk for a new 2014 peak. Resistance is at 1.1430, 1.1460 and 1.1520.
Source: Saxo Bank
The week that was
The first part of this week was, as Lisa Simpson would say, “meh”. The Japanese Labour Thanksgiving Day holiday on Monday set the tone, providing traders with an excuse for inactivity while Thursday’s Opec meeting in Vienna provided the risk of drama.
Tuesday saw a little more action. An AUDUSD rally on Monday (stemming from a rate cut in China) hit the wall when stories emerged that the Chinese rate move was more glitter than gold. This was followed by verbal intervention by the Reserve Bank of Australia, giving AUD a good one-two punch. US GDP data beat expectations but pre-Thanksgiving position adjustments kept pressure on the US dollar.
The RBA’s position on a currency surge is essentially "not for all the tea,
or rate changes, in China". Photo: iStock
Wednesday’s major US data dump failed to ignite any fireworks. The economic reports were mixed while a nasty storm on the East Coast ahead of the travel-intensive Thanksgiving holiday likely distracted American traders. Opec’s Vienna meeting on Thursday attracted a lot of attention and worried commodity currency traders.
Thursday saw more than Thanksgiving turkeys get carved up when oil prices plunged after Opec, led by Saudi Arabia, declined to cut production.
The week that will be
The countdown to Christmas begins. For many American banks, it is the last month of the fiscal year — a time to protect profits and bonuses and definitely not a time to strap on any risk. Despite that, risk will be hard to avoid.
The European Central Bank interest rate decision and press conference on Thursday could provide plenty of fireworks while the RBA meeting on Tuesday and the BoC meeting on Wednesday will serve as the warm-up acts.
The Bank of England meeting will, of course, be overshadowed by the ECB proceedings and if that wasn’t enough, there are plenty of regional data as well as the US nonfarm payrolls report to keep markets active and traders on their toes.
Monday starts with China Manufacturing Purchasing Managers Index data providing trading ammunition for AUDUSD and NZDUSD. That is followed by more PMI data from the Eurozone, the UK and the US.
The RBA will be the center of attention at the start of Tuesday trading, but the excitement fades rapidly afterwards as there isn’t anything to look forward to in Europe or North America.
Nothing to see here. Photo: Fuse
Wednesday looks more promising as Australia and Eurozone GDP data plus Eurozone Retail Sales are set to be released. The UK vies for attention with the Treasury’s Autumn Forecast Statement. The BoC interest rate decision and statement will drive short term USDCAD trading and the US ADP employment report. The EIA crude oil stock change report — which is usually ignored — may get a closer look in light of the recent Opec news.
Thursday’s session will be guided by the ECB statement and press conference as well as any new information from the BoE. When the dust settles from those events, the BoC takes its turn in the spotlight, although most traders will be monitoring their positions ahead of Friday’s US payrolls report.
Friday will have the usual flurry of post-payrolls action and then quickly settle back to digesting this week’s events while planning for the weekend.