Range trading ahead in weak data week 10Nov14p


Range trading ahead in weak data week

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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  • Bounce in WTI price helps Canadian dollar
  • US payroll reaction is overdone
  • EURCHF peg raises ghost of ERM and GBPDEM

By Michael O’Neill

The Canadian dollar is still basking in the glow of better-than-expected employment data even as the disappointment from the softer US nonfarm payrolls report starts to fade. USDCAD has shrugged off a weaker-than-expected Housing Starts report (Actual 183,600 vs. Forecast 200,000) but remains mired within a 1.1305-1.1340 trading band.

EURUSD rejected attempts above 1.2500 and has retreated while EURCHF traders wonder if the Swiss National Bank will defend the 1.2000 floor. Old traders can reminisce back to the ERM and George Soros, the Bank of England and the GBPDEM peg. That defence wasn’t pretty, at least for UK taxpayers.

Application of oil soothes Loonie woes

The rally in WTI off the $75.82/bbl low on November 4 snapped a short-term downtrend from September 29 with the break above $78.35/ bbl putting a fresh target back on $80.10. This has coincided with a sell-off in USDCAD from 1.1440 to 1.1310, currently. The rally occurred, in part, due to speculation of an impending OPEC meeting that may result in an output reduction and, in part, because of better-than-expected Chinese export data. However, the steep downtrend following the break of 90.00/bbl remains intact while below $80.10/bbl, which should limit USDCAD gains.

Chart WTI and USDCAD daily

Source: Saxo Bank

Lest we forget

“Lest we forget” is a phrase lifted from Rudyard Kipling’s poem Recessional and is a key message of the British Commonwealth’s Remembrance Day ceremonies. It may even be more meaningful today.

Germany has just celebrated the 25th anniversary of the fall of the Berlin Wall. Photo: iStock

Germany has just marked the 25th anniversary of the fall of the Berlin Wall and the end of the Cold War while G7 sanctions against Russia marked the start of Cold War ll. The much ballyhoo-ed Ukraine ceasefire, which led to a “risk on” market rally, appears to have fallen by the wayside with the rebel-held city of Donetsk suffering an artillery bombardment.

The Islamic State of Iran and Syria (ISIS) has sucked another US-led coalition into the quagmire of Iraq while deflecting attention from Iran’s nuclear ambitions. Both Iran and ISIS pose a threat to Middle East stability but apparently not to global growth.

As we have seen many times in the past, the FX market is finicky at times and it doesn’t need much to stampede into risk aversion. Lest we forget.

NFP revisions — double the pleasure, double the fun

Friday’s nonfarm payrolls (NFP) miss of a mere 17,000 from estimates has been offset by the 31,000 upward revision to the two previous reports, a development that has apparently been lost on FX traders. In addition, the unemployment rate dropped to 5.8%, which is a six-year low.

The NFP headline number was a fairly minor miss yet the FX impact has been fairly substantial. The US dollar has shed about 0.0150 points against EUR and the Commonwealth bloc while USDJPY has dropped from 115.50 to 114.00.

The US employment picture is improving and the economic recovery is continuing, which means that the Fed is moving closer to raising interest rates. Meanwhile, the Eurozone and Japan are going in the opposite direction. Arguably, the current bout of US dollar weakness may be due to profit-taking but a lack of meaningful US data this week suggests more consolidation in the near term.

Chart: US unemployment rate -5 year

Source: TradingEconomics.com

Key Canadian data releases

There are slim pickings on the data from Canada this week and it is a stretch to describe these releases as “key”.

Thursday: Bank of Canada Review – Autumn 2014: This semi-annual report may provide clues as to the performance of the domestic economy and inflation risks.

Friday: Canadian Manufacturing Shipments – September: (Forecast 1.1% vs previous decline of 3.3%).

Key US data releases

Thursday: Job Openings and Labour Turnover Survey (JOLTS): This data may get a closer look due to the impact from Friday’s nonfarm payrolls data.

Friday: October Retail Sales (Forecast, 0.2%). The risk is that the data will surprise to the upside following September’s disappointing result and provide a little support to the US dollar.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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